Are Shareholders Liable For Company Debts?
When a company faces financial difficulty, it can raise questions about personal liability. One of the most common questions is: are shareholders liable for company debts?
Our guide explains how shareholder liability works, when protection can break down, and what it means for shareholders if a company becomes insolvent.
Summary: Are shareholders liable for company debts?
- Shareholders of limited companies are not usually liable for company debts, but there can be exceptions
- Personal guarantees and other instances can result in a shareholder’s personal liability being exposed
- If a shareholder is liable for company debts, consequences can range from personal asset seizure to bankruptcy and in extreme cases, criminal prosecution
- Shareholders who are also directors may not be protected under the limited liability exception as their main role is seen as director
- If the company goes insolvent, shareholders are lower on the priority list for payment and can end up with nothing
Are shareholders liable for limited company debts?
Shareholders are not usually liable for limited company debts. Creditors can only pursue a company’s assets.
However, for sole traders and general partnerships, personal assets are directly exposed to business debts.
This is one of the key reasons that business owners choose to incorporate rather than trading as a sole trader or partnership.
According to recent statistics, more than 5.4 million limited companies are registered in the UK, and over 800,000 new companies are incorporated each year.
When can shareholders be liable for company debts?
Although shareholders are not usually liable for limited company debts, there are certain important exceptions where they can become personally liable.
For an in-depth guide, read our article on the topic: Personal Liability And Insolvency: When Can I Be Personally Liable For Company Debts?
Personal guarantees
When you sign a personal guarantee, you can become liable. This is a legally binding obligation to repay the debt if the business cannot.
Banks, shareholders and some suppliers may require you to sign a personal guarantee before extending credit to smaller or newer companies. In these cases, the creditor can pursue the guarantor personally.
Read more about personal guarantees in our article: Personal Guarantees: What Are They And Can You Get Out Of One?
Unpaid share capital
If a shareholder has not paid in full for their shares, the balance owing remains a liability.
Creditors of an insolvent company may require shareholders to pay the remaining amount of their shares.
Shadow director liability
A shadow director is someone who has a considerable amount of say in the actions of a company without being a formal employee.
Shadow directors can be personally liable for acts of wrongful trading or fraudulent trading – just as a formal director would be.
Read our full article on shadow directors and liability during insolvency.
Fraudulent trading
If a shareholder has intentionally tried to defraud creditors, they can be held personally liable for company debts.
For example, if a shareholder obtained credit they know the company cannot repay, or they’ve used company funds for personal purposes.
This can result in serious consequences and potentially criminal prosecution.
What happens when a shareholder becomes liable for company debts?
If a shareholder has personally guaranteed a loan or credit facility that the company cannot repay, the creditor can pursue the shareholder directly for the outstanding debt.
If the shareholder cannot pay, all personal assets may be at risk which could lead to bankruptcy.
Where shareholder misconduct is involved, the consequences of this are more formal. A liquidator will investigate the misconduct and report their findings to the Insolvency Service. They will then decide whether further action will be taken.
Depending on the outcome, this could result in shareholders being made personally liable for company debt, director disqualification or in serious cases, criminal prosecution for fraudulent trading.
The best way to protect your position is to seek advice from a licensed insolvency practitioner as early as possible.
What about directors who are also shareholders?
It’s not uncommon within small companies to see that the person serving as director also holds shares. However, these two roles carry different obligations.
As a shareholder, liability is limited. As a director, you have statutory duties to the company and these can give rise to personal liability in ways that the shareholder status alone does not.
It is also worth noting that director liability does not necessarily end when you leave the company. Decisions made during your tenure can still be investigated after you resign.
Read more in our guide: How Long Is A Director Liable After Resignation?
What happens to shareholders when a company becomes insolvent?
If a company enters insolvency, shareholders are at the bottom of the creditor hierarchy.
Secured creditors are paid first (banks, suppliers etc.), followed by preferential creditors such as employees, then unsecured creditors.
Shareholders are only entitled to their return once all creditors have been paid in full. So if a company is facing insolvency, shareholders typically receive nothing.
This is not a form of personal liability as the shareholders don’t owe money to the creditors, but rather the consequences of owning equity rather than debt in a company with insufficient assets.
Further information
The limited liability protection is a great advantage, however, shareholders who are also directors or those who have personal guarantees face more risks.
If your company is under financial pressure and you are unsure about your personal liability, the most important step is to take early professional advice.
If you found this article useful, you may also want to read:
- Is There A Penalty For Not Issuing Payslips (UK)?
- What Does IBR Mean? Independent Business Review – Explained
- What Is A Compulsory Strike Off? All You Need To Know
- If a Company Goes Into Administration, Do I Have to Pay Them?
- What Is A Contingent Liability?
Please get in touch with Hudson Weir if you would like to discuss any debt-related concerns.
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