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IAI Actuarial Core Principles · Business Management · Separate legal personality, directors' duties, shareholders and partnerships

Sundaram Actuarial Consultants Ltd owes Rs 40 lakh to a vendor and cannot pay. The company is solvent in no respect and is wound up. The vendor discovers that Mr Rao, a shareholder who paid for all his shares in full, was also a director who acted honestly throughout. The vendor wants to recover the shortfall from Mr Rao personally. What is the likely position?

Mr Rao is not personally liable. The company is a separate legal person responsible for its own debts, and a member of a company limited by shares is liable only for any unpaid amount on his shares, which here is nil.

  1. AMr Rao is liable for the full shortfall because he was a director
  2. BMr Rao is liable for half the shortfall because liability is shared with the company
  3. CMr Rao is not personally liable for the company's debt, since his liability as a member is limited to any unpaid amount on his sharesCorrect
  4. DMr Rao is liable because the company is insolvent
  5. Mr Rao is liable only if he holds more than 50% of the shares

Explanation

Limited liability means a member of a company limited by shares risks only the unpaid amount on his shares. Mr Rao has fully paid, and nothing suggests fraud or breach of duty that would justify lifting the veil. Insolvency alone does not make directors or members liable.

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