Although a shareholder is not generally held personally liable for the company’s debt, you should make sure you are aware of them so that you do not fall into a situation where this could happen.
Limited liability of shareholders
In Hong Kong, limited liability means when the shareholder’s liability is limited to a fixed amount, most commonly the value of a shareholder’s investment in the business.
A limited liability company can be incorporated in Hong Kong by registering with the Companies Registry under the Companies Ordinance (Cap.622). A Company will then become a separate legal entity which means that the right and liability of the company are separate from those of its directors and shareholders.
Although companies can be either limited or unlimited, the preferred choice for most small business founders in Hong Kong is to set up a limited company as the liabilities of the owners of the business will be limited to whatever they invested in the company. The owner’s personal assets will also be protected from business liabilities.
Shareholder’s liability in a company limited by shares
A limited company limited by shares is one in which the shareholdings do not attach to any shareholders of the company. It is also the most sought after form of company in Hong Kong.
The liability of shareholders is limited to the nominal value of the shares they hold in the business. For example, A shareholder holds 10 shares with a nominal value of HK$1, his financial liability is capped at HK$10 if the company fails to pay its own debts.
Exceptions
Despite the idea of limited liability, there are still circumstances where shareholders can be responsible for company debt:
1. Personal guarantee by the shareholder
If the shareholder has given a personal guarantee for the company loan, and if the company fails to make repayment plus interest when due, the shareholder will assume personal liability to pay the outstanding amount. Please check out our guide on What are “personal guarantees” and “bank guarantees”?
2. Share price has not been fully paid for by the shareholder
Shares in the company could be only partly paid by a shareholder. A partly paid share means that a shareholder has only paid part of the share price and will pay the outstanding amount in the future. If the company fails to pay any company debts, the company’s liquidator can require those shareholders who have only partly paid for the shares to pay the unpaid amount.
3. Piercing the corporate veil
Piercing of the corporate veil is an exception to the principle of a separate legal entity. This exception entitles creditors to treat the liabilities of a company as the liabilities of its shareholders. Circumstances where piercing the corporate veil may be allowed:
- When the company engaged in fraudulent behavior and the shareholders were aware of such behavior
- When the separation between the corporation and shareholders is so insignificant, such that the shareholders use the company as if it is his personal account
Piercing the corporate veil is more likely to occur in a smaller company as the few shareholders of the company are more likely to use the company as their personal asset. Therefore, you should be careful when being involved with these kinds of companies.
Key takeaway
- A company is separate from its shareholders because of the principle of separate legal entity. A shareholder is not generally responsible to pay a company’s debt
- However, there are 3 circumstances where shareholders might be liable for the company’s loan: A person guarantee is signed, shares are not fully paid for and piercing the corporate veil.
- Piercing the corporate veil occurs when there is fraud or there is little separation between the company and its shareholders.