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Although shareholders are part owners of a company, shareholders, unlike directors, generally do not owe duties to the company. However, there are certain circumstances where a shareholder will have duties to or legal responsibility for a company. These duties or legal responsibility could extend even after they have sold their shares and exited. This legal responsibility is known as liability. This article will discuss when a shareholder may be liable towards a company, even after they have sold their shares and exited.

Liable For a Company as Shareholder

Although a shareholder holds shares in the company, they are legally distinct from the company. As a result, the legal responsibility, or liability, of a shareholder is usually limited to any unpaid amounts owing on the shares.

When you purchase shares from a company, you can pay for shares:

  • in full;
  • in part; or
  • not at all.

When you pay for shares in part or not at all, you the risk that the company can call for the full payment of the shares at any time in the future. This will usually be at a time when cash is not readily available to the company. That risk is your liability, and it is your legal responsibility to repay that amount for the shares. However, if you pay for the shares in full at the time of purchase, you will incur no liability or legal responsibility. However, this will not be the case if you are acting as a shadow director or guarantor to the company.

Liable For a Company as Shadow Director

It is possible for a shareholder to also operate in the role of company director at the same time as being a shareholder. Directors have an obligation to uphold directors duties, and can in certain circumstances be held personally liable for the debts of the company. Even if you have not been formally appointed as a director, you could still be a “shadow director“. A shadow director is someone (a person or corporation) who acts:

  • as a director;
  • as someone who has involvement in the management of a company similar to that of a typical director; or
  • in a manner in which the company is accustomed to act on their instructions, or on their approval.

For example, a shadow director may require the appointed directors of a company to inform them about the company’s affairs or consult them in relation to any decision making.

If you are acting as a shadow director, you can be held personally liable for the debts of a company in the same way that actual directors are. If you exercise a level of influence over the management of a company, it is a good idea to find out whether your conduct is likely to amount to acting as a shadow director.

Liable For a Company as Guarantor

If you have acted as a guarantor of a company’s obligations, you can be held liable for a company’s obligations under contracts.

For example, you may have agreed to act as a guarantor to secure a lease for company premises. This usually means you have provided some sort of security for the lease. This is typically a piece of real property such as a house. The lessor can sell the security (the house) to repay the lease if the company fails to pay for it.

Similarly, you may have secured an agreement to finance company equipment. In that case, the bank can sell the security to repay the loan if the company cannot repay it.

The nature of your liability as a guarantor will depend on factors such as the:

  • term of the contracts (the length of time that the contract will be binding);
  • total amount owed under the lease; and
  • total amount owed under the loan.

Your obligations as guarantor endure for the length of the contract and do not cease when you sell your shares. Many contracts prescribe that the guarantor’s obligations under the contract last beyond the term of the contract. This is in case the company fails to uphold its post-contract obligations.

Depending on your contract, you may ask the company to remove you as guarantor to a contract. However, you would need to review the particular contract in question to determine the requirements for any amendments. Typically, modifications to a contract must be documented in writing and signed by all parties.

Key Takeaways

A shareholder is a partial owner of a company. They have rights and obligations set out in the company constitution and shareholders agreement. Shareholders in a company who are considering exiting a company by selling their shares should consider whether they have outstanding liabilities after their exit. A shareholder can be liable to the company in various roles. This could be as a:

  • shareholder;
  • director; or
  • guarantor.

If you have any questions about your liability as a shareholder after exiting a company, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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