I'd love to say the following idea was mine, but it wasn't, so I'm going to give credit for where it came from, in a letter to the Guardian today:
Shareholders in a limited company that goes bad are liable for no more than the money they have already paid for their shares — the company's creditors stand the loss, not the owners of the company, the shareholders or the directors. This is not a right, but a privilege we grant so that people will be ready to invest in new enterprises without fear of taking on unlimited liabilities.
We don't have to privilege all companies, directors and shareholders over their creditors in this way — there's no human right to it. We could instead say that liability is only limited if the highest-paid executive's remuneration does not exceed, say, 30 times the median employee's salary. It would be a brave shareholder, individual or institutional, that permitted any executive's remuneration package to approach the point where they, the shareholders and directors, might be found personally liable if things go wrong.
David Harington
Worcester
I have long argued that the right to limited liability is a privilege that carries obligations, including the duty to pay tax and to file accounts. I haven't argued often, and certainly not in the case of public companies, that the privilege of liability should be withdrawn as a sanction.
I think that's been an omission on my part. We should be much more straightforward in saying that limited liability is a privilege to be used for the benefit of society, and with care, and that if obligations to society are not respect then it should simply be withdrawn with the shareholders and not society at large then having the duty to remedy the defect. When should that happen? Let me suggest the following occasions for a start:
1) When excess pay is allowed, as noted above.
2) When accounts are not filed on time, for any reason.
3) When corporation tax returns are not filed, for any reason. Of course these are not public documents now: they soon would be if this was the case.
4) Three months after any set of accounts is filed showing the company to be insolvent unless action to remedy the defect has been taken in the meantime.
That will concentrate minds I think.
Now which MP would like to propose it as a private member's bill?
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How will this help the economic recovery, whenever that may be?
More equal, fairer societies that respect the rule of law create prosperity
This suggestion will help achieve all those things
It is therefore bound to add to prosperity
More intelligent societies create prosperity.
I also read this excellent letter this morning. There have been too many examples of company directors running a company into the ground, leaving debts and yet being able to form new companies This is the type of policy which Labour should be endorsing but what is it doing at this precise moment – fighting amongst itself? This is so much like the 1980s but there is one difference – the calibre of the politicians involved. No current Labour politician can match Healey, Foot, Hattersley and Benn. Now we have squabbling amongst the former advisors, researchers and PR frontmen about who can demonstrate the most aggressive neoliberal policies whilst suggesting that this will solve our economic woes.
foreign (probably EU, freedom of establishment and all that) limited liability company trades in the UK via a UK branch – rule avoided. the end.
Tiny issue
But not an issue at all – they have have to be registered here
And I might even say, so what? There are 2.8 million companies here and that won’t change
tiny issue? its just circumvented the proposed rule – ie the removal of limited liability. The shareholders liability is limited to the captial injected into EU co, so your stick to beat the company/shareholders with over relatively remuneration levels has disappeared.
alternatively, the shareholders will just interpose a foreign limited liability company above the UK company, thus blocking the unlimited UK entities unlimited status………again stick has disappeared.
this propsal in its current form is completely unrealistic. Interesting idea though, the lawyers will have a field day with fees on this.
Then we have an anti-avoidance provision
Ever heard of them?
would be interested in how your anti-avoidance provision would somehow impose unlimited liability on shareholders not holding shares in a UK entity – I guess if they were UK shareholders it could work, but I thought one of your posts the other day disclosed that a good chunk of shareholders in UK companies were actually foreign.
yes i have heard of an anti avoidance provision, S.13 TCGA and transfer of assets abroad regs are good examples………..ones that you choose to ignore when arguing that HMRC needs more powers to tackle offshore abuse.
Ever heard of pursuing claims in foreign courts?
But remember – the risk would be enough to ensure enforcement
yes i have, asil nadir springs to mind…………….
And what happened to nadir? he had to do a runner, and ended up holed up in a villa in Cyprus, unable to live a “normal” life. He even said that he gave himself up because he couldnt take it any more.
I dont think he got away with it.
holed up in a villa in cyprus !?!? you must be joking, he was treated like a hero out there. He was always out and about in the bars and restaurants in the towns. He certainly wasnt living the life of some sort of recluse. He did go everywhere with bodyguards having said that !
In one of my fits of historical perspective, I wonder if the time has come to abolish limited liability? Or at least substantially change how it functions?
The argument for removing limited liability status from UK companies is frankly quite silly. There are existing regulations in the UK Companies Act that provides for action to be taken against directors – these need need to be refined and then unleash hell on directors who trade recklessly in pursuit, mainly, of feathering their own nests.
But it’s only members who can in many cases impose the pain
So making shareholders feel the pain would work -0 vyer well indeed
This one will run….I give it 7 years to being law
But aren’t you failing to recognise that in most cases that the ultimate shareholders are actually powerless to intervene – given that much investment is by pension funds etc where the control is exercised by fund managers. It would also need a pretty major change of law (including changes to European Directives) to make such a wholesale change to the limited liability framework.
On the other hand Justin’s idea of extending those areas where liability falls on directors sounds infinitely more achievable given that it could be more easily added to those areas where such liability already exists in Company Law – subject to tightening those clauses where comanies are already able to indemnify their directors.
So what? Aren’t I allowed to suggest big changes? I don’t accept the existing paradigm – so a lot I say requires big changes – and I’m also used to getting it. People said we couldn’t have country-by-country reporting but a version of it is law in the US and it’s coming in the EU – and that’s because I bothered to write about it
Change can happen
Of course we could use existing laws – but we don’t so nothing will happen – just as I’m sure Justin wants
Making pension trustees potentially liable for the companies they invest in would radically change things overnight – that’s what I want
I suppose this is where I differ – I think it would take years to change the paradigm especially given that Europe would have to be involved and the fairly strident opposition that would be attached – and in the meantime? Quick effective measures that achieve most of what is necessary now – and for which public support could quickly be found – have a lot in their favours.
I don’t think that the problem is with pension trustees but the actuaries and fund managers on whom they rely. Most pension trustees are in practice well meaning amateurs who tend to rely on what their companies and professional advisers say – to put the liability on them isn’t really hitting the right target.
An easy way to refine the Companies Act is to follow the South African legislation that threatens both pecuniary and criminal sanction on directors who act outside their statutory duty. Action for recovery of losses may be instituted by stakeholders including creditors, shareholders and liquidators.
[…] couple of days ago I suggested that limited liability should be removed from a company in the event that it abused certain standards if they were made contrary to law. So, for […]
Shareholders are generally considered to be absent owners. They’ve plonked down their money in a company and then they basically let managers get on with it. The system of corporate governance has evolved in order to ensure that managers don’t simply run off with the money or spend it all on booze and fast women.
The idea of limited liability is to encourage investment. When shareholders aren’t worried that they may face future capital calls, they’ll be prepared to invest more.
So the idea that shareholders should lose their limited liability because they wanted to pay a superstar director (or other employee) what they think they’re worth is totally ludicrous.
The next three are even more absurd. Shareholders are, as we said, absent. They’ve delegated the responsibility of running the company to managers. So why should shareholders be penalised if managers screw up by not filing accounts or tax returns or by trading while insolvent? You’ve got this totally wrong. Directors are responsible for ensuring a company isn’t trading insolvently, and they suffer if they fail in that responsibility. Not shareholders.
And because the system is not working we need to change it
And as a matter of fact it is not working
So change is inevitable
And if shareholders won’t ensure their directors are competent they’ll have to have the privilege granted to them by society removed. It really is very simple. Except no doubt to those who want the abuse to continue, which looks like they may include you in their number