Question 1 of 20
Which of the following statements about the director's liability for the debt is correct?
A company is a private company limited by shares. A director owns 80% of the issued shares and is the sole director; a shareholder owns the remaining 20%. The company has fallen into serious financial difficulty and owes a substantial sum to a trade supplier, which has obtained judgment against the company for the debt. The company has very few assets and cannot pay. The director has paid in full for all the shares he holds. The trade supplier now wishes to recover the outstanding amount from the director personally.
- AThe director is personally liable for the full debt, being the majority shareholder and sole director.
- BThe director is liable only up to 80% of the company's outstanding debts, reflecting his shareholding.
- CThe director has no further liability for the company's debts, as his shares are fully paid up.
- DThe director and the shareholder are jointly liable, in proportion to their respective shareholdings.
- EThe director is personally liable because the company has insufficient assets to satisfy the debt.
Reveal fully worked answer
Correct answer: C — The director has no further liability for the company's debts, as his shares are fully paid up.
Why this option wins
A company is a separate legal person, distinct from its shareholders and directors. The debt to the trade supplier is owed by the company, not by the people who own or run it. In a company limited by shares, a shareholder's liability is limited to any amount still unpaid on their shares. The director has paid in full for all his shares, so there is nothing more he must contribute. He cannot be pursued for the company's debt just because he is a shareholder. Holding 80% of the shares and being the sole director does not change this, because a director is not automatically liable for the company's debts. The trade supplier's judgment is against the company, so it must look to the company's assets for payment.
Why the other options fail
- A
- Control is the tempting feature here, but owning most of the shares and being the only director does not make the director liable for what the company owes. The company is a separate legal person, and the debt remains its own.
- B
- No rule links a shareholder's liability to their percentage of the shares. A shareholder's only exposure is any amount unpaid on their shares, and the director's is nil because he has paid in full.
- D
- Shareholders are being treated here as if they were partners sharing the firm's debts. Members of a limited company are not jointly liable for its debts at all. The company itself is the debtor.
- E
- A company's lack of assets does not pass its debt to a shareholder. It simply means the creditor may go unpaid, with no claim against a shareholder whose shares are fully paid. This reaches personal liability for the wrong reason.