History of limited liability

As like most of the Indian laws, the Companies Act can find its history under Common Law. The purpose of this chapter is to look for the instances of the concept of Limited Liability in the United Kingdom and how it came about in India.

The concept of Limited Liability under Common Law comes from Rome when the United Kingdom was part of the Roman Empire. In the Roman Empire, the corporations were formed without limited liability and were recognized by the Emperor in return for their services to the empire. However, this changed after Emperor Alexander began regulating corporations. This meant that the corporations which were now recognized by the Emperor had certain advantages like that provided by those under the Doctrine of Separate Personality like the right to own properties, sue or get sued, perpetual succession, etc. 

When the Roman Empire was on the decline, the Roman Emperor had started incorporating and regulating companies as his solution to stop the decline of the empire by providing economic stability. During those times, the condition through which a corporation would be incorporated was that it was of benefit to the Roman Empire. It was observed by many philosophers that the only reason why the Roman Empire had allowed for the formation of corporations under their empire was that it was easier to deal with an organized body instead of people scattered without a corporation.

The concept of Limited Liability came from the world peculium. This refers to the amount or the portion of the property owned by the head of the family. It was stated that the son or the legal heir of the head of the family is only responsible for that part of the property which belonged to his father i.e. peculium (Hillman, 1997). 

The Romans had a direct influence on the United Kingdom’s mercantile system. After Britain became a free nation, they started making trade associations which they called Guilds. Further, the Guilds which were formed in Britain were called the charters. Charters in Britain were then awarded only to those who engaged in the public benefit like the Churches and monasteries. 

After the Guilds became more developed, they changed into a body such as a corporation. The charters were given royal grants which made them monopolies in the trades to which they belonged but without the concept of limited liability. However, it did need for people to be part of a certain charter in order to engage in a particular trade. 

The concept of limited liability came along with the case of Edmunds v Brown and Tillard. In this case, the Court had held that the private person who formed the company was not liable when the company was dissolved.

However, many historians believe that the concept of Limited Liability came about through the East India Company. The companies which were made to go on a foreign voyage in order to take up foreign territories were chartered companies and they were given a monopoly by the crown. In these companies, the shareholders were not personally liable for the losses of the Company. This concept with regards to Limited Liability for these companies came through an act which was called “Declaratory Concerning Bankruptcy Act”. This Act did not allow the shareholders to suffer the losses of the Company i.e. if the Company were to go bankrupt then the shareholders were not charged from their personal assets.

By the time Britain passed its English Companies Act, 1844, they had developed the concept of Limited Liability as it is known today. The Indian Joint Stock Companies Act, 1850 was the first Act that borrowed the concept of Limited Liability from the British Act. However, the Indian Companies Act, 1882 stated that the liability of the members in a company was limited even though the liability of the directors of the company were unlimited.

 This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.