Dear Member,

Pursuant to Section-9 of Companies Act, 2013 "Company shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name."

By reading the above provision it is clear that a company has a separate legal entity from its Shareholders/members and is liable for its debts. Moreover, it is advisable to those, who doesn’t want to bear liability arises from future contingencies in a business, to register their business as a company or LLP (in case of Partnership). It is one of the main reasons why so many people choose to incorporate their business is to benefit from the protection limited liability provides.

Despite the protection provided limited liability, there are certain circumstances when a limited company’s shareholder could be made personally liable for business debts:

One instance is when a shareholder signs a personal guarantee for a company loan. In that case, if the business is unable to repay the debt, the creditor will be able to take action against the shareholder who signed the guarantee. 

In a Private limited company, it’s common for the directors and the shareholders of the business to be one and the same. Where a shareholder acts as a director or officer of the company, there are several other scenarios when they could be made personally liable for company debts:

1. Lifting of corporate veil by government officials, where they are of opinion that the directors/members are using the company as medium to do fraudulent practices.   

2. Where the shareholder/director continues to trade in the interests of the shareholders despite knowing the company is insolvent; 

3. Disposing of company assets for free or for below market value during or leading up to insolvency;

4. Raising funds to repay the company’s creditors through fraudulent means. 

Furthermore, there are 3 types of Private company namely: Company Limited by Shares, Company Limited by Guarantee and Unlimited Companies.

Unlimited companies are those types of company that do not have any limit on the liability of its members. The liability of each of the members extends to the whole amount of the company’s debts and liabilities. Therefore, the creditors of an unlimited company have the ability to enforce the debt and liability of the company on the shareholders, if wound-up.

Thanks.