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 corporation insolvent

“My wife and I are the sole shareholders  of our family business - what is our personal exposure?”

 The legal liability of directors and shareholders in a Company.

 In these difficult financial times and with our economy struggling a lot of private individuals and businesses are under severe financial pressure.

How do you survive?

A few weeks ago we did a blog of retrenchment and that was aimed at employees.

Today we turn our attention to businesses and specifically companies.

Please note that we are dealing in this blog specifically with companies and not other juristic persons, as the rules allying to other juristic persons, like close corporations and trusts, are different.

This is the enquiry that we received on Wednesday last week and we have had similar enquiries in the past.

“My company is going under - what is my personal exposure?”

The body of the enquiry then read as follows:

 “My wife and I are the sole shareholders and only directors of our family business which is a Pty Ltd 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 though 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 the question we received last week. His is a nutshell was our reply.

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 lawyer in order to establish if and to what extent you could be at risk of attracting personal liability.

 Please visit our website at www.legaladviceoffice.co.za or send us an email to This email address is being protected from spambots. You need JavaScript enabled to view it. and we will respond to your legal queries within 48 hours.

About our author:

Hugh Pollard (Legal Consultant), has a BA LLB and 42 years’ experience in the legal field. 22 years as a practicing attorney and conveyancer; and 20 years as a Legal Consultant.

082-0932304 (Hugh’s Cell Number)

This email address is being protected from spambots. You need JavaScript enabled to view it.

www.legaladviceoffice.co.za

 

 

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