The philosophy of limited stockholder liability consequences in more injury than good and should be abolished.
The anomalousness that is limited stockholder liability has its roots in the historical development of company jurisprudence. There are assorted types of limited company which can be incorporated under the Companies Act 1985 but the most common is a company “limited by shares” . This means that the liability of members ( stockholders ) is restricted to the sum due on their portions. This is unrealistic in two respects, the first practical and the 2nd philosophical. In the first case, it should be observed that in the instance of really many companies, the individuality of the stockholders is to all purposes and intents indistinguishable to that of the managers. Typically, members of a household will organize a limited company for the intent of trading as a little concern and the portions will be allocated to the same persons as those who besides serve as managers and hence have the really much more significant duties of managers imposed upon them by jurisprudence.
In the 2nd instance, stockholders will often utilize the company as a vehicle for their ain concern intents. In such fortunes, the restriction of liability to the comparatively modest amount due on the portions ( even if this is non to the full paid up at the beginning which is often the instance ) is clearly an unreal limitation upon liability. Such a limitation is inappropriate in the modern age particularly where, as in the instance of big public companies, the bulk of the stockholders ( in footings of shareholding if non in footings of Numberss of portions ) will be institutional investors. In add-on, the current arguments refering corporate administration and the answerability of managers throw the place of the stockholder into crisp alleviation and raise the inquiry of the extent to which the stockholder under the present government may be said to possess power without duty.
At the root of the job lies the construct of the company as an entity. In the early old ages of joint stock companies, they were universally regarded as a species of partnership. Writing in 1843, J.W. Smith [ 1 ] described a company or “body corporate” as “several persons united in such a mode that they and their replacements constitute but one individual in jurisprudence, a individual distinct from that of any of the members, though made up of them all…” . Thus the early impression of the company was that it was non so much created by the members as made up of them all. However, the rapid growing of what were so referred to as joint stock companies in the first portion of the 19th century created a state of affairs in which portions in such companies became readily tradable as investings therefore disassociating the stockholders from the function of members concerned in the direction of the company and progressively projecting them in the function of investors or even speculators.
InBligh V Brent[ 2 ] , it was held that stockholders had no direct legal or just involvement in the company but simply the right to have dividends and to delegate their portions for value. Stockholders hence ceased to protect their investing through active engagement in the direction of the company and came to trust upon the fact that although such investing may be forfeit in the event of the prostration of the company, their liability ( unlike that in a partnership ) was limited to their staying duties in regard of paying for their portions.
Ireland [ 3 ] summarises the current trouble therefore:
“In short, a organic structure of jurisprudence designed for application to 19th century joint stock companies – individual entity, national companies whose stockholders had been relieved of any meaningful ownership map – has come to be applied both to little private concerns I which stockholders and company are frequently to all purposes and purposes one, and to multi-unit, multi-divisional, multi-national corporations. As a consequence, the conceptual construction of company jurisprudence has become of all time more divorced from the economic worlds to which it applies…”
Notwithstanding this historical anomalousness, it has begun to be recognised that there are fortunes in which it is appropriate to “lift the corporate veil” and fix stockholders with liability in their ain right. A statutory illustration of this is to be found in s.24 of the Companies Act 1985. This imposes limitless personal liability upon every stockholder if the company continues to merchandise for more than 6 months with fewer than the minimal figure of members where those that remain are cognizant of the fact. It is submitted that while such a potentially punitory countenance may promote conformity with the statute law, it is in itself inappropriate in a state of affairs in which such liability might potentially fall upon single and corporate stockholder alike. However, the tribunals have traditionally been prepared to “lift the veil” in order to determine the individuality of stockholders in state of affairss where the world of ownership is more of import than the corporate image.
The authoritative illustration of this is to be found inDaimler V Continental Tyre Co[ 4 ] which concerned the application of the Proclamation against Trading with the Enemy Act 1914. An English complainant sought finding of liability to a company incorporated in this legal power but whose managers and stockholders were all German. While admiting that “the character of single stockholders can non impact the character of a company” , Lord Parker CJ stated that it may:
“…be really material on the inquiry whether the company’s agents, or the individuals inde factocontrol of its personal businesss are in fact, adhering to, taking instructions from, or moving under the control of enemies…”
It was held that this would depend upon the figure of such stockholders who fell into the forbidden class. Although this determination is frequently cited as the premier illustration of “lifting the veil” , it is submitted that it may in itself be of limited application as a consequence of the particular wartime fortunes which obtained and the fact that the object of the exercising in that instance was to forestall the breaching of a step implemented in the involvements of national security. It is, on its ain, light justification for enforcing general civil liability upon stockholders.
It is suggested that a more appropriate attack to repairing stockholders with liability is to be found in instances where the tribunals have been prepared to deduce an bureau relationship. InWallersteiner V Moir[ 5 ] , Lord Denning employed a celebrated marionette analogy to depict companies under the control of Wallersteiner:
“”…they were merely themarionettes…No one else got within range of them…Transformed into legal linguistic communication, they were hisagentsto make as he commanded. He was theprincipalbehind them. I am of the sentiment that the tribunal should draw aside the corporate head covering and handle these concerns as being his creatures…”
However, this attack should non be taken excessively far. There must stay a differentiation between ownership of portions even where this confers a controlling involvement and a state of affairs in which the company is simply an unintentional vehicle for the concern activities of the major stockholder ( s ) .
Careful analysis is particularly appropriate in the instance of corporate groups where a figure of companies may in fact be engaged in a common concern activity. This may turn out peculiarly sinister where the object of the division of involvements between a figure of such groups is to mask the activities of the trading entity as a whole. This rule is illustrated byGilford Motor Co Ltd V Horne[ 6 ] in which the Managing Director of a company was under a compact non to beg clients of that company but formed another company of his ain for that intent. In relation to groups of companies, the attack is demonstrated inDHN Food Distributors Ltd V London Borough of Tower Hamlets[ 7 ] which involved an clever effort by one company to claim compensation for perturbation to land which in fact belonged to another company the stockholders of which were indistinguishable to the first. Lord Denning stated that the tribunal should hold respect to the overall image of ownership:
“…this is particularly the instance where the parent company owns all the portions of the subsidiaries…” .
Such companies should to all purposes and intents be treated as one.
It is submitted that these assorted techniques are unreal and unsatisfactory. What is required is a extremist reappraisal of the nature of a company in the visible radiation of modern commercial worlds and the direction of companies in pattern. This is compellingly argued by Ireland [ 8 ] :
“Ultimately, the conceptual pea soup enfolding the portion and shareholding arises from modern company law’s failure to take separate corporate personality earnestly plenty, and its consequent effort to straddle two basically unreconcilable positions.”
He argues that the jurisprudence has failed “fully to recognize the deductions of the depersonification of the company and the decrease of the corporate stockholder to the position of a rentier investor” . What is required is the rewording of the company as an entity in its ain right. This may at first sight seem a unusual proposition given the insisting in most analysis upon the being of the limited company as an independent legal entity but, as has been demonstrated above, this theoretical account is most often insisted upon for the intent of curtailing the liability of stockholders. In the instance of the little company, this is frequently a meaningless exercising since a new or little company with limited investors and small portion capital will non in world be able to obtain recognition and other concern installations in the absence of personal warrants, most frequently required of the managers.
Therefore, the strength of the corporate entity is to all purposes and intents denied to the stockholders. In such fortunes, it is possibly appropriate that their liability should be likewise limited but there is small practical addition to them from this. By contrast, the continued restriction of liability in the instance of larger corporations where the existent ownership and control lies in the custodies of other corporate of institutional investors can no longer be regarded as appropriate.
While admiting that “the philosophy of limited stockholder liability consequences in more injury than good” , there is no clear reply to the inquiry of how such abolishment would run in pattern. To get rid of such limited liability, without more, would ensue in debacle. If one considers the illustration of the ‘Harold lloydNames’ who were ab initio seduced by considerable fiscal additions in return for taking on the seemingly harmless load of limitless personal liability, it is possible to reason that the infliction of such liability upon stockholders would non work: shareholding at nowadays may be regarded as a respectable signifier of chancing. The additions which might be achieved from such endeavor are offset merely by the hazard of losing one’s “stake”.
To increase such liability would doubtless discourage both private and institutional investors likewise to the extent that the current system of financing corporate endeavor would fall in. By the same item, such investors who were non therefore deterred would be probably to return to nineteenth-century manner involvement in oversing the direction of the company which – as is demonstrated by the occasional efforts by stockholders to step in in corporate administration through the mechanism of the company’s Annual General Meeting – could barely be reconciled with modern direction constructions and techniques. Conversely, a theoretical account such as that suggested by Ireland [ 9 ] of the company detached from its stockholders and operating as a signifier of societal establishment for the benefit of its assorted stakeholders is barely likely to turn out dynamic, if even operable, in a commercial environment. Possibly the most logical, if ambitionless decision, is to continue the position quo in which investors continue to bask the protection of limited liability while – by statute law instead than the organic development of the jurisprudence by the tribunals – beef uping the ability of tribunals and regulative organic structures to strike at agreements which are clearly a fake.
Adams, T. ,Business & A ; Company Legislation 2004-2005, ( 2004 )
Davies, P. ,Gower and Davies’Principles of Modern Company Law, ( 7ThursdayEd. , 2003 )
Hannigan, B. ,Company Law, ( 2003 )
Ireland, P. ,Company Law and the Myth of Shareholder Ownership, [ 1999 ] MLR 32
Ottolenghi, S. ,From Peeping Behind the Corporate Veil to Ignoring it Wholly, [ 1990 ] MLR 338