The principle of extending liability beyond the corporate shield is an important aspect of corporate law in the Kingdom of Bahrain, particularly concerning limited liability companies. This principle ensures the maintenance of commercial and corporate standards by holding companies and their shareholders accountable for their actions.
Personal Liability in Limited Liability Companies in the Kingdom of Bahrain
The extension of liability beyond the corporate shield means that a shareholder can no longer rely on the protection of limited liability if the corporate structure is misused to conceal unlawful actions or omissions. In such cases, the shareholder may be held personally liable for the consequences of those actions or omissions.
The primary reason individuals establish limited liability companies is to limit their personal liability. As stipulated in Legislative Decree No. (21) of 2001 promulgating the Commercial Companies Law (“CCL”), as amended, a shareholder’s liability is generally restricted to their share in the company. However, Article (18 bis) of the CCL sets out specific conditions under which this limitation is lifted, exposing shareholders, managers, and directors to personal liability.
Shareholders, managers, and directors of shareholding companies, closed shareholding companies, and limited liability companies may be held personally liable for damages sustained by the company if they commit any of the following acts:
Providing false or misleading information about the company’s share capital in its deed of association or dealings with third parties.
- Using the company for fraudulent or illegitimate purposes.
- Treating the company’s funds as personal assets.
- Failing to separate personal interests from the company’s interests.
- Incurring obligations or liabilities on behalf of the company with knowledge that the company cannot fulfill them.
- Causing the company’s inability to pay taxes or government fees due to gross negligence or wrongdoing.
- Violating applicable laws or the company’s constitutional documents.
- Exceeding their authority or committing fraud or gross negligence in the performance of their duties.
- Failing to act prudently under the circumstances.
As a result, individuals intending to establish limited liability companies or invest in such companies in Bahrain must understand that the corporate shield of limited liability is not absolute. If the conditions outlined in Article (18 bis) of the CCL are met, personal liability may arise, exposing them to claims from creditors and third parties.
This principle serves as a reminder for business owners and investors to operate within the framework of the law and maintain transparency and integrity in their corporate practices of Article (18 bis) of the CCL detailed hereinabove were to apply.
