Are Shareholders Liable?

Typically, Australian shareholders are not personally liable for any company debts. The Corporations Act 2001 holds that a company is responsible for its own liabilities, and those liabilities do not automatically pass to their shareholders. If anything, a shareholder’s financial obligation is limited to what remains unpaid on their shares. Section 254M(1) of the Corporations Act 2001 provides that:

If shares in a company are partly-paid, the shareholder is liable to pay calls on the shares in accordance with the terms on which the shares are on issue.

However, there are some instances where shareholders do hold liability. In these scenarios, liability flows from their individual role and conduct and not from shareholding itself. Still, however, the amount in which the shareholder can be liable is limited. There are 2 main ways in which shareholders can hold liability.

#1: Personal Guarantees

A personal guarantee is when a shareholder voluntarily assumes obligations outside of the Corporations Act, thus making them liable. When this occurs, they are liable as an individual, not in their capacity as a member or shareholder of the company. Thus, their liability arises under contract law, rather than company law. Remember that as a shareholder, when you take on any responsibilities beyond your shareholding duties, you are opening yourself up for liability.

#2: Statutory Extension of Liability

A Statutory Extension of Liability, most common in holding companies, can make a holding company liable for a subsidiary’s corporate debts under specific statutory provisions – for example, where the holding company is found to have allowed the subsidiary to trade while insolvent under section 588V of the Corporations Act 2001. In these cases, piercing the corporate veil is justified through the operation of those specific statutory provisions.

Statutory Limits on Shareholder Liability

There are, however, statutory limits on shareholder liability that occur even if personal guarantees or a statutory extension of liability exists. Shareholders are only liable to pay any unpaid amounts on shares and are not required to contribute to any further company debts.

The most important thing about shareholder liability is that on the rare occasions that it does occur, it is never based on shareholding alone. Liability typically arises either because a shareholder has voluntarily assumed personal obligations (such as through a personal guarantee), or because they have acted in a directorial capacity and committed a contravention while doing so. If you have any questions about shareholder liability in your small business, please do not hesitate to contact us. We are here to help.

DISCLAIMER: This article is for informational purposes only and does not constitute legal advice.