A corporation is an incorporated entity designed to limit the liability of its owners (called shareholders). Generally, shareholders are not personally liable for the debts of the corporation. Creditors can only collect their debts by going after corporate assets.
That being said, according to section 22(1) of the Companies Act, if a company carries on its business recklessly or with gross negligence, with the intent to defraud any person or for any fraudulent purpose, the directors and prescribed officers can be held personally liable.
Debts under corporate insolvency
While a company's debts are not the directors' debts, if the company continues incurring debts at a time when it cannot afford to pay its debts as and when they fall due,then the directors can be liable for these debts.
Corporations have always been liable for the contracts and obligations that directors, officers, and employees enter into on their behalf. Absent a severe abuse of this power to contract by an individual employee or director, any contract in which the company receives a benefit will attach to the company.
C corporations provide limited liability protection to owners, who are called shareholders, meaning owners are typically not personally responsible for business debts and liabilities.
A sole proprietor may delegate decision-making authority to employees and independent contractors, but is ultimately the person responsible for the business' liabilities, debts, and tax obligations, for example.
If the corporation or LLC cannot pay its debts, creditors can normally only go after the assets owned by the company and not the personal assets of the owners. However, the business owner can also be held responsible for corporate or LLC debts in certain situations.
If the director fails to act in the best interests of company creditors and acts wrongfully, they could be held personally liable for the business's debts. Director wrongdoing includes: Failing to uphold director duties. Accessing finance through fraudulent means.
Courts can, in some cases, hold individual owners, members, or shareholders personally liable for business debts and obligations. This is where piercing the corporate veil comes in. Piercing is possible if the owners fail to maintain a separate legal existence between their personal affairs and the company.
By running your business as a corporation instead of a sole proprietorship, you generally protect yourself from personal liability for the business's actions or debts. In essence, the corporate veil ensures that the business and its owner are treated as distinct legal entities.
Piercing the corporate veil refers to the legal doctrine that holds owners, members or shareholders of a corporation or LLC personally liable for the business's debts and obligations when they fail to maintain the company's separate legal existence from their personal affairs.
In terms of section 77(2)(a) of the Act, a director of a company may be held liable (in accordance with the principles of the common law relating to the breach of a fiduciary duty) for any loss, damages or costs sustained by the company as a consequence of any breach by the director of the duties contemplated, inter ...
One such situation is somewhat obvious but often overlooked – a person, including a shareholder or officer, can be held liable for the debts of a corporation if he or she has agreed that they may be held personally liable.
Generally, individuals are considered separate from the corporations they control. So, if a corporation fails to pay a debt, the corporation itself is liable, and not its individual owners or operators. But the individual protection offered by a corporation is not unlimited.
When a company enters liquidation, it provides its books and records to the liquidator. The liquidator goes through those records and decides a date where the company first became insolvent. If the records show any debts incurred after that date, the directors can be held personally liable for those debts.
The Court reiterated that the Creditor Duty is a fiduciary duty that directors owe to the company. This duty is not one that directors owe directly to creditors and creditors therefore cannot sue directors for breach of the Creditor Duty.
In principle, the company, alone, is responsible for the debts incurred in the running of the company and the creditors are, in principle, precluded from looking to the directors or shareholders for payment of any shortfall arising as a result of the company's insolvency.
Directors, officers or shareholders of corporations and members of limited liability companies can become personally liable for judgments against the corporation or LLC in some cases.
If you get a summons notifying you that a debt collector is suing you, don't ignore it. If you do, the collector may be able to get a default judgment against you (that is, the court enters judgment in the collector's favor because you didn't respond to defend yourself) and garnish your wages and bank account.
A company director can be held personally liable for the debts of their company in certain instances. Any debts belonging to the company which have been secured with a personal guarantee will need to be repaid by the director should the company become insolvent and subsequently enter liquidation.
If your business falls under the sole proprietorship structure, you and your business are legally the same. So if you incur business debts, the creditors can legally come after you for payment. In the case of a general partnership, the matter is the same.
Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk. May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
Sole Proprietorship
The owner shares in the business's profits and losses. Since the sole proprietor is self-employed, self-employment taxes must be paid. There is no liability protection for the owner. The owner is liable for all debts.