Sunday, 4 July 2010

Limited Liability: what it is and what's wrong with it

Back in 1721 when the South Sea Bubble burst an angry Crown and Government fined the Directors. Sir Theodore Janssen, thought to have been worth £1m then, had to sell his Wimbledon Manor estate holding to pay his fine. The Labour Government did not take this attitude towards the collapse of the banking system. Instead of letting them fold and penalising the Directors it spent billions propping them up. Over the last three years we have been starkly reminded of the power of unaccountable multi-corporations, stronger than national governments. In Britain companies of all sizes are continually going into administration and folding. Under their limited liability status the Directors and shareholders can walk away from paying the debts they have built up. They can also set up new companies and start the process again.
The Alliance for Green Socialism is initiating a debate about whether company limited liability status is a licence for non-accountability that explicitly allows limited companies and their shareholders to evade responsibilities for their debts, and
implicitly encourages reckless behaviour by limited companies and their directors. It suggests that recent changes in the law further encourage recklessness and debt evasion. 'A significant effect of limited liability has been the control of much of the economy by entities that are answerable to no-one because their shares are held by other limited companies and organisations which are not personally owned nor accountable, including investment funds and pension funds.' AGS believes that radical reform of the law allowing limited liability is needed.
'Limited liability' means that the shareholders, who own the company, have a right to the profits and the assets of the company, but they are not legally liable for its debts. The company can buy and sell and borrow but no-one has to pay its debts if it fails.' So the directors and shareholders of a company which runs into financial trouble can start another and then let the first go bust. If the second gets into trouble, a third can be started, and so on. Suppliers lose their money, employees lose their wages (and even the vital national insurance contributions the company had failed to pay), and the Government loses its unpaid taxes.
AGS accepts that a counter argument is that limited liability 'enables the creation of large companies to do things that no individual or partnership would be prepared to risk. The argument is that real people would never invest in searching for oil in the North Sea, building an offshore wind farm, designing a new jumbo jet, producing a new PC operating system, running a supermarket chain, etc, if they were liable for any (potentially huge) debts of the project.'

AGS poses two questions of principle:
- is it true that large private projects require limited liability?
- do we want large projects controlled by private finance anyway?

This is a very important debate. However there is one section of companies that are covered by limited liability which would be adversely affected, voluntary and charity organisations whose members are £1 shareholders and whose Directors receive no pay, and which pay no profit dividends. The end of limited liability could be that no one would wish to be involved in any voluntary or charitable organisation with large budgets.

Information about the Alliance can be found on:

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