Are Involuntary Creditors Adequately Protected from the Adverse Impact of the Doctrine of Limited Liability? An Analysis of the Origins of the Doctrine and its Modern Application Through the Prism of Involuntary Creditors' Protection
| Pages | 137-181 |
| Date | 01 April 2021 |
| Published date | 01 April 2021 |
| Author | Mikołaj Kudlinski |
| Subject Matter | Derecho Civil |
The Adverse Impact of the Doctrine of Limited Liability 137
Are Involuntary Creditors Adequately
Protected from the Adverse Impact of the
Doctrine of Limited Liability?
An Analysis of the Origins of the Doctrine
and its Modern Application Through the
Prism of Involuntary Creditors’ Protection
M ´*1
A
The doctrine of limited liability is considered as one of the most important issues
in corporate law. This is because, by limiting shareholders’ exposure to risk, limited
liability incentivises people to invest in corporate entities and pursue various business
endeavours, which in turn stimulates economic growth. However, it is also often
argued that the doctrine of limited liability is controversial, as it allows companies
to easily externalise their commercial risks, which exposes the vulnerable group
of involuntary creditors to significant losses. This problem is particularly evident
in the context of corporate groups, where parent companies use the corporate
form to insulate themselves from liability for the acts of their subsidiaries. This
paper discusses the origins of the limited liability doctrine through the prism
of its development in the United Kingdom, and finds that that the interests of
involuntary creditors were not given adequate consideration at the time of its
* Christ Church, University of Oxford. LLB Hons (Aberdeen), LLM (Edinburgh). I am grateful
to Adam Strukowski and Izabella Kuna for their help in the revision of this article. I am also
indebted to the anonymous editors of Cambridge Law Review for their valuable comments on the
earlier draft. Any errors remain my own. mikolaj.kudlinski@chch.ox.ac.uk.
Cambridge Law Review (2021) Vol VI, Issue i, 137–181
The Adverse Impact of the Doctrine of Limited Liability138
inception. Arguably, this doctrine was never supposed to be applied in relation
to this group of creditors at all. Subsequently, this paper discusses the current
protection mechanism available to involuntary creditors in the United Kingdom
and finds that, for various reasons, these mechanisms are not eective. This article
concludes by discussing alternative approaches to limited liability and noting
that the control-based presumption of parent liability would strike a fair balance
between the interests of the various actors involved in the company’s activity, and
would provide involuntary creditors with a greater degree of protection.
Keywords: company law, limited liability, creditors, involuntary creditors, alternatives to limited
liability
I. I
Companies form an inextricable part of modern society. Today, corporate entities
are encountered virtually everywhere; companies produce and distribute countless
products, provide various services, run all types of transport, supply weapons,
engage in politics, and have the ability to influence global financial markets.1
Moreover, companies are seen as the main drivers of the globalisation process.2
For the above reasons, corporations are “among the most powerful institutions of
our time”.3
Companies underpin the capitalist economies upon which modern societies
are predicated.4 In fact, in 2019, companies represented 72.5% of total businesses
in the United Kingdom.5 Likewise, at the end of June 2020, there were four million
five hundred thousand three hundred ninety-two corporate entities on the total
register of companies; four million one hundred thousand three hundred twenty-
1 Sarah Worthington, Sealy and Worthington’s Text, Cases, and Materials in Company Law (Oxford Univer-
sity Press 2016) 1.
2 Stuart Kirsch, Mining Capitalism: The Relationship Between Corporations and Their Critics (University of
California Press 2014) 1.
3 ibid. On this account, Noam Chomsky described the most powerful corporations as today’s “mas-
ters of mankind”. See Noam Chomsky, Masters of Mankind: Essays and Lectures, 1969-2013 (Haymar-
ket Books 2014).
4 Peter A Hall and David Soskice, ‘An Introduction to Varieties of Capitalism’ in Peter A. Hall
and David Soskice (eds), Varieties of Capitalism - The Institutional Foundations of Comparative Advantage
(Oxford University Press 2004) 6.
5 Oce for National Statistics, ‘UK Business: Activity, Size and Location 2019’ (2 October 2019) 4
<www.ons.gov.uk/businessindustryandtrade/business/activitysizeandlocation/bulletins/ukbusi-
nessactivitysizeandlocation/2019> accessed 25 May 2020.
The Adverse Impact of the Doctrine of Limited Liability 139
three were actively trading.6 The number of companies on the total register is
growing at a steady rate and has increased since 1979 by over three million four
hundred thousand.7 During the same period, the number of companies on the
eective register has grown by over three million two hundred thousand.8 This
data evidences that companies are the main vehicles through which business is
carried out in the United Kingdom.9
Upon incorporation, a company becomes a legal person distinct from its
shareholders.10 According to Armour et al., being a legal fiction, the company
can: (a) enter into contracts; (b) have rights in property; (c) sue and be sued in
its own name and; (d) delegate authority to agents.11 Thus, as a consequence of
incorporation, the company has its own rights and is capable of undertaking
its own obligations.12 The doctrine of separate legal personality is therefore
“fundamental”13 to the conceptual understanding of the structure of corporate
law. In addition, it is of crucial significance from the functional perspective, as the
separate legal personality of the company makes it possible to distinguish the assets
owned by the company’s members from the assets owned by the company itself.14
6 Companies House, ‘Ocial Statistics: Incorporated companies in the UK April to June 2020’ (30
July 2020) <www.gov.uk/government/publications/incorporated-companies-in-the-uk-april-to-
june-2020/incorporated-companies-in-the-uk-april-to-june-2020> accessed 4 August 2020.
7 Companies House, ‘Ocial Statistics: Companies register activities: 2018 to 2019’ (1 August 2019)
Section 3. <www.gov.uk/government/publications/companies-register-activities-statistical-re-
lease-2018-to-2019/companies-register-activities-2018-to-2019#overseas> accessed 25 May 2020.
8 ibid.
9 Similarly, in Australia, between 2018 and 2019, companies represented 37.9% of all businesses,
the largest of any type of legal organisation. See Australian Bureau of Statistics, ‘8165.0 - Counts
of Australian Businesses, including Entries and Exits, June 2015 to June 2019’ (20 February 2020)
<www.abs.gov.au/ausstats/abs@.nsf/mf/8165.0> accessed 25 May 2020.
10 Salomon v Salomon [1897] AC 22 HL at [31] per Lord Halsbury, at [51] per Lord Macnaghten. See
also Brenda Hannigan, Company Law (5th edn., Oxford University Press 2018) 42.
11 John Armour, Henry Hansmann, Reinier Kraakman and Mariana Pargendler, ‘What is Corporate
Law?’ in Kraakman et al. (eds), Anatomy of Corporate Law: A Comparative and Functional Approach (Ox-
ford University Press 2017) 8.
12 Phillip I Blumberg, ‘Limited Liability and Corporate Groups’ (1986) 11 Journal of Corporate Law
573, 577.
13 Paul Davies, Introduction to Company Law (Oxford University Press 2002) 9.
14 ibid 11.
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeStart Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting