Exceptions to the limited liability

A Company is an artificial person that is incorporated to run a business or a for-profit organization. An Artificial Person refers to when a legal entity is incorporated to function as a natural person but is not a natural person. The purpose of the company is to provide a veil to its directors and shareholders so that the directors and shareholders are not personally liable for the debts of the Company.

Limited Liability, as the name suggests, is a feature of the Companies Act which limits the liability of the Company. According to the Companies Act, 2013, there are three types of limited liability companies:

1. Company Limited by Guarantee- Section 2(21) of the Companies Act, 2013 states a company limited by guarantee as a company having liability limited to the amount subscribed to the members in the memorandum which they take to contribute in case the company winds up. It refers to the amount which is individually taken by the members of the company which they would pay for in case the company winds up;
2. Company Limited by Shares- Section 2(22) of the Companies Act, 2013 states company limited by shares as a company having liability limited of its members to the amount as per the memorandum to the number of shares unpaid by them;
3. Unlimited Company- Section 2(92) of the Companies Act, 2013 states unlimited company as a company with no limit on its liability. Therefore, the personal assets of the members of the Company may be taken in case of debts.

Limited Liability provides a veil for natural persons not to be liable against an artificial person which is the company. However, there are certain exceptions to this:

1. Members are liable in cases where they run a corporation less than the prescribed numbers. The number of people needed to incorporate a public company is seven and a private company is 2. In cases where a company does business for more than six months without the prescribed number of members then the members would be liable;

2. When the company is listed as an unlimited company. There can be no limitation of liability for an unlimited Company;

3. If during the incorporation of the company, if the company concealed any material fact in order to defraud the Authority and form the company then the personal members can be held liable for the formation of the Company;

4. During the winding-up of a company, if any action is done by the management of the company to defraud the creditors then the management of the company can be held personally liable;

5. If it is found that the reason for starting the company was to defraud the customers or share-holders, then all those who had knowledge of such reason shall be personally liable;

6. If the prospectus of the company is made in order to defraud the shareholders, then the Tribunal can hold all those who had knowledge of this to be personally liable;

7. When fraud has taken place in the company through any director, KMP, or any other officer then they can be held personally liable.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.