Question

Justify the following statement.

The liability of a shareholder of company is limited.

Answer 1

(1) A joint stock company is a registered association. It is registered under the Companies Act, 1956. The effect of such registration (incorporation) is that the company becomes a distinct body independent of the members (shareholders) i.e. the owners who have formed it. The company is an independent legal entity distinct from its members. It is called a corporate body or a legal person. In other words, the company and its members are not the' same.
(2) Therefore, the liabilities of the company cannot become the liabilities of the shareholders. The company cannot bind the shareholders by its acts. Similarly, the members of the company cannot bind the company by their own acts. The debts of the company are repayable from out of the assets of the company. The creditors have no right to recover their dues from the shareholders. Thus, the liability of the shareholders is limited to the extent of the unpaid amount on the shares. In the case of fully paid-up shares, there is no liability on the part of shareholders.