Shareholders, are you liable for company debts?

Article written by Henry Lin

The economic turmoil of Covid-19 has swept the four corners of the globe. Many businesses previously with healthy cashflows immediately have entered into a state of insolvency. As a shareholder of a company, debts that the company sustains generally do not attract a personal liability. However, it is time to check whether your shares are “Partly Paid” lest you may be “called” to pay for the outstanding amount.

What Are Partly Paid Shares?

Shares are for a price when a company gives shares to existing shareholders or incoming shareholders. Quite often, the shareholder receiving the shares will pay the full issue price of the shares, which is called ‘Fully Paid Shares’. However, a company may issue ‘Partly Paid’ Shares (AKA ‘Contributing Shares’). A ‘Partly Paid’ Share means that the shareholder has merely paid part of the issue price upfront with the remaining amount unpaid.

Shareholders’ liability on call

Shareholders, who own partly paid shares, must pay the remaining issue price at request of the company. In other words, the company is entitled to ‘call on’ the shareholder to pay amounts owing on the Partly Paid Shares. The exercise may differ from company to company due to different constitutions or shareholder agreements. Normally, at the time of the issuance of the Partly Paid Shares, the shareholder and the company agree when the company can call on payment. Upon the company receiving the balance, the Partly Paid Shares become Fully Paid Shares.

Time of liquidation

If you own partly paid shares with outstanding payment, basically, you are not required to pay any company debts.  However, as you do owe a liability to the company, once the company goes into liquidation, the company’s liquidator can require you to pay the balance on your shares.

Questions for a Shareholder

  • Have you and the company correctly recorded whether you or any of your business partners have fully paid for issue price of their shares?
  • If so, how much do you or your business partners owe to your company?
  • When will your company be able to call on those amounts?
  • What are the consequences if they are unable to pay on time?

Feel free to contact SLF Lawyers if you require legal advice regarding Partly Paid Shares, issuance of shares or business structure/restructure.

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