Opinion on limited liability

The Royal Mercantile Law Commission which was formed in 1854 had opposed the concept of Limited Liability. The arguments which the commission had stated in their report were part business arguments but they also considered the economic, social, political impact of the same. There were two groups in the favour of limited liability in the company and there were three groups against it.

Pro-Limited Liability

The Banking and the Railway crisis in 1846-47 in the UK had led to an argument for the need for limited liability in the joint-stock companies. The first joint-stock company act was passed in India in 1850. However, there was no implication of the crisis in India, even though many businessmen went bankrupt due to the crisis as they had shares in the company.

This led to the passing of the Companies Act, 1856 in England followed by India in 1857. This was the first act in India that allowed for limited liability. However, every company other than banking companies had limited liability but it was extended until 1858.

The argument for the limited liability by the business community was based on an economic rationale. The argument was that the limited liability would help in times of crisis such as 1846-47.

Apart from the business community, there was support from the Liberal politicians who defended it by saying free trade and laissez-faire. The politicians argued that it was the choice of the parties to a contract whether to transact under limited liability or not. Further, the only reason for state intervention in this matter should be if the transaction of the business is done with illegal objects or opposed to morality.

The politicians further argued that the limited liability was disrupting the creativity and entrepreneurship among the people of the country. They believed that if a business were to work under limited liability, entrepreneurs would take larger risks which would in turn ensure large profits.

Against Limited Liability

The time during the argument of the Limited Liability was also the same time as the Industrial Revolution. Many were scared that this would lead to the attraction of foreign investment which would drive out the local businesses. The argument which was put forth by the business commentators was that the industrial growth in Britain had happened due to the concept of unlimited liability. The concept of limited liability would be beneficial in France, the USA, and Ireland but not in the UK where labor was abundant.

The political economists were against the idea of limited liability as they could not allow the investors to gain the advantage of limited liability while escaping the risks of being bankrupt. Many political economists felt that this would allow for people to put forth their interests at the expense of other people’s money.[1]

They believed it to be impossible that limited liability was the reason for the improvement of the British economy.

Even the common law judges were against the concept of limited liability. They believed that the concept of limited liability went against the common law rule that when a business goes bankrupt then all of the partners are personally liable for the debts.

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.