ABC Ltd. took a loan of Rs. 50 lac from a Bank for its growth and expansion plans. The company was unable to repay because of heavy losses. The company asked its shareholders to come forward and contribute towards repayment of loan. The shareholders refused as they had already paid the full amount due on their shares. Bank filed a case against ABC Ltd. The court said that company could not call shareholders to repay loan as they have no unpaid amount of shares. It was the duty of ABC Ltd. to use company's assets to repay loan.
(a) In the above case what kind of liability is enjoyed by the shareholders of ABC Ltd.?
(b) Which feature of company protected shareholders, i.e., owner of business not to pay?

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Solution

(a) In the above case the kind of liability enjoyed by the shareholders of ABC Ltd is limited liability. It is the legal protection available to the shareholders of privately and publicly owned corporations under which the financial liability of each shareholder for the company's debts and obligations is limited to the par value of his or her fully paid-up shares. The company itself, as a legal entity, is liable for the rest.
(b) Separate Legal Entity is the feature which protected the shareholders, i.e., the owner of business not to pay. A separate legal entity is a legal entity, typically a business, that is defined as detached from another business or individual with respect to accountability. A separate legal entity may be set up in the case of a corporation or a limited liability company, to separate the actions of the entity from those of the individual or other company.

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