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Bob buys a successful company for a large amount of money, on loan from a Bank. Within a year, the company is bankrupt. Assume for the sake of the question that this is due to intentional or reckless poor management.

The banks, as well as any suppliers, lose their money; all employees lose their jobs and 2 months of unpaid salaries.

Does Bob have any liability if they intentionally or recklessly manage the company so poorly it ends up in bankruptcy?

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    What in your scenario constitutes fraud?
    – user6726
    Nov 12, 2022 at 16:12
  • @user6726 I'm not sure it's the right term here, but causing someone else to lose money is typically some kind of fraud. Presumably, Bob went to the bank saying, "I'll pay your money back with X% of interest" and not "I'll never pay that money back".
    – PMF
    Nov 12, 2022 at 16:55
  • No, that is not what fraud means. Fraud may result in financial loss, but the essence of fraud is making a knowingly false statement the truth of which the other party relies on in engaging in a transaction.
    – user6726
    Nov 12, 2022 at 17:02
  • @user6726 Hmm, ok. What would be a better term for this scenario then? Reckless bankruptcy? Negligent bankruptcy?
    – PMF
    Nov 12, 2022 at 18:00
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    @ohwilleke Indeed, the question was originally asked that way (see history). I think the current answer is applicable to that case.
    – PMF
    Nov 16, 2022 at 6:12

1 Answer 1

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Not as a shareholder

The entire point of limited liability companies is that the shareholders are protected from the losses of the company - they can only lose the amount they paid (or still owe) for their shares.

The directors and officers of a company have various duties that they owe to the company and can be held liable if they breach those duties. Those duties are:

  • the duty of loyalty,
  • the duty of care,
  • the right to rely on certain information,
  • the business judgment rule, and
  • fiduciary duties in the context of insolvency, corporate opportunities, and interested director transactions (or insider transactions)

"[I]ntentional or reckless poor management" would, on the face of it, appear to breach the duty of care and the business judgement rule and could expose the directors to liability.

However, Bob is a shareholder; not a director or officer. If he is not involved in the company beyond appointing the directors, he is not liable. If he points himself as a director or becomes an officer by telling the directors what to do, then he could be liable.

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