Law and You > Corporate Laws > Companies Act, 2013 > Limited Liability of Members of Company
The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organization.” Due to the creation of a separate legal entity, the members have limited liability. Under Section 34(2) of the Company Act, in the event of a company being wind up, the members of the company are solely liable to contribute to the assets and liabilities of the company. None of its members is legally bound to contribute to anything more than the nominal value of shares held by the member which still remains unpaid. If the corporation is sued or goes bankrupt, the assets of the company will be at stake, but not the personal assets of the members such as savings, a home or a vehicle. This means that the liability of a member is limited. For example, if A holds shares of the total nominal value of ₹ 1,000/- and has already paid ₹250/- (or 25% of the value) as part payment at the time of allotment, he cannot be called upon to pay more than Rs. 750/-, the amount remaining unpaid on his shares. If he holds fully-paid shares, he has no further liability to pay even if the company is declared insolvent. In the case of a company limited by guarantee, the liability of members is limited to a specified amount of the guarantee mentioned in the memorandum. Thus, the directors and members cannot be held personally responsible for the corporation’s debts or obligations.
In J. H. Rayner (Mincing Lane) Ltd. v. Dept. of Tarde and Industry, (1990) 2 AC 418 case, no member is bound to contribute anything more than the nominal values of the share held by him.
When do Directors Held responsible?:
It should be noted that following are situations when directors of a corporation can be held liable.
- Under Section #a of the Companies Act, 2013 if at any time the number of members of a company is reduced, in the case of a public company, below seven, in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor
- When the company is incorporated as an Unlimited Company under Section 3(2)(c) of the Act •
- Under Section 7(7)(b) of the Companies Act, where a company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants, direct that liability of the members of such company shall be unlimited.
- Further under section 339(1) of the Companies Act, where in the course of winding up it appears that any business of the company has been carried on with an intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal may declare the persons who were knowingly parties to the carrying on of the business in the manner aforesaid as personally liable, without limitation of liability, for all or any of the debts/liabilities of the company.
- Under Section 35(3) of the Companies Act, where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person who was a director at the time of issue of the prospectus or has been named as a director in the prospectus or every person who has authorised the issue of prospectus or every promoter or a person referred to as an expert in the prospectus shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.
- As per section 75(1) of the Companies Act, where a company fails to repay the deposit or part thereof or any interest thereon referred to in section 74 within the time specified or such further time as may be allowed by the Tribunal and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall, without prejudice to other liabilities, also be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors.
- As Per Section 224(5) of the Companies Act, where the report made by an inspector states that fraud has taken place in a company and due to such fraud any director, key managerial personnel, other officer of the company or any other person or entity, has taken undue advantage or benefit, whether in the form of any asset, property or cash or in any other manner, the Central Government may file an application before the Tribunal for appropriate orders with regard to disgorgement of such asset, property, or cash, and also for holding such director, key managerial personnel, officer or other person liable personally without any limitation of liability
In partnership, each partner of a firm is personally liable for all the liabilities of the firm to an unlimited extent. This advantage of having limited liability for its members is one of the major reasons for setting up an incorporated company. Using this benefit the entrepreneur can take a risk.
In Re. London & Globe Finance Corp., (1903) 1 Ch. D. 728 case, Justice Buckley made following observations: “The statutes related to limited liability have probably done more than any legislation of the last fifty years to further the commercial prosperity of the country.
Conclusion:
Under Section 34(2) of the Company Act, in the event of a company being wind up, the members of the company are solely liable to contribute to the assets and liabilities of the company. None of its members is legally bound to contribute to anything more than the nominal value of shares held by the member which still remains unpaid. If the corporation is sued or goes bankrupt, the assets of the company will be at stake, but not the personal assets of the members such as savings, a home or a vehicle. In the case of a company limited by guarantee, the liability of members is limited to a specified amount of the guarantee mentioned in the memorandum. Thus, the directors and members cannot be held personally responsible for the corporation’s debts or obligations.
In Re. London and Globe Finance Corporation, (1903) 1 Ch. D. 728 at 731, Buckley, J. has observed: ‘The statutes relating to limited liability have probably done more than any legislation of the last fifty years to further the commercial prosperity of the country. They have, to the advantage of the investor as well as of the public, allowed and encouraged aggregation of small sums into large capitals which have been employed in undertakings of “great public utility largely increasing the wealth of the country”.