Limited liability is the whole point of incorporation. Division 2 of Part VII of the Companies Act 1997 sets out exactly how far it goes.
Section 79 — liability of shareholders
A shareholder is not liable for an obligation of the company by reason only of being a shareholder. Liability is limited to —
• any amount unpaid on a share held by the shareholder;
• any liability expressly provided for in the constitution;
• any liability to repay a distribution under section 54;
• any liability under section 82 for calls; and
• the liabilities of a shareholder who is also a director or who has otherwise given a personal undertaking.
Those words do the work. A shareholder who is also a director carries every director’s duty and every director’s exposure — insolvent trading under section 348, failure to keep accounting records under section 348A, fraudulent trading under section 423, and the phoenix company provisions in sections 429A to 429F.
A shareholder who has guaranteed the company’s borrowing is liable on the guarantee as a matter of contract — and under section 19(1) a guarantor of a company obligation cannot escape by pointing to the company’s internal irregularities.
Unpaid amounts, and section 82 calls
Because shares under this Act have no nominal value (s 39), the “amount unpaid” is whatever remains outstanding on the terms of issue. Section 47 requires the board to decide the consideration for an issue and the terms on which shares are issued, and those terms may allow payment by instalments.
Section 82 makes a shareholder liable to pay a call lawfully made, and Schedule 2 clause 11 provides for loss of the voting right where calls are unpaid. Section 83 protects shareholders from being forced to take on more: a shareholder is not required to acquire shares by an alteration to the constitution made after they became a shareholder, unless they agree.
Section 80 — liability of former shareholders
A former shareholder remains liable, in a liquidation, to the extent the section provides — broadly, for amounts unpaid on shares held while a shareholder, and where the shares were transferred within the period the section specifies before the commencement of the liquidation, and the present holder cannot pay.
Section 81 contains additional provisions relating to the liability of shareholders and former shareholders, and section 318 gives the liquidator power to enforce the liability of shareholders and former shareholders. So selling shares shortly before a collapse does not automatically end the exposure to unpaid amounts.
Sections 84 and 85 — personal representatives and trustees
| Provision | Effect |
|---|---|
| s 73 | A personal representative of a deceased shareholder may be registered as the holder |
| s 84 | The personal representative is liable in that capacity, and the liability is answered out of the estate rather than personally, to the extent the section provides |
| s 74 | The trustee of a bankrupt shareholder may be registered as the holder |
| s 85 | A trustee registered as a shareholder is liable in that capacity, with recourse to the trust property as the section provides |
| s 72 | No trust may be entered on the share register — the register shows the registered holder only |
Under section 78, a shareholder is the person whose name is entered in the share register as the holder. Section 72 keeps trusts off the register. A person holding shares for someone else is therefore the shareholder for the Act’s purposes, and must protect their position by the trust deed — not by anything on the register.
When can a creditor reach a shareholder at all?
- Unpaid share capital — enforced by the liquidator under section 318, not by individual creditors.
- Repayment of an improper distribution — section 54, where the company did not satisfy the solvency test, subject to the defences for a shareholder who received it in good faith and has altered their position.
- A constitutional liability — unusual, but section 79 preserves it.
- A guarantee or indemnity given by the shareholder personally.
- Liability wearing another hat — as a director, as a person who took part in fraudulent trading, or as a shadow director within section 107.
- Pooling orders — under sections 320A to 320C, where the shareholder is a related company.
Separate legal personality cuts both ways. A wrong done to the company is the company’s claim, and a fall in the value of shares that merely reflects that loss is not separately recoverable by the shareholder. The route is a derivative action under section 143, or the prejudiced shareholder remedy in section 152.
Practical points
- Check the terms of issue before buying shares — any unpaid amount travels with them.
- Resist personal guarantees where you can, and understand that giving one puts limited liability aside for that debt.
- Do not accept distributions you know the company cannot afford. Section 54 is the standing risk for controlling shareholders in owner-managed companies.
- Keep the shareholder and director roles distinct in your records — and remember section 107 can make a person a director in substance.
- If you hold shares as trustee or executor, be registered in that capacity and rely on sections 84 and 85; the register itself will not show the trust.
Sources
- Companies Act 1997 — ss 19, 39, 47, 54, 72–74, 78–85, 107, 143, 152, 318, 320A–320C, 348, 348A, 423, 429A–429F; Schedule 2
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.