Have you ever wonder, at the point of incorporating your company, are there any circumstances where you will be personally liable for your company’s debts? The general answer will be no.

That is the sole purpose of why you should incorporate an exempt private company limited by shares. The Singapore courts will be unwilling to allow creditors to go after the directors in a personal capacity for their company’s debts. This is in the spirit of creating a pro-business environment in Singapore, to encourage enterprising individuals to start businesses and create more jobs.

If every individual can be sued in a personal capacity for their company’s debts, very little people will be willing to start their own businesses.

However, there are some exceptions to this general rule of thumb. We discuss them below.

Scenarios where Directors will be made personally liable

  1. If you are the guarantor or co-borrowerIf you choose to take out a credit facility for your company, in a personal capacity as a guarantor, the creditor will be able to sue you in a personal capacity for the repayment of debts, together with or without your company. Even though you and your company are considered as two separate legal persons, but if you and your company sign on a credit facility agreement as a borrower and guarantor, then both of you will be jointly liable for the debt incurred.
  2. Creditors apply to the court to hold the director(s)/shareholder(s) personally liableThe second scenario is whereby a creditor applies to the court to ‘lift the corporate veil’. This is a technical legal concept. A ‘veil’ is cast over the controllers of the company, thus separating the company and the controllers as two separate legal entities. Once the corporate ‘veil’ is lifted, it means the controlling director or shareholder will be liable for the company’s debts. Chances of succeeding are slim and it can only happen in certain circumstances. The creditor has to show either:
    • You have abused the limited liability protection the company’s corporate form has provided at the creditor’s expense

      • The court will require proof that you have abused your company, using it as a vessel to commit fraud or sham transaction whether dishonestly or maliciously, by withdrawing all company’s funds including the fraudulently obtained funds. In such cases, the creditor has no legal recourse as the company has no more funds for the creditor to claim from.
    • You have treated the company’s assets as your own
      • This is a fairly straightforward scenario. You treat the company’s bank account as your personal bank account, withdrawing funds from it without a board resolution authorisation, or you claim to be entitled to receivables of the company.
  3. In breach of the Companies ActThere are certain statutory provisions that state under certain circumstances, a director or shareholder will be liable for the company’s debts. Section 145(10) of the Companies Act states that if the company has operated for six (6) months or more without a Singapore resident director, any shareholders who come to be aware of this matter can also become liable for any company’s debts incurred after the 6-month period. Additionally, section 144(2) of Companies Act states that a shareholder or director who signs a promissory note, bill of exchange, or any other negotiable instruments on behalf of the company where its name is not mentioned on the document, they will potentially be liable for payment obligations of that particular agreement if the company does not make any payments.

If you are held personally liable for the company’s debts, what should you do?

The simple answer to this is, regardless if you think you may or may not be liable for the debt, you should immediately engage a litigator to defend the suit if a creditor sues you personally for your company’s debts. Simply because of the reason mentioned above in (2), it will be difficult to apply to ‘lift the corporate veil’ and impossible to predict the outcome at the beginning of the suit.

Engaging a lawyer can potentially help to defeat the claim, or buy you time and give some leverage to negotiate for a settlement.

The creditors may engage debt collectors who may start harassing you at home, you may consider applying for a protection order through your lawyer, and seek damages for harassment from them.

Paying the Company debts if you lose the lawsuit against Creditors

In the event that you lose the lawsuit, you will have to pay the company’s debts and you should. If you are unable to repay or willfully choose not to pay, the creditors can apply to enforce the judgment against you. This is a serious matter as your personal belongings can be seized and sold.

Your next alternative move is to file for bankruptcy. Because once the bankruptcy order is made, all creditors will be barred from taking further legal proceedings to recover the debts. Instead of paying off the full amount of the debts, you can make instalments over the course of a few years instead.

Nevertheless, being a bankrupt has very serious repercussions. One of the things that you will be barred from doing, is traveling out of Singapore or holding any directorships in any company until you are discharged from bankruptcy status.

While as a general rule, directors will not be liable personally for their Singapore registered companies, however, there can be situations whereby the directors can be liable. If you are sitting on board as a company director and a creditor is suing you personally for your company’s debts, you should seek to engage a lawyer without delay. They will be the best persons to advise you on your next course of action.