My Company – my money? – Kevin House, Senior Commercial Law Partner
We have seen examples of shareholders and directors of companies being subject to claims (some substantial) as a result of company failures. They have not taken advantage of the limited liability available where companies are involved and decisions and entitlements of participants are adequately recorded. They have as a result had to repay monies drawn from the company, sometimes for a considerable period prior to the company failure.
Once a company is formed, particularly where ownership is closely held, such as in a family company, there is a tendency to regard the company only as a convenient vehicle to trade. Share ownership is equated with ownership of the business and the underlying funds the business produces.
The real situation is however very different from that. Legally, formation of a company creates a separate legal person. The company owns the business and its funds. The concept of limited liability through a company is a cornerstone of business activity. Once any sum agreed to be due on the shares has been paid, then in the absence of a shareholder becoming involved in management, there should be no further liability should the company fail, if money withdrawn from the company is correctly approved and documented.
For shareholders who are also directors, the activities as directors are additionally subject to Companies Act requirements in respect of prudent and responsible decisions and the recording of those.
It is therefore important that:
- on formation of a company or subsequent issues of shares, a shareholder’s consent is obtained not only to the issue of the shares but that there is a clear statement as to what each shareholder has accepted by way of liability on the shares;
- decisions are recorded by resolutions or minutes and that it is clear whether shareholders are making decisions by voting rights attached to their shares, or the decisions are the decisions of directors, and thereby subject to the Companies Act requirements as to prudence and responsibility etc;
- amounts to be drawn as salaries or director’s remuneration are authorised and recorded in minutes. Otherwise they become drawings liable to be repayable upon demand, the demand usually being made by a liquidator;
- amounts distributed to shareholders are approved by appropriate minutes and that the directors approving the distribution complete required certificates as to solvency, failing which the directors can be liable to creditors.
In summary, protection for shareholders and directors can be achieved by careful documentation of decisions and completion of appropriate formalities such as solvency certificates as required by the Companies Act. To simply treat the company as an extension of the individual trader is a dangerous course which may result on company insolvency in substantial loss to the individuals involved.
The information contained in this paper is necessarily of a generalised nature and specific advice should be sought in relation to any particular situation.