I became a shareholder in my Uncle’s company last year. It’s a private company limited by shares, it is a
Café on a high street in London. I was not to sure about investing in the company, as my Uncle has never
been good with managing money, but after a long time he persuaded me.
Now all of a sudden at the last company management meeting I find out that the Café has defaulted on its loan to the bank and the bank are now sending threatening letters about taking this to court to get their money bank. I knew I never should have become a shareholder in the company, I did not have a good feeling about it. Now that the Café has defaulted on it’s loan and I am a shareholder I am worried that they will try and come after me aswell, as I own 35% of the company.
I am really worried that they will try and repossess my house or something. As the company owes the bank a substantial amount and none of the shareholders have cash to pay it off, it’s hard enough for the Café to keep up with it’s monthly bills. What I want to know is do I as a shareholder of a private limited liability company have liability for the debts of the company in any shape or form whatsoever or am I am totally protected?
The Answer from Solicitors Online
When using a limited liability company to operate and run your business, you can rest assured that you as a shareholder or owner of the company have limited liability for the debts of the company.
your company incurs debts, they are not regarded as the debts of one or more of the company’s shareholders. Therefore shareholders are not liable to pay the sum owed by a company to creditors. This is as a result of the principle of separate legal personality. The principle of separate legal personality means that the company and its shareholders are regarded as being two separate legal entities, which share their own distinct liabilities and are not intertwined.
In what circumstances does a shareholder have to provide money to the company to enable it to pay its creditors?
There are some circumstances under which a owner and shareholders of a company are not protected from the liability of a company’s debts. One example is when an owner personally guarantees a loan that a company takes out. Meaning that the owner will be personally liable for any defaults by the company in the repayment of the loan.
Owners of registered companies can opt not to have limited liability from their company when they register their company. A company can be set up so that there is no limit on the liability that its owner and shareholders have, making it an unlimited company as far as liability is concerned.
In accordance with the Insolvency Act 1986 section 74(1), when a company is wound up, every present and past shareholder is liable to contribute to the assets of the company, up to any amount that insufficient for payment of its debts and liabilities, this includes the expenses of the winding up.
Companies Limited By Guarantee
When a company is limited by guarantee, the guarantor has no liability to contribute to the company. In accordance with Insolvency Act 1986 section 74(1) and section 74(3), in companies limited by guarantee each shareholder is only required to pay the specific amount undertaken to be contributed by him or to the company’s assets in the event of it being wound up.
Companies Limited By Shares
In the case of a company limited by shares, if a shareholder has not paid up the whole value of their shares to the company, the company has the right to make a call for part or all the remainder of the agreed share capital contribution from a shareholder to be paid.
Limited Liability Partnerships
Members of a limited liability partnership limit their liability in respect of the partnership, by using the limited liability structure. Under the Limited Liability Partnership Act 2000 section 1(4) the members of a limited liability partnership have a duty to contribute to its assets in the event of the partnership being wound up by Insolvency proceedings.
The Benefits of Shareholder Limited Liability
When shareholder liability for a company is limited, this encourages investment into the company and attracts new shareholders who can remain confident that they will not be liable in the case that the company gets into debt.
Shareholder’s liability being limited also facilitates the transfer of shares, since other people are more confident to buy shares in a company with the protection of limited liability.
The limited liability of shareholders also provides clarity and certainty as to the assets available to creditors of a company.
If you need legal advice online on the limited liability of a company and it’s separate legal personality, you can speak to our Solicitors online right now.