Businesses should be aware of the risk of uncapped liability for corporate debts which can arise through the use of unlimited companies. The inclusion of an unlimited company, particularly as a trading company, in any corporate group structure carries risks.  The current economic climate and increased rate of corporate insolvencies have magnified these dangers.

In an unlimited company there is no upper limit on the personal liability of shareholders for the company’s debts upon the company’s insolvency.  Although one might expect this type of company to be rare, 2% of all Irish companies are unlimited, and Ireland has more than twice as many unlimited companies as it has PLCs. 

There may be advantages to the inclusion of unlimited companies in certain corporate structures:

• Some unlimited companies, unlike most limited companies, need not file accounts at the CRO; and
• Unlimited companies enjoy greater flexibility than limited companies in undertaking capital reductions and in carrying out share redemptions or buy-backs.

These advantages must be weighed against the risks and dangers involved:

• Members are liable (without limitation as to amount) for the company’s debts on insolvency;
• Many groups seek to ring-fence any liability by ensuring that the shareholders of an unlimited company are themselves limited-liability entities.  However it is always possible that a court will hold such limited-liability “buffer” companies to be a sham, will “lift the corporate veil” and look to the ultimate underlying members;
• The courts enjoy powers under the Companies Act 1990 to order “related companies” (which need not necessarily be shareholders) of an insolvent unlimited company to contribute to the debts of that unlimited company;
• It is particularly dangerous for an individual to be a member of an unlimited company, even in a nominee capacity; and
• Former members continue to be liable for company debts for one year after ceasing to be a member.  This presents issues if the unlimited company is ever sold, and can potentially complicate an exit.

Any business with an unlimited company in its group structure should consider carefully whether the risks involved outweigh any perceived advantages.  If so, thought should be given to removing or at least minimising the exposure of the unlimited company:

• Re-registration as a limited company is possible if the unlimited company was not previously a limited company; and
• If re-registration is not possible, a corporate reorganisation transferring the trade (and in particular, any relationships with third-party creditors) to a limited-liability company may achieve the same result.