Are Shareholders Liable for a Company’s Debts?

This article is prepared to explain how the Company Law of Mongolia distinguishes between a company’s assets and a shareholder’s personal assets.

A company’s assets consist of the property it owns and its property rights. These assets are used to finance the company’s operations and satisfy its liabilities.[1] In other words, as an independent legal entity, a company has its own separate assets.

A shareholder invests capital in the company and holds shares, and those shares constitute the shareholder’s personal property right. On the basis of such share ownership, the shareholder may receive dividends, participate in shareholders’ meetings with voting rights, and, after the company is liquidated, receive a proportionate share of the proceeds from the sale of the remaining assets.[2] However, a shareholder does not have the legal right to directly dispose of the company’s immovable property, movable property, or cash that is registered in the company’s name.[3]

Accordingly, a company’s assets are those registered in the company’s name and owned exclusively by the company, whereas a shareholder’s asset is the shareholding itself. Because of this distinction, the company’s debts and obligations are satisfied solely from the company’s assets. In other words, a shareholder is not personally liable for the company’s debts with their own private property. Rather, the shareholder’s liability is limited to the amount of the capital contributed to the company, namely the value of the shares held.[4] This is one of the most important legal mechanisms for protecting investors.

However, where the assets and property rights contributed by a shareholder to the company are not clearly separated from, and are instead mixed with, that shareholder’s other personal assets and property rights, the law provides that the shareholder may become liable for the company’s debts with all of their assets and property rights.[5] The Supreme Court has interpreted this to mean that “the property and property rights contributed by a shareholder to the company must be registered as company assets, reflected in the balance sheet, and clearly distinguished from the shareholder’s personal property.”[5] By contrast, where the separation between such assets and rights is clearly established, the shareholder’s liability remains limited to the amount contributed to the company.[6] This demonstrates that clearly distinguishing assets and rights is a fundamental condition for ensuring a shareholder’s limited liability.

In addition, if a company is dissolved, the liquidation committee settles the debts owed to creditors and other obligees first, and then distributes the proceeds from the sale of the remaining assets to shareholders in the order prescribed by law. In doing so, the proceeds from the sale of the remaining assets are allocated among the holders of the company’s common shares in proportion to the number of shares they hold.[9]

In light of the above, clearly distinguishing between company assets and shareholder assets is not only a legal requirement but also an important safeguard for maintaining investor confidence and protecting the security of shareholders’ personal property.

Sources:

[1] Article 9.1, Company Law of Mongolia

[2] Article 3.3, Company Law of Mongolia

[3] Article 3.2, Company Law of Mongolia

[4] Article 9.3, Company Law of Mongolia

[5] Article 9.5, Company Law of Mongolia; Resolution No. 27 of the Supreme Court of Mongolia dated June 18, 2007, “On Interpreting Certain Provisions of the Company Law of Mongolia,” para. 14

[6] Article 9.3, Company Law of Mongolia

[7] Articles 53 and 54, Company Law of Mongolia

[8] Article 30.1, Company Law of Mongolia

[9] Article 28, Company Law of Mongolia

Disclaimer: This article is intended for general informational purposes only and have been prepared in accordance with the laws in effect at the time of writing. For legal advice, please consult a professional attorney.