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My company is going under – what is my personal exposure?

“My wife and I are the sole shareholders and directors of our family company. We’ve had a few good years, but with the current economic times, despite our best efforts to keep the company afloat, it doesn’t look like the company is going to make it. For the first time this reality has hit us and we are both worried that the company’s creditors will come after us and take our home and savings. Can they do this?”

The short answer to this question is no. Your company creditors should not be able to come after you personally. But, this is a qualified no. At the core of our company law is the concept of limited liability which implies that the shareholders and directors of the company will not be liable for the actions or conduct of the company, provided however they have played within the rules. The concept of limited liability allows shareholders and directors to take business decisions without the fear that they will be held personally accountable – again, provided they play within the rules.

The assets and liabilities of a company belong to the company, and not to you as a shareholder. That means all profits and losses are also apportioned to the company. But as stated above, this principle of limited liability is qualified and our courts have in exceptional circumstances compelled shareholders to stand in for the debts and liabilities of the company. Our courts have held that when this happens they effectively pierce the protective corporate veil and look through the company to hold the shareholders liable. Our courts remain hesitant to do this and rather aim to uphold the corporate veil. But each case is considered on its own merits and in some cases such action may be justified. In considering whether to pierce the corporate veil, our courts will look at the running of the company and its overall conduct and whether or not the separate legal persona of the company was abused by the shareholders e.g. for the purpose of defrauding others etc. 

Likewise, the liability of directors of a company is not open-ended. Our company law does however confer duties on a director of a company and determines that a director can be held personally liable should the director fail to comply with these duties, again subject to limitations and conditions.

So to come back to your question. As shareholder and director you and your wife should not by default be personally liable for the debts of your company. However, this position is qualified both in terms of your position as shareholders and directors based on your use of the company and your conduct as directors. Our advice would be to discuss your company’s financial position and your concerns about liability with your attorney in order to establish if and to what extent you could be at risk of attracting personal liability.

 
August 8, 2018
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