Legal Tip 218: Are Shareholders Liable for the Debt of a Company?

Discussion in 'Legal Issues' started by Terry_w, 26th Jun, 2019.

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  1. Terry_w

    Terry_w Well-Known Member Business Member

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    A worry for some people is that if they become shareholders of a company, they could somehow become liable for the debts of the company.

    This is not the case unless the shareholders give a personal guarantee or become directors of the company perhaps.

    Example

    Bart invests in Barney Pty Ltd which is a construction company. The company has virtually no assets. One day one of the staff members is seriously injured and sues the company. The company collapses and Bart is worried ‘they will come after him’.

    This is generally not possible because Bart is a separate legal person to the company. His shares will be worthless, but there is where it ends.


    However, there are some limited exceptions to this rule those for cases of fraud, the company acting as agent for the shareholder, shadow director roles, shams, parent companies and subsidiaries – all of which are very rare.


    Caselaw
    The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 42

    “The company...is a distinct person from its shareholders. The shareholders are not liable to creditors for the debts of the company. The shareholders do not own the property of the company...” (at 435)
     
    Silverson and Simon Moore like this.
  2. Terry_w

    Terry_w Well-Known Member Business Member

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