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Limited liability


I. Introduction.. 2 more

II. The concept of limited liability.. 3

III. Why limited liability?. 3

IV. Areas of concern.. 3

i) Moral hazard.. 3

ii) Immorality.. 3

iii) Closely held companies. 3 Visit redistribute

Limited liabilityhref=";link=11345;d=1;U=cal1966;;s=fb9e83606c9325346ea5a78f38ccfb9c#_Toc9136920#_Toc9136920">iv) Groups of companies. 3

v) Tort creditors. 3

V. Current regulation and the need for reform... 3 redistribute

i) Rules related to share capital. 3

ii) Imposing liabilities on managers or shareholders. 3coeb

iii) Judicial veil piercing and group of companies. 3

iv) Small businesses, tort creditors: revolutionary reforms?. 3 Weber suppressed

VI. The way ahead.. 3

I. Introduction

The institution of limited liability for companies has typically been regarded as one of the most important innovations of the late industrial revolution period. This view was appropriately expressed by one early commentator, who stated: "The limited liability corporation is the greatest single discovery of modern times... Even steam and electricity are less important than the limited liability company"[1]. Commentators generally consider that limited liability has been proved a vital instrument in the attainment of economic growth. However, recent analysis of the limited liability principle have questioned its potential advantages and have argued for adoption of a more restrictive approach by the regulation.

It is the aim of this paper to analyze the importance of the existence of limited liability companies in the 21st century, as a means of fostering entrepreneurial spirit, and to argue that while the above aim is regarded as essential in the market economy, there is invariably a need for a clear and precise framework through which the principle should apply. The potential abuse of the limited liability principle requires a careful consideration when deciding about the appropriate level of regulation.

The guiding principle of competitiveness of UK companies and the emphasis on the construction of a legal system that has an advantageous framework of company law and will allure businesses to it, as evidenced in the Company Law Review: Final Report[2], needs to be balanced with the guarantee that sensible prophylactic measures are taken by the legislator to avoid misuse of the principle. The need to attract more businesses does not justify an extremely lax application of the limited liability principle.

Due to the wide ambit of the subject matter, this paper will address primarily the major areas of concern in the field of companies limited by shares. The application of the principle will be discussed in relation to small businesses, groups of companies, tort creditors and provisions related to share capital and liabilities of directors will be analysed. Before this analysis, however, it is important to consider the concept of limited liability and the positive attributes of it.

II. The concept of limited liability

Eleven years after the Joint Stock Companies Act 1844, which introduced the incorporation by registration, the privilege of limited liability became available with the Limited Liability Act 1855[3]. Initially, it was assumed that the limited liability principle would apply to public corporations, i.e. companies that have the ability to invite the public to subscribe for shares[4], since the grant of this right was considered vital to the raise of great amounts of capital for enterprises involved in public utilities. However, the "calamitous"[5] decision in the Salomon case had the effect of allowing also members of closely held businesses to have the right to enjoy limited liability, provided that these kinds of companies are willing to submit to the formalities of the Companies Act.[6].

The meaning of limited liability is that, in case of insolvency, shareholders are under no obligation to the company or its creditors beyond their obligations on the par value of their shares or under the guarantee they have agreed in the case of a company limited by guarantee. The limited company, thus, involves two separate concepts, first it has a separate legal personality altogether from the members and has its own assets and liabilities[7] and secondly, its members can invest with limited liability[8].

It has been argued that if limited liability were not provided by the law, firms would attempt to create it by contract[9]. Indeed, as it can be seen by the various devices used by unincorporated partnerships to give those owning stock limited liability, that was the case before the statutory grant of the limited liability. The formal introduction of the twin principles of incorporation and limited liability led to the establishment of companies as the major instrument in economic development and contributed to the evolution of commerce and arguably to world prosperity[10].

III. Why limited liability?

The major contribution of limited liability is that it supports the investor to invest its capital into dynamic business without worrying that he will incur further liability. The economic theory of the firm, which explains the company as a nexus of contracts joining inputs to produce outputs[11], has provided a solid base for the appraisal of limited liability. As regards mainly publicly held companies, where the distinctive feature is that of separation between management and investment, limited liability reduces the need to monitor the agents of the company, since the investor will not be held liable for the company's debts created by the managers` decisions[12]. The investor knows that the most he can lose is the amount he has put in the company. Besides, it reduces the costs of monitoring other shareholders, as it makes the identity of the other shareholder and specifically their wealth irrelevant[13].

Moreover, it promotes the free transfer of shares, which in turn, through the market price of those shares, induces the managers to act efficiently. The threat of a take-over may have a potential beneficial result on the decisions of the managers and if it increases the probability of maximization of the firm's assets, shareholders and creditors will be better off[14].

Diversification of portfolios as well, will be easier within a limited liability regime. Manne argues that investors will be able to minimize risks and managers will enter into more risky businesses without putting in jeopardy the whole wealth of the shareholders[15]. Consequently, the investor will charge less for the supply of his capital. Halpern et al. point out that under an unlimited liability regime, securities markets might even cease to exist or concentration of the shares would be in the hands of the wealthier shareholders, since the latter would lack the incentive to buy small amounts of shares, knowing that they may incur unlimited liability[16].

As regards contractual claims, the matter is which situation produces lower transaction costs and is more efficient overall. Limited liability reduces transaction costs, since there is no need for the parties to make individual contracts regulating their relationship[17]. It is seen as the appropriate regime with regard to informed creditors with bargaining power. Voluntary creditors are better positioned to deal with the consequences of the failure of a company than shareholders, since they can take precautionary measures such as screening and higher interest rates when negotiating with the company[18]. Posner[19] regards limited liability as a means of risk shifting while Easterbrook and Fischel[20] argue that when a company fails the loss is "swallowed" rather than shifted, since equity investors lose their investments before the debts holders. There is no externality of risk, since the creditors will be ex ante compensated and shareholders have the possibility to waive limited liability when they judge that this is more efficient[21]. Furthermore, since the shareholders are well diversified, each debt contract will have an insignificant impact on their financial position[22].

Overall, the positive attributes of limited liability, as revealed above, provide a firm ground for its appraisal as a principle needed to promote trade and industry prosperity.

IV. Areas of concern

The principle of limited liability, although now established almost universally, has never stopped to provoke various doubts as regards its possible deficiencies. We will now try to analyze and assess some of these problems.

i) Moral hazard

The most frequent argument against the conferring of limited liability is the moral hazard, which it may create through the shift of the risk of failure from shareholders to creditors[23]. Under a limited liability regime, shareholders have the opportunity to effect uncompensated transfer of risks to creditors and thus it creates incentives for excessive allocations of social resources to risky enterprises. Shareholders know that they will reap all the benefits and that they will not bear the risk of failure. Whereas in the case of large lenders, they can obtain personal guarantees from the owners, small trade creditors usually do not have the bargaining power or resources to shelter themselves through contract[24]. Thus, limited liability has the effect of transferring the risk from superior risk bearers to small trade creditors[25].

ii) Immorality

A related problem is the immorality, which limited liability may create in the commercial life and which in the long term can be significantly damaging. Hall argues that "liability limitations artificially distance individuals from the acknowledged personal responsibility"[26]. The blatant misuse of limited liability is easily discernible in the case of the so-called "phoenix" companies, where deceitful entrepreneurs let their company to go into insolvency liquidation, thus avoiding their liabilities to creditors and then they buy the assets of the company from the liquidator and re-commence business through a new company.

iii) Closely held companies

Specific arguments have been advanced in the case of closely held companies. Halpern et al. argue that the owners of such companies have strong incentive to take excessive risk and invest inadequate capital to carry their ventures[27]. In addition, since the owners and the managers of these companies are the same, the cost savings on monitoring agents and shareholders are less, compared to those in large corporations. In the case of diversification, Freedman points out that the latter is not possible in small firms, since the owners usually invest their money in their firm and do not have interest in providing capital to other companies[28]. Besides, the possibility of contracting round limited liability by large lenders, which is greater than in the case of large companies, will have the effect of increasing transaction costs. The latter practice will also affect the situation of small creditors, who will not have the ability to shift back the risk[29].

iv) Groups of companies

The limited liability principle may have adverse effects also in the case of corporate groups. As Easterbook and Fischel admit, the potential moral hazard is intensified in this case. The parent company may use the subsidiary as a means of engaging in risky ventures without being responsible for the actions of the latter[30]. It may often be the case that the subsidiary will be undercapitalized and it will not operate on a profit-making basis, with effect of transferring uncompensated risks to creditors[31]. Milman points out:" by the liberal creation of undercapitalized subsidiaries a second level of limited liability is thus created for business wishing to insulate themselves from enterprise liability[32]. The company, being able to determine its own size, can define the boundaries of its responsibilities so as to avoid mandatory legal duties and thus creating the so-called capital boundary problem[33].

v) Tort creditors

The most conceiving argument against limited liability is that related to tort creditors. The latter, compared to contractual creditors, are involuntary creditors and therefore the Coase theorem is inapplicable here[34]. Whereas contractual creditors have the opportunity to assess the possible dangers as regards the company they deal with and thus request compensation or personal guarantees, the tort creditors are not in a position to avoid or monitor the risk to which the company is exposing them[35]. As a result, the risk in that case is effectively externalized. The limited liability thus, can operate both as a means of decreasing the costs on precautions to avoid accidents and as a means of encouraging investment in hazardous industries. The problem is exemplified in the case of corporate groups, which in order to avoid mass torts litigation, structure themselves in such a way as to prevent claims from tort creditors, who will be thus confined to claims against the assets of undercapitalized subsidiaries[36]. While such a company may have a positive value for its shareholders and it can be attractive to investment, yet its net present value to society as a whole may be negative[37].

V. Current regulation and the need for reform

Procaccia, even though a proponent of the view that company law should be seen as a means of assistance of the conduct of commerce so as to achieve economic benefit for the society, has drawn the attention for the need of regulation of limited liability companies[38]. Indeed, as it has been showed from the previous analysis, the limited liability institution, though essential for the economic development, can be used as a vehicle for an ineffective allocation of risks and thus having a destructive effect on the society as a whole. Company law therefore, should have a major role in administering the use of limited liability. It is essential to find the balance between the needs of commerce and industry and the need to protect creditors and investors.

English law, while it offers efficient and easy access to incorporation with limited liability in order to encourage economic activity, aims also at protecting shareholders' and creditors' rights, thus promoting participation by the former in companies and encouraging the latter to deal with the formed companies. Through several provisions in the Companies Act 1985 and the Insolvency Act 1986, it has tried to deal with the specific features of limited liability companies. The courts have also taken action in order to restrict the possible exploitation of the limited liability principle. It is now appropriate to try to evaluate if the above means have been proved efficient in finding the desirable balance.

i) Rules related to share capital

The provisions related to share capital[39] were introduced in order to provide a margin of safety for creditors and to give managers and major shareholders an incentive to maintain the company` s solvency. Since the company has been held to have a separate legal personality, those who give credit to the company, especially the unsecured creditors, must be sure that the latter has adequate funds to repay them.

The maintenance of capital doctrine provides a number of rules designed to protect the capital fund of a company[40]. Still, in the private companies context, there is no need of capital at all, thus they merely can borrow the resources needed for them to function[41]. While the rules related to share capital could be economically efficient since this is what creditors would bargain in the absence of a compulsory company law provision, it is questionable if today their aim is being achieved[42]. The recent decision of the European Court of Justice in the Centros case[43] reveals the deficiencies of the doctrine at the European level and more specifically the danger of circumvention of the rule through the incorporation of companies in UK leading probably to a "race of laxity".

The DTI has proposed to relax the rules regulating reductions of capital and to introduce an easier procedure for the reduction of capital, which will only require a special resolution of the shareholders plus a certification of solvency from the directors[44]. The Company Law Review aims especially at deregulating completely the share capital maintenance rules as far as private companies are concerned.

All the same, various scholars are proposing the introduction of minimum capital requirement in the context of private companies, as a method of an indirect creditor protection and of inducing the shareholders to ensure that the operations of the company are commercially prudent. Prime emphasizes the general destabilizing commercial effect of the lack of such rules, especially when recession occurs[45]. The danger of the proliferation of one-man companies without adequate capitalization seems a reasonable justification for the introduction of the doctrine in this context. Moreover, a minimum capital could operate so as to oblige entrepreneurs to reflect on their personal responsibility before incorporating and it could be an efficient means of preventing frivolous incorporation.[46].

ii) Imposing liabilities on managers or shareholders

In principle, as a consequence of the separate corporate personality, there is no such liability in English company law. However, the introduction of specific statutory provisions has succeeded in piercing the corporate veil in some cases.

Insolvency practitioners had difficulty establishing dishonesty under the fraudulent trading provisions[47], introduced in 1929. Due to the strict standard of proof required by the courts, the provision had an insignificant impact on constraining the abuses of limited liability.

In order to alleviate the deficiencies of the fraudulent trading provision, the wrongful trading provision was introduced in 1985, after a recommendation of the Cork Committee[48]. Professor Prentice described section 214 of the Insolvency Act as "one of the most important developments in company law this century"[49]. It allows the court to order contributions from a director where the company is put into insolvent liquidation and it can be shown that before the commencement of the winding-up, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into liquidation. S.214 of the Insolvency Act 1986 aims at stimulating directors to deal with a financial crisis before it is too late. As a result, this could reduce losses to creditors, since the latter would be able to act as external controllers to the duties of care, duty and carefulness of the directors[50].

However, the difficulty in finding the exact point, when directors should have realized that the company would not escape insolvency and the liquidators' reluctance to bring claims due to high litigation costs restrict significantly the application of wrongful trading provision. Hicks `s proposal that resources should be managed by the Insolvency Service, in a form of a legal aid fund, to which liquidators could apply for assistance in order to claim compensation on a wrongful trading basis, may be proved useful in inducing liquidators to rely on the wrongful trading provision[51].

Finally, directors may face a disqualification order under the Company Directors Disqualification Act 1986 that states that they are unfit to be concerned in the management of the company[52]. With the aim of protecting the public interest, deterring improper conduct by the directors and promoting standards of good practice, the Act is a clear-cut example of the regulatory approach of the company law in the limited liability context. Due to the introduction of the statutory whistle blowing in section 7(3), the application of the Act has become particularly prolific. However, this regulatory strategy has become a victim of its success, since it is financed out of public funds.

In general, the above provisions are methods of ex post regulation of the use of limited liability. While they may have prospective effect, as a way of inducing the persons responsible to monitor the firm's capitalization and efficiency, they offer no significant assistance in cases, where the directors or owners of the companies have already abused the limited liability principle. As Finch points out "the liquidator cannot attack the incompetence or mismanagement that may have brought the company to the verge of the insolvency"[53]. Thus, the damage has already occurred and very few things can be done to alleviate the detrimental effects on creditors.

iii) Judicial veil piercing and group of companies

The courts through the application of the "lifting of veil" doctrine have tried to balance the benefits of limited liability against its costs[54]. The separate legal personality has been disregarded in cases, which involve agency relationship, fraud, tax, trust, enemy, group of companies and tort.

While, there has been a modification in the established principle of separate personality in relation to group accounts[55], the courts seem unwilling to accept claims for lifting the veil in the group of companies' cases. This reluctance of the courts is often regarded as based on a pro-multinational approach to businesses. As Janet Dine points out "the courts today are more prepared to lift the corporate veil when to do so is to the advantage of the parent company but refuse to do so when it would be to its disadvantage" [56].

The situation thus, in this area is still governed by the principle that companies with related shareholdings bear no responsibility for the liabilities of other companies in the group. Nevertheless, there have been some limited, though, exceptions, where the courts disregarded the principle and held member companies liable for debts incurred by other members in the group, apart from the cases where circumstances indicate that the subsidiary is a mere façade. These are in cases of guaranteed liabilities, judicially approved pooling arrangements under section 426 of the Companies Act 1985 and finally when it can be proved that the parent itself is a director of the subsidiary and as such can be liable for wrongful trading[57].

Given the importance that the group structure has nowadays as a vehicle of economic development and the simultaneous dependence on the case law in order to clarify this difficult matter, it is essential to introduce more efficient methods to deal with this aspect of company law. The reliance on the courts to deal with this matter has been proven a rather costly and disorganized solution. Milman suggests that a possible solution would be to reverse the burden of proof so that parents will be liable, unless they can prove that there has been no meddling with the management of the subsidiary and that the latter had not been able to obtain any credit by virtue of its relationship with the parent[58].

More importantly, there should be a clear and precise principle, introduced by the legislation, from which litigants can envisage when the courts will apply the Salomon principle and where not. Unfortunately, the Company Law Review, having the view that insolvency law offers adequate protection, did not recommend any reform of the law applicable to group of companies.

Above all, action should be encouraged at a transnational level, which would set unified standards in order to deter relocation of groups in states whose rules on group of companies are more "enabling". The Ninth Draft Directive on groups of companies would provide such a solution in the EU context but it is now regrettably abandoned.

iv) Small businesses, tort creditors: revolutionary reforms?

Based on the arguments advanced in the first part of this paper, many scholars have observed that limited liability may not be the appropriate regime for small businesses. The Companies Act 1985, as it is designed with the needs of public companies in mind, does not provide an well-organized framework to small businesses[59].

Hicks' proposal[60] that the greatest deregulatory opportunity would be a new business corporation without limited liability is rejected by Freedman, who points out that this would allure an insignificant number of entrepreneurs. Instead, based on the difficulty of finding a way to distinguish properly between closely held firms and others, she suggests that limited liability should be retained in the small business context provided that it would not be encouraged[61]. The indispensable need to protect creditors in the case of limited liability companies restrains significantly the limits of deregulation in this area. A possible new kind of limited liability company would result in encouraging sole traderships and partnerships to incorporate, expanding thus the opportunities for externalization of risk against the interests of creditors[62].

All the same, the EC Directive on single member private company[63], the recently introduced Limited Liability Partnership in UK and the "think small first" approach of the Company Law Review to private company regulation and legislative structure reveal the current dominant trend in company law, which favours the open access to limited liability without taking into account its possible deficiencies.

In the case of tort creditors, there have been significant proposals in favour of the introduction of unlimited liability. Hansmann and Kraakman suggest that an unlimited liability regime would be efficient provided that shareholders' liability would be pro rata, meaning that each shareholder would be personally liable in proportion to his investment in the firm[64]. Leebron instead argues that the solution lies in the amendment of legislation so as to provide tort creditors with special priority in insolvency proceedings[65].

The appropriate solution to this major deficiency of the limited liability principle should be addressed by the legislator, since he is undoubtfully the most appropriate authority to deal efficiently with the problem.

VI. The way ahead

In the context of international business community, the business environment in UK and particularly the company law regime are considered favourable to economic enterprise. The limited liability regime and moreover the current political emphasis on the need to make company regulation efficient and proportionate, as evidenced in the Company Law Review, are regarded essential in order to allure foreign enterprises to incorporate in UK. The introductory sentence of the Company Law Review: Final Report[66] which states that "A key principle has been that company law should be primarily enabling or facilitative- it should provide an effective vehicle for business leadership and enterprise to flourish freely in a climate of discipline and accountability" reveals the driving force behind the reform.

Nonetheless, an extensive deregulation carries the danger of increasing the possibilities of abuses of the limited liability principle. It is more efficient to restrict ab initio the access to limited liability than leaving the courts to decide ex post what the limits should be. A clear and precise context thus is indispensable in exploiting efficiently the limited liability institution and finally attaining economic growth.

The evolving corporate social responsibility theory, which views the company not only as profit maximizer, places at the heart of the company' s aims the protection of creditors. A balance needs to be achieved between the need to facilitate business set-ups and the requirement to regulate companies in the interests of shareholders, creditors, the companies themselves and the commercial community generally.

The European Union may provide a basis for the development of common standards among the various Member States in the field of company law with the result of limiting the possibilities of a Member State becoming the "Delaware of Europe".

Above all, we must always bear in mind that in the company law field, political considerations have always played an important role in the attempt to regulate the conduct of enterprises. An approach tilting in favour of powerful businesses may have harmful effects on persons unable to lobby effectively for their protection. It is mainly the duty of the legislator to remain impartial and strike a balance between those conflicting interests.



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[1] Professor N. M. Butler, President of Columbia University (quoted by A. L. Diamond in Orhnial (ed.), Limited Liability and the corporation, Law Society of Canada, 1982).

[2] Company Law Review Steering Group, Modern Company Law for a Competitive Economy: Final Report of the Company Law Review Steering Group (DTI, URN 01/942 and 01/943, July 27, 2001), report/index.htm

[3] The principle is now contained in s. 1 (2(a, b)) of the Companies Act 1985.

[4] The Companies Act 1985 (s.81) prohibits private companies from issuing, or causing to be issued, any advertisement offering securities to be issued by the company.

[5] O. Kahn- Freund, "Some reflections on company law reform", (1944) 7 MLR 54

[6] Salomon v. Salomon and Co. Ltd [1897] AC 22.

[7] Salomon v. Salomon and Co Ltd, n 6 above.

[8] It must be clear however, that the liability of the company for its various debts is unlimited and the limitation is on the members of the company to contribute to the payment of the company` s debts.

[9] Easterbrook F. and Fischel D. "Limited Liability and the corporation" (1985) 52 U. Chi. L. Rev. 89

[10] Whincup M. "Inequitable Incorporation: the abuse of a privilege", (1981) 2 Co.Law. 158

[11] Farna L. and Jensen M. "Agency problems and residual claims" (1983) 26 J. L. & Econ. 327

[12] Easterbrook F. and Fischel D. n 9 above

[13] Cheffins Brian, "Company Law, Theory, Structure and Operation" (1998) Oxford University Press.

[14] Easterbrook F. and Fischel D. n 9 above

[15] Manne, "Our two corporation systems: Law and economics", (1967) 53 Va. L. Rev. 259

[16] Halpern, Trebilock and Turnbull, "An economic analysis of limited liability in corporations law" (1980) 30 U. Toronto L.J. 117

[17] Pettet B. "Limited liability- A principle for the 21st century?" (1995) 48 Current Legal Problems (Part 2) 125.

[18] Cheffins Brian, n 13 above.

[19] Posner R., "The rights of creditors of affiliated corporations" (1976) 43 U. Chi. L. Rev. 499

[20] Easterbrook F. and Fischel D. n 9 above

[21] Hansmann H. and Kraakman R. "Towards unlimited liability for corporate torts" (1991) 100 Yale L.J. 1879

[22] Cheffins Brian, n 13 above.

[23] Landers M. "A unified approach to parent, subsidiary and affiliate questions in bankruptcy" (1967) 43 U. Chi. L.R.

[24] Freedman J., "Limited liability: large company theory and small firms" (2000) 63 MLR 317

[25] Cheffins Brian, n 13 above.

[26] Hall K. "Starting from silence": the future of feminist analysis of corporate law" (1995) 7 Corp. and Bus. L.J. 149

[27] Halpern, Trebilock and Turnbull, n 16 above

[28] Freedman J., n 24 above. But in "Limited liability, tort victims and creditors" (1991) 91 Columb. L.Rev. 1565 Leebron argues that while the owners will rarely be diversified, an unlimited liability regime would completely eliminate the ability to obtain the benefits of diversification.

[29] Freedman J., n 24 above.

[30] Easterbrook F. and Fischel D. n 9 above

[31] Landers M. n 23 above.

[32] Milman David, "Groups of companies: the path towards discrete regulation" in Milman David (ed.) Regulating enterprise: law and business organisations in the UK, (1999) Oxford Hart. However, Posner holds that the imposition of unlimited liability would result in a growth of information costs since the creditor would have to investigate the economic situation of the other companies in the group (Posner R., n 19 above)

[33] Collins Hugh, "Ascription of legal responsibity to groups in complex patterns of economic integration" (1990) 53 MLR 731.

[34] The Coase theorem is defined as the situation where "markets participants can potentially deal with externality problems in a socially optimal manner by concluding private agreements". See Coase R., "The problem of social costs" (1960) 3 J. of L. and Econ. (cited at Cheffins B., n 13 above)

[35] Hansmann H. and Kraakman R. n 21 above.

[36] See the decision in Adams v. Cape Industries plc. [1990] 2 WLR 657, where the collapsed subsidiary had a low capitalisation and secured credit because of its connection with the parent company and the Court held that it could not disregard the principles of Salomon v. Salomon & Co Ltd merely because it considers that justice so requires.

[37] Cheffins Brian, n 13 above.

[38] Procaccia U. "Designing a new corporate code for Israel" (1987) 35 Am J. of Comp. Law 581

[39] Sections 135,143,159-181 of the Companies Act 1985

[40] The matter is now regulated by the European Union; see Second EC Directive of 13 December 1976 on coordination of safeguards which, for the protection of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital with a view to making such safeguards equivalent (77/91 EEC), especially art. 15-22.

[41] Prime T., "Structuring the law of private limited companies through the next millennium" in Milman David (ed.) Regulating enterprise: law and business organisations in the UK, (1999) Oxford Hart.

[42] Ferran Eilis, "Creditors` interests and "core" company law" (1999) 20 Co. Law. 314

[43] Centros (C-217/97) (2000) 2 WLR 1048

[44] DTI Consultation Document (October 1999) Company Formation and Capital Maintenance paras. 3.27 et seq.

[45] Prime and Scanlan, The law of private limited companies, (1996) Butterworths.

[46] Freedman J., n 24 above. Lower, instead suggests that the directors of private companies could be obliged to read a statement about the possible personal liability in certain cases, see Lower M., "Limited liability for small-closely held businesses" (2000) 22 LLR 89

[47] s. 213 of Insolvency Act 1986, s. 458 of Companies Act 1985, sch. 24 of Companies Act 1985

[48] s. 214 of Insolvency Act 1986

[49] Prentice D., "Creditors' Interests and Directors' Duties" (1990) 10 Oxford Journal of Legal Studies 265.

[50] Arsalidou D., " The impact of section 214(4) of the Insolvency Act 1986 on directors` duties" (2001) 22(1) Co. Law. 19

[51] Hicks Andrew, "Director Disqualification: can it deliver" (2001) JBL 433

[52] Section 6 of the Company Directors Disqualification Act 1986.

[53] Finch V., "Company Directors: Who Cares About Skill and Care?" (1992) 55 Modern Law Review 179

[54] Easterbrook F. and Fischel D. n 9 above

[55] Eleventh EC Directive of 21 December 1989 concerning disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State (89/666/EEC)

[56] Janet Dine, The Governance of Corporate Groups (2000) Cambridge University Press. See DHN Ltd case, where Lrd Denning stated that the corporate veil should be lifted and that the companies were in reality a group and should be treated as one and so compensation was payable, DHN Ltd v. Tower Hamlets (1976) 1 WLR 852

[57] "Under English law if the parent company controls the actions of the directors of a subsidiary and their conduct can be regarded as wrongful trading, the parent may be regarded as a "shadow director" and treated as equally responsible" Milman D, n 32 above

[58] Milman D., n 32 above

[59] See Hicks A., "Corporate form: Questioning the unsung hero" (1997) JBL 306 where, based on the results of the ACCA research "Alternative Company Structures for the Small Business" (Research Report No. 42, 1995), he concludes that limited liability is not the primary reason why small businesses choose to incorporate.

[60] Hicks A., n 59 above.

[61] Freedman n 24, above. Indeed, the freedom of the creditors and the owners to allot the risks as efficiently as possible in the case of limited liability regime provides a strong argument for the retention of limited liability (Hansmann H. and Kraakman R. n 21 above). See also Halpern, Trebilock and Turnbull, n 16 above, where they advocate the adoption of an unlimited liability regime for closely held companies.

[62] Freedman n 24, above

[63] EC Directive 89/667 on single member private limited liability companies [1989] O.J. L 395, implemented in UK by S.I. 1992 No. 1669, which introduced inter alia new s. 1 (3A) of the Companies Act 1985.

[64] Hansmann H. and Kraakman R. n 21 above, while Pettet argues that the liability insurance against tort claims purchased by the companies is the more efficient solution ( n 17 above).

[65] Leebron, n 28 above. See also Cheffins B., n 13 above

[66] Company Law Review: Final Report, n 2 above.

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