A 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 example, if the maximum ratio of high to low pay in a company was made subject to a law and that ratio was breached I suggested limited liability should be withdrawn from the shareholders of the company, and that the principle should be extended to other issues, such as failing to file accounts and tax returns.
The idea was, almost inevitably, pooh-poohed by the nay-sayers as impossible to implement. But they're wrong. Within a couple of days the idea has clear legal backing. As the FT reports this morning:
The UK's fraud investigator intends to confiscate shareholder dividends paid by companies convicted of criminal offences, after it won approval for a landmark court action.
The Serious Fraud Office won a civil recovery order on Thursday against the principal shareholder of a company that had admitted corruption .
Mabey Engineering Holding agreed to repay the £131,201 dividend it received from Mabey & Johnson, which built bridges in Iraq and admitted corruption and breaches of UN sanctions in 2009 . Two former Mabey & Johnson executives went to prison after the company reported their behaviour to the SFO. The agreement, approved by the High Court and seen by the Financial Times, marks the first time that the SFO has tried to recover proceeds of crime by targeting dividends paid in the UK.
While the sum confiscated by the SFO is relatively small, lawyers warned that the precedent it set was potentially huge.
“Under the existing proceeds of crime legislation, the SFO is actually able to do this, which is an alarming proposition for innocent third-party investors,” said Jonathan Fisher QC, a barrister specialising in financial crime. “Intellectually it's unassailable but if it happened on a large scale it could undermine people's pension funds.”
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It has long been the case that directors are personally liable for the repayment of illegal dividends – I don’t think the principle of limited liability for shareholders has been breached. I think this demonstrates the point that it is easier to extend the liability for misdemeanours to directors than it would be to remove limited liability.
Wrong
Read the report
I should add that what has happened here is that the parent company has agreed to repay the dividend it received so that the liability does not fall on the company’s directors – as often happens when there is an illegal dividend.
Wrong
Read the report
You’re making excuses
It is not as you’re sduggesting
Hi, the SFO site has a useful summary. The directors of the subsidiary company broke the law. As the SFO states “M&J pleaded guilty to charges of corruption and breaches of United Nations sanctions and was convicted at Southwark Crown Court in September 2009”
Out of the profits of these criminal acts, “dividends” were paid to the parent company. The profits were “proceeds of crime” and therefore could be recovered from the parent, although labelled “dividends” the payments were out of unlawful assets. The parent has paid the amount back.
How has the principle of limited liability been breached by seeking to remove from the parent assets that the parent received due to unlawful actions? If you want to label it as such, so be it, but to use your term, I doubt the nay-sayers will lose much sleep.
It should be noted that the breaking of sanctions etc was brought to the attention of the SFO by the company, the company was a whistle blower on itself. If wrong has been done, an action to be commended.
Regards
Augustine
The ring fence was broken
And it could therefore be so in other cases if it was so decided by law
That was, and is, my point
If you can do it once you can do so again
No Richard I’ve read the report and the SFO press release – and it doesn’t look like the principle of limited liability has been breached. The shareholders have only been made responsible for repaying the proceeds of crime. The SFO press release makes it clear that that institutional shareholders should show due diligence in checking that dividends they receive from the company are not the proceeds of crime as they were in this case – but that is not the same as saying that they are liable for all the company’s debts or that they have any responsibility for excessive remuneration and other dubious but still legal activities.
But if we can make them liable for some crimes we can make them liable for others too
I’m saying no more than that
And I think my point is that there are already existing legal channels for making directors liable, and now for parent companies and possibly institutional shareholders (if they don’t do proper due diligence) for dividends paid out of the proceeds of crime, and I would rather use those channels ratehr than playing around with limited liability – which was actually put in place to defend passive shareholders and would be a pretty blunt tool given that it may be difficult to distinguish between passive and non passive shareholders.
I can live with both
Happy to accommodate you
It is worth noting that one of the biggest missed opportunities to do something about bonus culture in the financial sector at least was the incredibly weak FSA Remuneration Code – the FSA had the legal power to do something but bottled out from using it.
“The principle of limited liability has been breached here”
No it hasn’t. Repaying the proceeds of crime has nothing to do with limited liability.
Respectfully, pull the other one
Your claim is ludicrous
No, it’s not an illegal dividend (ie under CA06); but neither is this a true example of an attack on limited liability; ie, the shareholder(s) exposure in the event of a wind up.
This has come about through Proceeds of Crime legislation, where assets that are proceeds of crime can be recovered from those who benefit. In this case, it is the parent co that has benefitted from proceeds of crime.
This is distinctly different and so far from being ‘legal backing’ from what you are proposing (and I make no comment on that suggestion), which was that shareholders would be open to action from creditors, ie to make good company losses.
It’s not the same, of course
It proves such things are possible
That was my point
Hi, as you well know it has been possible to “pierce the corporate veil” for many years and in many circumstances. When the veil of limited liablity is pierced in your words the “ring fence” is broken. The disregard of limited liablity does exist and I assumed your original blog was a “thought piece” on extending the circumstances in which limited liability can be disregarded.
The veil was not pierced in this particular circustance of Mabey & Johnson … therefore I am at a loss to understand the point you make. Metaphorically your original blog was discussing oranges, this case is a description of a banana and you suggest it supports your discussion … by all means think that but will others understand your thought processes?. I think that there are better ways of supporting your discussion.
As for issue of proceeds of crime, that has been around for many years and used many times and has little to do with limited liability.
And respectfully I disagree – as no doubt the barristers in the case did too
Hi Richard,
I am perplexed. I am not sure how you are linking these two issues and think that you may have missed the point. The prosecution of Mabey Engineering Holding took place under the Proceeds of Crime Act 2002. This act is a criminal act designed to ensure that people can not benefit from criminal activity. For instance it is used to seize the assets of drug dealers or property cons.
What you refer to is a lifting of limited liability in company matters. It is a completely different concept. The common law and subsequently statute has made provision for stopping proceeds of crime for centuries, but that does not relate to liability of shareholders.
Perhaps you can explain how this instance shows an example of lifting limited liability.
As a matter of fact limited liability was lifted – a dividend had to be repaid as a result of a criminal act
So, if a company were to commit another criminal act then limited liability could be lifted as well
I am baffled why it is so hard to see that
Limited liability creates a separate legal personality from it directors, but this case never involved the actions of the company as a body corporate. It was because of the case of R v Forsyth; R v Mabey [2011] UKSC 9. This was the directors acting illegally under the Iraq (United Nations Sanctions) Order 2000 by “making funds available to Iraq”.
This has nothing to do with the removal of limited liability from the company so that directors may be pursued for an amount over an above their original share purchase. This is an explicit amount that was made illegally.
An example of lifting limited liability would be in an instance where (I will use an example that I think you were trying to suggest in your original article) directors ran up huge costs for a company and a large unpaid tax bill. What you are then suggesting is that because of that the original fixed liability, determined by the amount of shares they owned, should not be relevant. In other words they should have unlimited liability should they abuse the limited liability system.
And respectfully – I still disagree
So we’ve run to the end of the line on this one
“As a matter of fact limited liability was lifted”
As a statement of law that is categorically wrong, Richard.
Respectfully, you are making yourself look very foolish here. I believe you have no legal training and I am afraid that is showing.
And respectfully – it’s you who has utterly missed the point I am making
Limited liability was breached here – you simply cannot say otherwise as a shareholder had to pay – so you emphatically show your own complete inability to interpret simple facts – but the key issue is that if it can be done for some criminal acts it could be done for others – like breaching high pay legislation, which was the point I was making
But you and others reveal your blind prejudice in reading when denying that
As for my ability – there’s not a lawyer I know who’d agree with you – usually because I can out argue them hollow – and they know it when I have engaged with them as a chartered accountant over the last thirty years. Only the fools amongst them don’t, and they lose badly as a result. And respectfully, that looks to include you.
Sorry to disagree with you again Richard, but to some extent you and the other posters appear to be at cross purposes.
The Proceeds of Crime Act permits, statutorily, the confiscation of the proceeds of crime. Wherever the proceeds may end up … And in this the statute ignores the corporate veil, it is correct, but it is the statutory power that enables the SFO to confiscate the proceeds of crime and it is not a simple lifting of the corporate veil.
The reason for this is that, were the corporate veil simply lifted, then the entire fine, debts and other liabilities of the subsidiary could become the liability of the parent too. And that is not what has happened. Limited liability remains for everything other than the proceeds of crime.
In ignoring the corporate veil, the Act permits the prosecuting authority and court to ignore all other legal distinctions too … So the proceeds of crime could be technically pursued even where they have apparently been transmitted to a third party, entirely unconnected with the party that has committed the crime … Although, if that party has given good consideration and is entirely ignorant, there may be a good defence to the claim.
Your critics above have correctly identified that there are occasions where the corporate veil can properly be pierced … And this is longstanding. It usually occurs where there has been an insolvency and the shareholders or others have benefitted gratuitously or where there has been an attempt to defraud creditors. Other cases include where someone has used a corporate vehicle in an effort to hide the true participant in a transaction; and there are other examples too.
The distinction that is drawn is clear. Since Saloman’s case, companies registered appropriately are able to protect their shareholders from liability save to the extent of their fully paid shares or guarantees. This can be lifted completely … Or it can be ignored for the purposes of a specific recovery.
There are equitable tracing claims that can also be used to ignore legal identity and definition to seek to recover specific assets. In addition, where legal title to goods has not passed, the goods can be recovered from any subsequent purchaser … Which really annoys car buyers who discover on buying a car that an outstanding debt is owed and that although they have paid a fair price, the hp company is able to take the car from them!
And you miss the point
My point is that if it is so easy to lift the veil for some crime then of course it can be for other situations as well
And I am suggesting other such situations.
That’s all I said.
Why is it so hard to understand that? Is the legal mind so blinkered?
It is in your use of the words ‘lifting the veil’ which concerns me.
It is one thing to follow an asset or a sum of money that are the proceeds of crime and seek to recover them. But that is not, in my view, ‘lifting the veil’ of incorporation. That is simply utilising a statutory tool to recover an asset … And there are statutory tools in all sorts of areas of the law that permit this to be done.
So what you seek is already available in all sorts of areas … The difficulty I have with your proposal is that you appear to seek to simply remove the protection of limited liability from some companies where they have acted in a manner that you disapprove of … And I suspect that the result will be disproportionate and potentially very unfair; especially to the thousands of small shareholders who have very little real say in the running of their companies.
This is very different to the specific asset recovery systems used by the SFO.
Those shareholders can vote their boards down or sell
That will be their choice
And if capitalism can’t be responsible those taking part should pay the price. It’s a very simple scenario – buit one where you want the gain and no pain. Well, that game has to be over