Pvt ltd co.- lock in period, can i get paid first before others?
akash
(Querist) 20 September 2013
This query is : Resolved
Hello Experts,
I started a small Private Ltd Co. and one of the directors, who quit later on, gave a loan of around Rs 3 lacs and I put in around Rs 7 lacs. Now the business is in heavy losses and the 2 remaining directors (including me) are planning to shut it down. The assets are very limited- only about Rs 1.5 lacs. The 3 lac loan from the director who quit has a lock in period of 1 more year left (i.e. he can't ask for his money back for another year) , whereas my loan does not have any lock in. If we sell the assets and the company realizes Rs 1.5 lacs, can it be used to pay back my loan first, since there's no lock in?
If we declare bankruptcy after an year, can the director who quit prosecute us that we used the assets to pay our loan first? Technically, I feel that since I can ask for my money back anytime, I should be able to get it paid rightaway.
Thanks
Ms.Nirmala P.Rao
(Expert) 10 October 2013
Dear Client,
You can't get paid first.
Since it is a Joint Stock company under the company Law, you need to apply for voluntary winding up first and file an application for voluntary winding up with the registrar of Joint stock companys', who has to take the permission/sanction of the Central Government etc for liquidation of your company and after your creditors are paid their loans first in accordance with the priority in point of time of their debts,(Secured creditors are paid first) your question of using the assets of the company if any, would arise, Since private limited company is treated as a partnership business, you directors/members may incur personal liability also for repayment to creditors if the assets are not sufficient to meet your company's debts. The question of repayment of your loan to you first by the company after winding up is subject to any agreement/contract among all three of you including the past director/member. If you want to thank me please press the thank you button on my profile.
akash
(Querist) 10 October 2013
Thanks Madam.
You mentioned that "private limited company is treated as a partnership business, you directors/members may incur personal liability also for repayment to creditors". As I understand, Pvt Ltd co. has only limited liability, how come the liability is unlimited?
Ms.Nirmala P.Rao
(Expert) 11 October 2013
Dear Client.
If the company directors commit acts of fraud, malfeasance, Mismanagement etc and they drop the word limited from the word private limited in the papers connected with the business of the company etc, then private limited company in such circumstances is treated as partnership and direcots liability becomes unlimited. Please read the following also.
Directors/contributors/members liabilitu on winding up etc:
The claims may arise because all has not been well with the company and that certain decisions were taken by Director / Directors who need to be held accountable for that decision. Normally, such claims relate to the fraudulent conduct of business when a company is in the course of winding up. These claims will arise when the company continues to carry on business and incur debts at a time when there is, to the knowledge of the Directors, no reasonable prospect of the creditors ever receiving payment of those debts. The Directors are personally liable in such a case for such debts of the company.
Claims may arise against Directors to furnish such information particularly stating material interests of the Directors or Managing Director of the company, whether in their capacity as such or as members or creditors of the company or otherwise. This is instrumental in gauging the effect of those interests on the compromise or arrangements so proposed. The Directors also owe a duty to the Official liquidator, where a winding up order has been made by the High Court, to submit and verify a statement as to the affairs of the company.
In all the aforementioned cases it is unlikely that such claims will be brought by the creditors or members and are in practice brought by a Official liquidator (duly appointed by the members or creditors or High Court) in the name of the company. Since directors act as agents of the company they ow a fiduciary duty/duty of trust to the company and are personally responsible for their misconduct relating to the affairs of the company to third parties if they exceed or act in breach of this trust imposed on them by the company and after winding up they incur personal liability also in such circumstances to creditors and other third parties for the debts of th company on account of their misconduct.
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