Electronic copy available at: http://ssrn.

com/abstract=1980681
FROM PRIVILEGE TO RIGHTTHEMES IN THE
EMERGENCE OF LIMITED LIABILITY
COLIN MACKIE*
Despite widespread disagreement as to its merits, the doctrine of limited liability
was formally introduced into English law by the Limited Liability Act 1855. The
Joint Stock Companies Act 1856 substantially modied the 1855 Act, effectively
rendering limited liability available as of right. It also extended the doctrine to
Scots law. Prior to these enactments, the emergence of limited liability in the
United Kingdom had been a very gradual process, granted on rare occasions. A
dramatic change in government policy, therefore, occurred between 1855 and
1856 which, to date, has not been explored fully. This paper examines the
pertinent legal, economic, social and political themes underlying this sudden
change. The Governments desire to promote widespread investment, a change of
strategy in its regulation of fraud and speculation in companies and the growing
use of contractual limitations of liability in commerce are identied as contribut-
ing factors. However, this paper concludes that the political climate of 18551856
explains both the timing of the change in policy and the form which the doctrine
adopted. The 1855 Act was not only rushed but forced through Parliament at the
height of the widely unpopular Crimean War. This stemmed from a desire to
appease growing class unrest with the privilege with which limited liability was
associated and to increase government revenue, through the facilitation of
enterprise and investment, at a time of need. Rational and detailed debate as to
the wider implications of the doctrine was absent as a result. Importantly, the
effects of the legislation upon non-contractual creditors, such as tort and delict
victims, were not considered during the parliamentary debates. It is contended
that the 1855 and 1856 Acts were not intended to apply to this category of
creditor.
1. Introduction
T
he doctrine that the liability of a shareholder is limited to the amount, if
any, unpaid on the shares held by them, has been enshrined in the
statutory law of companies in the United Kingdom for over 150 years. Despite
widespread disagreement as to its merits, the doctrine of limited liability was
formally introduced into English law by the Limited Liability Act 1855.
1
The
1855 Act did not apply to Scotland.
2
The doctrine was, however, extended to
*
Doctoral candidate, University of Aberdeen (research funded by the Arts & Humanities
Research Council). An earlier draft of this paper was presented at the Company Law session of
the Society of Legal Scholars Annual Conference held at the University of Cambridge on
September 7, 2011.
1
Limited Liability Act 1855 (18 & 19 Vict. c.133) (the 1855 Act).
2
1855 Act s.18.
Electronic copy available at: http://ssrn.com/abstract=1980681
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 294
Scots law by the Joint Stock Companies Act 1856
3
one year later. Prior to
these enactments, the emergence of limited liability in the United Kingdom
could only be characterised as a, long drawn out, gradual process, granted
on rare occasions.
4
However, a sudden and sharp break occurred between
1855 and 1856 whereby: Not only was the pace suddenly quickened, but the
law itself turned upside down.
5
All previous discussions on the subject of
limited liability had considered its role within limited partnerships, specically
the French societe en commandite,
6
rather than joint stock companies. Indeed,
in 1854, a Mercantile Law Commission had recommended against the
introduction of limited liability into partnership law.
7
The legislation was also
enacted at a time of deep political unrest in the United Kingdom, with a
parliamentary session mid-way through the widely unpopular Crimean War,
8
being chosen to enact companies legislation of such fundamental importance.
A dramatic change in government policy, therefore, occurred between 1855
and 1856 which, to date, has not been explored fully.
This paper will examine the reasons for the sudden change through
analysis of the pertinent legal, social, economic and political themes of the
time. The signicance of this investigation lies in the fact that the doctrine
remains as controversial now as it was in the mid-nineteenth century. In recent
decades, inter alia, it has received sustained criticism in relation to its use by
corporate groups as a shield from liabilities to third parties such as tort and
delict victims.
9
The ability to use the doctrine in this way has the potential to
promote socially irresponsible corporate behaviour. Analysis of the reasons for
the sudden change in government policy between 1855 and 1856 may shed
some valuable light upon the aims and intentions of the originators of the
1855 and 1856 Acts. This will provide the foundation for later research to
determine whether the doctrine continues to service the aim(s) and inten-
tion(s) of its originators or whether its modern usage has been contorted out
of all recognition. Three main arguments will be developed: rst, the tense
political climate of 18551856 explains both the timing of the Governments
change in policy and the form which the doctrine adopted. The 1855 Act was
3
Joint Stock Companies Act 1856 (19 & 20 Vict. c.47) (the 1856 Act).
4
Philip L. Cottrell, Industrial Finance 18301914: The Finance and Organization of English
Manufacturing Industry (London: Methuen, 1983), p.54.
5
Cottrell, Industrial Finance 18301914, p.54.
6
This was a form of partnership, common on the Continent, whereby sleeping partners
could deposit capital into the rm but would not be liable for losses beyond the extent of their
investment.
7
See the Commissioners on Mercantile Laws, First Report of the Commissioners on Mercantile
Laws (HMSO, 1854), BPP, Vol.XXVII.
8
The Crimean War (March 1854February 1856) was a conict fought between the Russian
Empire and an alliance of the French, British and Ottoman Empires, the Kingdom of Sardinia,
and the Duchy of Nassau.
9
Peter Muchlinski, Limited liability and multinational enterprises: a case for reform? (2010)
34 Camb. J. Econ. 915, 915.
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 295
forced through Parliament at the height of the Crimean War to appease
growing class unrest with the privilege with which limited liability was
associated and to increase government revenue, through the facilitation of
enterprise and investment, at a time of need; secondly, a failure to consider
the effect of the 1855 and 1856 Acts upon non-contractual creditors, such as
tort and delict victims, when the respective Bills were being debated in
Parliament, may indicate that they were not intended to apply to this category
of creditor; nally, an approach preferable to a statutory conferral of limited
liability would have been for the courts to have implied limitations of liability
into corporate contracts.
2. From privilege to right
The overarching theme which may describe the movement towards the
statutory conferral of limited liability in 1855 is that of, privilege to right.
Prior to this, limited liability was granted on a discretionary basis by the State
and was generally reserved for transportation or utility ventures with large
capital demands and likely consequential public benet.
10
The rarity with
which limited liability and incorporation generally was conferred,
11
points
rmly to its status as a privilege. The Joint Stock Companies Registration,
Incorporation and Regulation Act 1844,
12
which did not apply to joint stock
companies established in Scotland,
13
provided the rst move towards a right to
incorporation upon satisfaction of certain conditions. However, shareholders,
existing and former, remained personally liable for claims against the company
for up to three years after they had ceased to be a shareholder.
14
Wholesale changes were introduced under the 1855 Act. Limited liability
would be conferred on the condition that the following requirements were
met: company capital was to be divided into shares of at least 10 each; the
deed of settlement was to be executed by a minimum of 25 shareholders who
must have held at least 75 per cent of the company capital; each of the 25
shareholders must have paid up at least 20 per cent of the value of their shares
and two promoters must have declared that was so; and nally Limited was
to be included in the corporate title.
15
For Jefferys, the high denomination and
uncalled character of the shares required under the 1855 Act was inuenced
by partnership tradition and practice and was, in the spirit of the band of
adventurers, known to each other before the formation of the company,
10
Tom Hadden, Company Law and Capitalism (London: Weidenfeld and Nicolson, 1972), p.11.
11
See fnn.5355, below.
12
Joint Stock Companies Registration, Incorporation and Regulation Act 1844 (7 & 8 Vict.
c.110) (the 1844 Act).
13
1844 Act s.2. However, if the Scottish joint stock company had a place of business in any
other part of the United Kingdom, it could register under the 1844 Act.
14
1844 Act s.66.
15
1855 Act s.1.
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 296
investing heavily and exercising direct control of the undertaking.
16
The
inuence of partnership principles is demonstrated further by the fact that the
requirement for 25 shareholders appears to have been taken from the 1844
Acts denition of a large partnership.
17
The 1856 Act, however, removed many of the safeguards provided by the
1855 Act. With the exception of compulsory registration provisions, the only
requirements for the attainment of limited liability was that there were seven
or more subscribers who held at least one share each and that Limited was
to be in the corporate title.
18
There was no minimum share denomination nor
was there a minimal percentage to be paid up on each share. In theory, a
limited company could now be incorporated by seven subscribers, each
holding a farthing share.
19
In one year, the form of the doctrine had changed
dramatically. An association could now incorporate, by mere registration
thus gain the protection of limited liability for its shareholders, as a matter of
right.
20
Upon introducing the Joint Stock Companies Bill to Parliament,
Robert Lowe
21
contended that this right was based on the principle of:
[F]reedom of contract, and the right of unlimited associationthe right
of people to make what contracts they please on behalf of themselves . . .
as long as they do not commit fraud, or otherwise act contrary to the
general policy of the law.
22
The overarching theme, from privilege to right, is supported by four
interconnected themes: the impact of the Crimean War; a change of
regulatory strategy; the contractualisation of limited liability; and the
facilitation of enterprise and investment. It is to these themes which we will
now turn.
(a) The impact of the Crimean War
The political economy of 1855, a parliamentary session mid-way through the
widely unpopular Crimean War, was instrumental in bringing the debate
surrounding limited liability to a head. When war broke out in March 1854,
16
J.B. Jefferys, The Denomination and Character of Shares, 18551885 (1946) 16(1) E.H.R.
45, 47.
17
M. Lobban, Corporate Identity and Limited Liability in France and England 182567
(1996) 25 Anglo-Am. L. Rev. 397, 428, citing a letter from Lord Denman to The Times, August
18, 1855.
18
1856 Act ss.3, 4, 8.
19
H.A. Shannon, The Coming of General Limited Liability in E.M. Carus-Wilson (ed.),
Essays in Economic History (London: Edward Arnold, 1954), Vol.1, p.379.
20
Shannon, The Coming of General Limited Liability in Carus-Wilson, Essays in Economic
History, Vol.1, p.359.
21
Vice President of the Board of Trade (August 1856April 1858).
22
Hansard, Vol.140, col.129 (February 1, 1856).
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 297
Britain still possessed an, aristocratic social and political structure.
23
However, signicant reform was called for by the public following the
perceived failings of the aristocracy in dealing with the practicalities of
modern warfare. With the advent of the rst war correspondents during the
Crimea, the British public heard of calamities, such as the charge of the Light
Brigade, almost as soon as they occurred.
24
A direct political consequence of
these failings was the resignation of the Prime Minister, Lord Aberdeen, after
a Commons vote of no condence on January 30, 1855.
25
The position of the
incumbent Aberdeen Peelite and Whig (or Liberal as they now referred to
themselves) coalition was untenable as a result, with its downfall being
precipitated by the resignation of Lord Russell.
26
Lord Palmerston, whose
reputation qualied him to restore condence in the ability of his class to
rule an ever more urban, industrial, and imperially minded state, was
appointed Prime Minister on February 6, 1855.
27
The coalition changed
markedly again in late February 1855, when the departure of some Peelites
and the absorption of the rest, rendered it a Liberal Government.
28
Emerging
from a period of unpopularity and instability, the Government will have been
seeking to make its mark in the face of severe public outcry.
As 1855 progressed, the inuence of the war unmistakably made itself felt
and began to pervade the broader sphere of domestic politics and policy.
29
The
atmosphere of, deepening gloom and hysteria which developed after failing
to achieve a quick victory in the Crimea brought about a, violent expression
of class feeling amongst the middle class and a, varied series of attacks on
existing institutions, liberalism and a free government.
30
The attacks led by
inuential newspapers such as The Times and MPs in the Commons,
31
23
Olive Anderson, A Liberal State at War: English Politics and Economics During the Crimean
War (London: Macmillan, 1967), p.102.
24
Alastair W. Massie, The charge of the light brigade and the Crimean War (Oxford
University Press, 2004). Oxford Dictionary of National Biography, http://www.oxforddnb.com/view/
theme/92728 [Accessed November 2, 2011].
25
Muriel Chamberlain, Gordon, George Hamiltonfourth earl of Aberdeen (17841860)
(Oxford University Press, 2004). Oxford Dictionary of National Biography, http://
www.oxforddnb.com/view/article/11044 [Accessed October 19, 2011].
26
Muriel Chamberlain, Gordon, George Hamiltonfourth earl of Aberdeen (17841860)
(Oxford University Press, 2004). Oxford Dictionary of National Biography, http://
www.oxforddnb.com/view/article/11044 [Accessed October 19, 2011].
27
David Steele, Temple, Henry John, third Viscount Palmerston (17841865) (Oxford
University Press, 2004). Oxford Dictionary of National Biography, http://www.oxforddnb.com/view/
article/27112 [Accessed October 19, 2011].
28
David Steele, Temple, Henry John, third Viscount Palmerston (17841865) (Oxford
University Press, 2004). Oxford Dictionary of National Biography, http://www.oxforddnb.com/view/
article/27112 [Accessed October 19, 2011].
29
Anderson, A Liberal State at War, p.171.
30
Anderson, A Liberal State at War, p.181.
31
See the comments of Robert Lowe, an independent Liberal MP, later to succeed Bouverie as
Vice President of the Board of Trade, in relation to the Limited Liability Bill, why was it in this
instance that they had a law which gave to the rich an enormous advantage which they withheld
from the poor?: Hansard, Vol.139, col.352 (June 29, 1855).
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 298
focused public attention upon certain special aspects of domestic issues in a
peculiarly intensive way, with the, grandiose arraignments of parliamentary
government, centralizing bureaucracy and aristocratic privilege, being fore-
most on the radar.
32
For Anderson, the argument that the absence of a general
right to limited liability conferred, unfair privilege upon rich and powerful
companies, was forceful enough in the tense atmosphere of 1855 to
precipitate the, great leap forward towards statutory conferral of the
doctrine.
33
The Governments response to the potency of this argument is illustrated by
the content and timing of the Limited Liability Bill. When the Bill was
originally introduced to the Commons, it was proposed that limited liability
would be granted to those companies which possessed a capital of 20,000 and
shares of 25 each, upon which 20 per cent was to be paid up. As we have
seen, the nal outcome differed markedly. Sir Hugh Cairns, a Tory who would
later become Lord Chancellor, believed that as the Limited Liability Bill was,
popular out of doors the Government sought to take advantage of this and
had, made concessions to the popular desire as a result.
34
These concerns
were also echoed by members of the Lords.
35
Whilst it is inevitable that the
parliamentary debates will have been conducted from a party-political stance,
the suggestion was that the Government had reacted to public opinion and
compromised on the content of the Bill to ensure that it was passed. The views
of the rising middle class will have played a vital role here given that they
stood to benet most from the introduction of limited liability.
36
Three key
reasons may be cited for this: rst, as investors, it would open up a greater
range of safe investment outlets for their accumulating savings; secondly, it
would allow, small to medium business people to compete with the,
leviathans of English industry without the fear of personal bankruptcy; and
thirdly, the professional members of the middle classes, notably the lawyers
and accountants, could expect a rise in advisory work resulting from the
legislation.
37
Ireland highlights the political power of this rentier class as more
important in the advent of limited liability than economic or efciency
imperatives.
38
Given the immense political pressure that the Government was
under, it is not improbable that the changes made to the Bill were to appease
public discontent.
32
Anderson, A Liberal State at War, pp.164, 171.
33
Anderson, A Liberal State at War, p.176.
34
Hansard, Vol.139, col.1397 (July 26, 1855).
35
See the comments of Earl Grey: An attempt has been made, by means of a popular cry, to
force rapidly through Parliament, without due deliberation, a measure that demands, the most
careful consideration: Hansard, Vol.139, col.1904 (August 7, 1855).
36
Rob McQueen, A Social History of Company Law: Great Britain and the Australian Colonies
18541920 (Farnham: Ashgate, 2009), p.124.
37
McQueen, A Social History of Company Law, pp.123, 124.
38
Paddy Ireland, Limited liability, shareholder rights and the problem of corporate irrespon-
sibility (2010) 34 Camb. J. Econ. 837, 848.
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 299
There was, however, the strong feeling that key details in the Bill, were
wanting in those safeguards which were deemed to be necessary and essen-
tial.
39
For example, there were concerns in the Lords over the lack of a
requirement for an independent audit to determine the solvency of corpora-
tions registered under the 1855 Act.
40
Others believed that all corporations
trading with limited liability should have a minimum capital.
41
A willingness to
pander to public opinion was also apparent in the parliamentary debates of
the 1856 Bill. Lowe acknowledged that the large number of amendments
made to the Bill as it passed through Parliament, were attributable to the
great interest which was taken in the subject by the public.
42
This is signicant
as it suggests that the form which the doctrine of limited liability took under
the 1855 Act and the 1856 Act, was dictated by a desire to reduce opposition
to the respective Bills rather than by, efciency-driven evolution.
43
Secondly, with regard to timing, there was widespread feeling in both
Houses that the Government was attempting to rush the Bill through
Parliament. For Saville, the Bill was, pushed hard through the Commons and
literally rammed down the throat of the Lords.
44
It was suggested that a Bill
had been ready in February 1854 but was delayed four times by the
Government during the 1855 parliamentary session.
45
Many of the Lords were
hostile to this delay given that they had issued a standing order declaring that
they would not give a second reading to any further Bill in the remaining
session after July 24, 1855. When the Bill nally reached the Lords on August
7, 1855 for its second reading, this left a matter of days until the end of the
parliamentary session for its contents to be debated. For many, it was
absurd that a measure of such importance to commerce could be duly
considered in such a short timescale.
46
For Lord Redesdale, the Governments
attempt to the force the Bill through Parliament was merely:
[A] convenient method either of getting rid of the measure with the least
possible difculty, or of obtaining the eclat of having done something in a
Parliament which otherwise had not been very fruitful in useful legislative
measures.
47
39
Lord Lyttelton, Hansard, Vol.139, col.1901 (August 7, 1855).
40
Earl Grey, Hansard, Vol.139, col.2035 (August 9, 1855).
41
Lord St Leonards suggested that a capital of 10,000 would be appropriate: Hansard,
Vol.139, col.2028 (August 9, 1855).
42
Hansard, Vol.141, col.543 (April 4, 1856).
43
Ireland, Limited liability, shareholder rights and the problem of corporate irresponsibility
(2010) 34 Camb. J. Econ. 837, 853.
44
J. Saville, Sleeping Partnership and Limited Liability (1956) 8(3) E.H.R. 418, 430; as we
shall see in the nal theme, this may have been driven by a desire to increase government revenue
during the war.
45
Hansard, Vol.139, col.1898 (August 7, 1855).
46
Earl Grey, Hansard, Vol.139, col.1905 (August 7, 1855).
47
Earl Grey, Hansard, Vol.139, col.1898 (August 7, 1855).
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 300
The content and the timing of the Bill may be seen as part of a strategic
political manoeuvre by the Government to pacify the escalating pressure
which was being levied upon it. The question, however, arises as to whether
the statutory conferral of limited liability would have arrived had the war not
taken place. Anderson suggests that the war simply, strengthened and
accelerated certain political and social developments which were in reality
already present although not yet obvious, representing, not a turning point
but a landmark.
48
The war may, therefore, have merely acted as a catalyst for
the general conferral of limited liability. Indeed, for as long as commerce has
existed, people have sought to eliminate, or at the very least, minimise their
liabilities.
49
As we shall see, the attainment of limited liability through contract
was prevalent in the commercial practice of the time. However, if limited
liability had not been legislated for by, persons in a state of excitement
50
as
was the case in 1855 and 1856, it may have taken a dramatically different
form. For example, many of the safeguards provided in the original Limited
Liability Bill and the subsequent 1855 Act may not have been removed by the
1856 Act. Alternatively, as we shall see below, the courts could have implied
limitations of liability into corporate contracts. Arguably, the oodgates had
been opened in the tail end of the 1855 parliamentary session by a particularly
susceptible Liberal Government eager to appear less aristocratic at a time of
immense public scrutiny and criticism.
(b) A change of regulatory strategy
Under the 1855 and 1856 Acts, the State permitted all undertakings to
incorporate and attain limited liability provided that certain registration
formalities and disclosure requirements were complied with. Whilst this
register and disclose approach remains at the heart of our modern
companies legislation,
51
it contrasts markedly with the strategy adopted
throughout the eighteenth and early nineteenth centuries. There, legislation
was enacted which sought to protect society from imprudent undertakings.
The protective approach developed in two stages: rst, pre-1825 prohibitive
legislation as to the formation of corporations and transferability of shares
under the Bubble Act 1720
52
; and secondly, post-1825 restrictive conferral of
the privilege of incorporation and its attendant advantages under the Bubble
48
Anderson, A Liberal State at War, p.279.
49
Robert W. Hillman, Limited Liability in Historical Perspective (1997) 54 Wash. & Lee L.
Rev. 615, 615.
50
Robert Lowe, Hansard, Vol.140, col.116 (February 1, 1856).
51
Companies Act 2006 ss.7, 16.
52
Bubble Act 1720 (17 Geo. I c.18) (the Bubble Act).
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 301
Companies Act 1825,
53
the Letters Patent Acts,
54
and the 1844 Act.
55
As the
State could determine unilaterally those companies which should be possessed
of privileges, such as limited liability, in theory, companies which the State
considered to be less than bona de, could be eliminated at source.
However, not only was this strategy unsustainable and economically inef-
cient but the prohibitive legislation was subject to agrant abuse.
56
Further-
more, the vast numbers of joint stock companies which had developed in
contravention of the Bubble Act were arguably too important to the economy
to prohibit their operation.
57
This led the Government to reassess the most
effective means of regulating fraud and speculation in these companies. A
general right to incorporation and subsequent conferral of limited liability
upon shareholders, in conjunction with registration and corporate disclosure
requirements lay at the heart of the new, efciency driven regulatory strategy.
Four factors which favour the general conferral of limited liability may be seen
to support this change of strategy. First, the existing strategy was procedurally
unfair. Upon introducing the Limited Liability Bill to Parliament, Edward
Pleydell-Bouverie,
58
a staunch Liberal but who, belonged to the old whig
school
59
was highly critical of the incumbent legislative regime. Foremost on
his radar were the rules developed by the Board of Trade for determining
53
Bubble Companies Act 1825 (6 Geo. IV c.91) (the 1825 Act); between 1825 and 1834, full
limited liability was conferred only once in 30 applications: Bishop C. Hunt, The Development of
the Business Corporation in England, 18001867 (Massachusetts: Harvard University Press, 1936),
p.58.
54
Grants of Privileges to Companies Act 1834 (4 & 5 Will. 4 c.94) (the 1834 Act); Chartered
Companies Act 1837 (7 Will. 4 & 1 Vict. c.73) (the 1837 Act); between 1834 and 1837, only
three or four out of 25 applications were approved: Hunt, The Development of the Business
Corporation in England, 18001867, p.60; Levi found that from 1837 to 1855, 163 applications
were made to the Board of Trade requesting charters to be granted conferring limited liability,
and of these 97 were granted and 60 refused or delayed: L. Levi, On Joint Stock Companies
(1870) 33 Journal of the Statistical Society of London 1, 14. Levi does not clarify what became of
the remaining six applications.
55
From 1844 to 1853, 135 Acts of Parliament for the incorporation of companies with limited
liability were passed: Levi, On Joint Stock Companies (1870) 33 Journal of the Statistical Society
of London 1, 14.
56
In Scotland, the large number of joint stock companies operating illegally under the Bubble
Act and the fact that only two cases (Masons of Lanark v Hamilton (1730) Mor. 14554;
MacAndrew v Robertson (1828) 6 S. 950) made reference to it in over 100 years may suggest that it
was not applicable in Scotland. Whilst in England, with the exception of a handful of test cases
(see R. v Dodd (1808) 9 East 516; (1808) 103 E.R. 670; Buck v Buck (1808) 1 Camp. 547; (1808)
170 E.R. 1052 and R. v Stratton (1809) 1 Camp. 549n), the Bubble Act was not enforced in the
courts.
57
Shannon found that by 1825 some joint stock companies had a capital in excess of
150,000,000: Shannon, The Coming of General Limited Liability in Carus-Wilson, Essays in
Economic History, Vol.1, p.360.
58
Vice President of the Board of Trade (March 1855August 1855).
59
George Boase, Bouverie, Edward Pleydell (18181889) (Oxford University Press, 2004).
Oxford Dictionary of National Biography, http://www.oxforddnb.com/view/article/3016 [Accessed
October 19, 2011].
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 302
applications for letters patent
60
and Private Acts of Parliament. Under these
rules,
61
privileges would only be granted if a companys objects were of,
general public advantage. Circumstances, inter alia, satisfying this test was
where the capital required was, of so large an amount that no single
partnership could be expected to support the expense, as in the case of
Railways, Canals, Docks and works of that description.
62
The boards
approach seemingly mirrored Adam Smiths
63
inuential, yet arguably out-
dated views on the relative inefciencies of joint stock companies.
64
Bouverie
believed the general public advantage test to be not only arbitrary but
subjective. Decisions were arbitrary in that many unsuccessful applicants
belonged to industries where Private Acts of Parliament had been granted. He
contended that if it was right to grant privileges in those cases, it was also
right to grant them generally.
65
Bouverie was also critical of the subjectivity of
decision making, as applications were dependent upon, the caprice of those
who happened to be at the head of the department.
66
Parliament had, thus,
cast upon the board, a duty which it was not competent to perform.
67
Underlying tones of equality and procedural fairness come to the fore. The
statutory conferral of limited liability would alleviate the concern that the
applications of a privileged few were being favoured.
Secondly, the existing strategy stied enterprise in furtherance of the
prevention of fraud. Whilst one of the great objects of the Bill was to
prevent fraud, Bouverie was adamant that this would not be achieved by,
prohibiting a class of transactions, many of which were honest and advant-
ageous to the public and the parties concerned.
68
As we have seen, this had
been the Governments approach to date. Rather, all undertakings would be
allowed to incorporate, with fraud being detected and punished ex post.
69
Detection was to be facilitated by the requirement for companies to disclose
information on share capital and share holdings. The reasoning behind this
change of strategy is captured well by Lowes statement that the Government
could not, supersede the vigilance of individuals, who are actuated by the
strongest personal interests to detect these frauds.
70
Whilst not explicitly
60
In this context, letters patent were a legal document, issued under the Royal Prerogative,
which conferred a right or power upon an unincorporated company without the requirement of a
Private Act of Parliament or charter.
61
Cited in Hunt, The Development of the Business Corporation in England, 18001867, pp.57, 58.
62
Hunt, The Development of the Business Corporation in England, 18001867, p.58.
63
See Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Oxford:
Clarendon, 1976), pp.744756.
64
Ireland, Limited liability, shareholder rights and the problem of corporate irresponsibility
(2010) 34 Camb. J. Econ. 837, 841.
65
Hansard, Vol.139, col.325 (June 29, 1855).
66
Hansard, Vol.139, col.325 (June 29, 1855).
67
Hansard, Vol.139, col.325 (June 29, 1855).
68
Hansard, Vol.139, col.326 (June 29, 1855).
69
Hansard, Vol.139, col.326 (June 29, 1855).
70
Hansard, Vol.140, col.124 (February 1, 1856).
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 303
acknowledging efciency considerations, it is clear that these underpinned the
new strategy; individuals had a greater economic incentive to detect fraud as
they had the most to lose. From the investors perspective, with the protection
of limited liability, they would be sheltered from nancial ruin should
fraudulent antics subsequently emerge.
Thirdly, the market was more effective than the State in weeding out
speculative, or what Bouverie termed, rash or imprudent undertakings.
71
Under the post-1856 Act strategy, Parliament would, not throw the slightest
obstacle in the way of limited companies being formed.
72
Market forces
would determine whether a venture was rash or imprudent. This, however, was
subject to an important caveat, namely that the greatest publicity should be
given to the affairs of limited companies.
73
For Bouverie, the most effective
means of protecting shareholders and creditors from the effects of speculation
in the long run was to, call on them to protect themselves.
74
Armed with the
information provided by corporations under statutory disclosure requirements,
creditors and investors could assess the nancial standing of a proposed
debtor or investment and thus make a decision as to risk. Investors would be
caught by the safety net of limited liability should the information prove
decient or the prudence of an investment be incorrectly assessed.
Fourthly, the statutory conferral of limited liability would permit the law of
joint stock companies in Scotland and England to be assimilated. Prior to
1856, joint stock companies established in Scotland were left, to the
operation of the common law whilst in England, they were governed by,
special regulations, the most important being the Acts of 1844 and 1855.
75
As we have seen, neither Act applied to Scotland. Indeed, the 1844 Act, did
not much need to be applied north of the border.
76
Under Scots common
law, a joint stock company was regarded as a separate persona and thus
conferred one of the great advantages available to English companies under
the 1844 Act.
77
The free transferability of shares in joint stock companies also
appears to have been permitted under Scots common law despite being
prohibited by the Bubble Act.
78
As the 1855 Act only applied to companies
registered under the 1844 Act,
79
it would have been difcult to extend to
71
Hansard, Vol.139, cols 326, 327 (June 29, 1855).
72
Hansard, Vol.140, col.131 (February 1, 1856).
73
Hansard, Vol.140, col.131 (February 1, 1856).
74
Hansard, Vol.139, col.327 (June 29, 1855).
75
Commissioners on Mercantile Laws, Second Report of the Commissioners on Mercantile Laws
(HMSO, 1855), BPP, Vol.XXVII, p.20.
76
Shannon, The Coming of General Limited Liability in Carus-Wilson, Essays in Economic
History, Vol.1, p.369.
77
R.H. Campbell, The Law and the Joint-Stock Company in Scotland in Peter L. Payne
(ed.), Studies in Scottish Business History (London: Frank Cass & Co, 1967), p.143.
78
Francis W. Clark, A Treatise on the Law Of Partnership and Joint-Stock Companies According
to the Law of Scotland (London: Smith and Son, 1866), Vol.1, p.5.
79
1855 Act s.1.
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 304
Scotland. In any event, the Mercantile Law Commission of 1855 believed
there to be aws in both systems. An Act of Parliament, conferring a
complete system of registration, accompanied by proper regulations, appli-
cable across the whole United Kingdom was perceived as the solution.
80
This arrived in the form of the 1856 Act. Not only did it confer limited liability
upon members of Scottish joint stock companies,
81
it also permitted the
Government to extend its new regulatory strategy uniformly across the United
Kingdom.
For the purpose of this paper, these ndings are important for a number of
reasons. First, limited liability may be seen as a necessary feature of the
Governments new, efciency driven regulatory strategy. A strategy which
places less emphasis upon protective regulation and more upon freedom of
contract and the disclosure of information reduces regulatory costs for the
Government. However, with cost reduction came the prospect of a rise in
fraud and speculation. A statutory right to limited liability would, however,
shelter investors in such companies from the fallout emanating from the new
strategy. Alongside key roles which will be discussed later, limited liability
may, therefore, be seen as a compromise in the trade-off between high
regulatory costs and the prospect of a rise in fraud and speculation. Secondly,
freedom of contract and the education of decision-making through corporate
disclosure was now the prime driver in a corporations relationship with its
creditors and shareholders. However, this highlights the plight of creditors,
such as tort and delict victims who, invariably, are not party to the contractual
or decision-making process. Finally, it points to an acknowledgment by the
Government that it, or more specically the Board of Trade, did not have the
competence to continue with the protective approach to regulation. Compe-
tence in this context may not only include skills, infrastructure and expertise
but also legitimacy. This realisation is closely related to the previous theme as
it may have been a direct response to the scrutiny under which the
Governments machinery had been subjected. The existing strategy may have
been seen as part of the centralised bureaucracy and aristocratic privilege
which had been under attack following the events in the Crimea. This, in
conjunction with the fact that a streamlining of costs will have been high on
the Governments agenda in 1855, may explain the timing of the change of
strategy detailed above.
80
Commissioners on Mercantile Laws, Second Report of the Commissioners on Mercantile Laws,
p.20.
81
Scots common law appears to have come close to recognising limited liability in John
Stevenson & Co v Macnair (1757) Mor. 14560 and 144667; (1757) 5 Bro. Supp. to Mor. 340;
(1757) Kam. Sel.191. Under a deed of constitution, no partner or subscriber could be compelled
to pay any more money to the stock than the sum which they had subscribed. A claim by a
creditor against individual members was rejected; the members were not liable beyond their
subscriptions. However, the question never arose for many years thereafter and so the decision
was, gradually but generally forgotten through the increasing inuence of English decisions:
Campbell, The Law and the Joint-Stock Company in Scotland in Payne, Studies in Scottish
Business History, p.148.
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 305
(c) The contractualisation of limited liability
With the exception of those applicants which surmounted the insuperable
difculties
82
of obtaining a charter or Private Act of Parliament, undertakings
were forced to operate as unincorporated joint stock companies. Under
English
83
and Scots
84
common law, their shareholders had unlimited personal
liability for the debts and obligations of the company. This, in conjunction
with the, large scale of these concerns, the impersonal connections, and the
frequent transferability of interests, meant that their shareholders were,
exposed to even higher risks than partners in ordinary partnerships.
85
Contractual measures were, therefore, adopted to limit their liability.
86
By
1844, it had become commonplace for joint stock companies in the insurance
industry to insert clauses into policies limiting the liability of shareholders to
the extent of their unpaid shares.
87
This practice was extended to trading
companies.
88
Maitland notes that whilst the courts were very unwilling to
concede that parties had agreed to such a clause, they had to admit that
personal liability could be excluded through sufciently explicit words.
89
The freedom of contract argument was endorsed under English common
law in a series of cases concerning the use of limitation of liability clauses in
insurance policies. In Halket v The Merchant Traders Ship, Loan and
Insurance Association,
90
a clause in an insurance policy provided that sub-
scribers of a company registered under the 1844 Act were not liable beyond
the amount of their respective shares. In upholding the clause, Lord Denman
C.J. held that the 1844 Act did not apply as it was, not intended to do away
with the effect of any special contract entered into with companies.
91
The
unlimited personal liability for shareholders prescribed by the 1844 Act could,
therefore, be contracted around. The lawfulness and validity of such limitation
clauses in the deeds of joint stock companies was conrmed in Hallett v
82
Laurence C.B. Gower et al, Gowers Principles of Modern Company Law, 4th edn (London:
Stevens & Sons, 1979), p.31.
83
Nathaniel Lindley, A Treatise on the Law of Partnership, including Its Application in Joint-stock
and Other Companies (Philadelphia: T. & J.W. Johnson & Co, 1860), Vol.1, pp.275, 301.
84
Clark, A Treatise on the Law Of Partnership and Joint-Stock Companies According to the Law
of Scotland, Vol.1, p.286.
85
Ron Harris, Industrializing English Law: Entrepreneurship & Business Organization, 17201844
(Cambridge: Cambridge University Press, 2000), p.143.
86
Phillip I. Blumberg, The Multinational Challenge to Corporate Law: The Search for a New
Corporate Personality (Oxford: Oxford University Press, 1993), p.15.
87
Hunt, The Development of the Business Corporation in England, 18001867, p.100.
88
Hunt, The Development of the Business Corporation in England, 18001867, p.100.
89
The Collected Papers of Frederic William Maitland, edited by H.A.L. Fisher (Cambridge:
Cambridge University Press, 1911), Vol.III Trust and Corporation, p.392, available at http://
oll.libertyfund.org/title/873/70330 [Accessed October 19, 2011].
90
Halket v The Merchant Traders Ship, Loan and Insurance Association (1849) 13 Q.B. 960;
(1849) 116 E.R. 1530.
91
Halket v The Merchant Traders Ship, Loan and Insurance Association (1849) 13 Q.B. 960;
(1849) 116 E.R. 1530, per Lord Denman C.J. at 1532.
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 306
Dowdall.
92
In Hallett, the plaintiff had entered into an insurance policy with a
joint stock company to cover his interest in a ship. The plaintiff brought a
claim against certain shareholders for non-payment under the policy. Under
its terms, no shareholder of the company was to be liable beyond the amount
of their share in the capital stock. Inter alia, it was held that the plaintiff was,
bound by the express declaration in the policy.
93
Under the contract, the
plaintiff and the shareholders, in the most plain and unambiguous terms,
agreed that [the shareholders] shall be liable only to a limited extent.
94
Contractual freedom was, therefore, the guiding principle in the resolution of
such disputes.
Unless a limitation of liability had been contractually agreed, it did not
seem possible to infer such a limitation. In Walburn v Ingilby,
95
Lord
Brougham held that a clause in the deed of a joint stock company which
limited the liability of a subscriber to the extent of his share was, wholly
nugatory . . . as between the company and strangers, and could, serve no
purpose whatever, unless to give notice to those who deal with the
company.
96
Members could not agree amongst themselves to restrict their
liability to third parties.
97
In Sea Fire and Life Assurance Co,
98
the court drew
an important distinction between the creditors notice of such a clause in the
deed of a partnership or joint stock company and the creditors agreement to
the clause. Lord Cranworth held that even if a person dealing with a
partnership had notice of a limitation of liability clause in the deed of
partnership, then this was quite immaterial, for the partners, might have
already incurred debts with other persons to the extent provided, and thus it
would not be possible for [the creditor] to ascertain the limit of their
liability.
99
The rights of creditors were, wholly extrinsic of any such
engagements.
100
Notice by itself was insufcient to engage the clause. The
creditors agreement to a limitation of liability clause was essential.
The timing of these decisions (1849, 1852, 1833 and 1854 respectively) is
signicant as it points to a strong developing trend in the common law before
the 1855 and 1856 Acts were introduced. Indeed, Butler contends that the
decision in Hallet was the major event that explained the arrival of a
statutory limited liability.
101
Whilst this paper contends that the matter is more
92
Hallett v Dowdall (1852) 18 Q.B. 2; (1852) 118 E.R. 1.
93
Hallett v Dowdall (1852) 18 Q.B. 2; (1852) 118 E.R. 1, per Martin B. at 56.
94
Hallett v Dowdall (1852) 18 Q.B. 2; (1852) 118 E.R. 1, per Martin B. at 56.
95
Walburn v Ingilby (1833) 1 My. & K. 61; (1833) 39 E.R. 604.
96
Walburn v Ingilby (1833) 1 My. & K. 61; (1833) 39 E.R. 604, per Lord Brougham at 611.
97
Walburn v Ingilby (1833) 1 My. & K. 61; (1833) 39 E.R. 604, per Lord Brougham at 611.
98
Sea Fire and Life Assurance Co (1854) 3 De G.M. & G. 459; (1854) 43 E.R. 180.
99
Sea Fire and Life Assurance Co (1854) 3 De G.M. & G. 459; (1854) 43 E.R. 180, per Lord
Cranworth at 188.
100
Sea Fire and Life Assurance Co (1854) 3 De G.M. & G. 459; (1854) 43 E.R. 180, per Lord
Cranworth at 188.
101
Henry N. Butler, General Incorporation in Nineteenth Century England: Interaction of
Common Law and Legislative Processes (1986) 6 Intl Rev. L. & Econ. 169, 182.
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 307
complex than this, there can be little doubt that the decision played a key role.
It gave strength to the argument deployed in Parliament that the Limited
Liability Bill did not propose anything new as under the common law, any
two persons under a special contract could limit their liability.
102
All that the
Bill proposed was that a, general measure should supersede the necessity for
special contracts.
103
A number of observations may be made here. First,
Farrar et al note that the general conferral of limited liability was important
from an, economic point of view
104
as it reduced the cost of transactions.
Lawyers would no longer be required to draft express limitations of liability
clauses into contracts. However, where a contract was still required by the
nature of the transaction, for example, insurance policies or other high value
contracts, cost savings will have been minimal given that such limitation
clauses will have been of standard form. Secondly, whilst special contracts
could be used in, uniform deals or ones of high value they were impractical
in those, numerous lesser deals, oral or implicit, made in the course of daily
business.
105
The general conferral of limited liability, therefore, extended the
protection afforded by the doctrine to the full spectrum of transactions and
traders.
Thirdly, it is submitted that something new was proposed by the Bill; a
limitation on liability for tortious and delictual debts. Prior to this, only
contractually agreed limitations with third parties under special contracts had
been permitted. As Harris notes: Noncontractual claims, based on torts . . .
and the like, were . . . not affected by contractual limitation of respon-
sibility.
106
The limitation of liability under contract was, therefore, only
partial.
107
Under the regime of statutory limited liability prescribed by the
1855 Act,
108
the claims of non-contractual creditors or what Lord Brougham
referred to as strangers in Walburn v Ingilby, who had not agreed to
relinquish their rights, were to become limited to company funds inclusive of
any uncalled share capital. With the exception of any amount unpaid on
shares held, a complete limitation of liability was conferred upon members
of limited companies. This result does not sit comfortably with the decision in
102
Earl Granville, Hansard, Vol.139, col.2126 (August 11, 1855).
103
Earl Granville, Hansard, Vol.139, col.2126 (August 11, 1855).
104
John H. Farrar et al (eds), Farrars Company Law, 3rd edn (London: Butterworths, 1991),
p.21.
105
Harris, Industrializing English Law: Entrepreneurship & Business Organization, 17201844,
p.143.
106
Harris, Industrializing English Law: Entrepreneurship & Business Organization, 17201844,
p.143.
107
Harris, Industrializing English Law: Entrepreneurship & Business Organization, 17201844,
p.143.
108
If there were insufcient, Property or Effects within a company to, levy or enforce any,
Execution, Sequestration, or other Process in the Nature of Execution made against it, no
shareholder could be pursued for a sum greater than an amount, equal to the Portion of his
Shares not paid up: 1855 Act s.8.
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 308
Sea Fire and Life Assurance Co only one year previous. Fourthly, Parliament
failed to consider the effect of the 1855 and 1856 Acts upon non-contractual
creditors, such as tort and delict victims. Indeed, neither House expressly
considered this body of creditor in the respective parliamentary debates. The
legislatures predominant focus was on contractual debts. This emphasis was
highlighted by Lowe in his introduction of the Joint Stock Companies Bill to
Parliament. His object was, not to urge the adoption of limited liability but
to argue, in favour of human libertythat people may be permitted to deal
how and with whom they choose, without the ofcious interference of the
State.
109
The emphasis on dealing was clearly of fundamental importance.
Atiyah contends that if Parliament had not passed the 1855 Act, it was
possible that the courts would have implied contractual terms limiting
liability at common law.
110
From the perspective of non-contractual creditors,
this would have been preferable as limited liability would only have been
granted in relation to contractual claims. Tortious and delictual debts would
not be covered. This approach would have conferred many of the same
advantages provided by the statutory form of the doctrine.
(d) The facilitation of enterprise and investment
As the Limited Liability Bill passed through Parliament, concerns were
expressed regarding the impact which existing legislation was having upon
enterprise and investment in the United Kingdom. It was believed that there
was an, immense amount of capital in the country ready to be at once
employed, but which could not be accumulated and utilised under the 1844
Act.
111
Signicantly, a Mercantile Law Commission Report of 1854 came to a
very different conclusion. They found no evidence of a want of capital for
the purposes of trade.
112
Rather
113
:
[T]he annual increasing wealth of the country and the difculty of
nding protable investments for it [were] sufcient guarantees that an
adequate amount will always be devoted to any mercantile enterprise that
holds out a reasonable prospect of gain.
The Government, however, now appeared to believe that the existing laws
were distorting market forces and thus sought to mobilise the more efcient
109
Hansard, Vol.140, col.131 (February 1, 1856).
110
Patrick S. Atiyah, The Rise and Fall of Freedom of Contract (Oxford: Clarendon, 1979),
pp.566, 567.
111
Marquess of Clanricarde, Hansard, Vol.139, col.1910 (August 7, 1855).
112
Commissioners on Mercantile Laws, First Report of the Commissioners on Mercantile Laws,
p.5.
113
Commissioners on Mercantile Laws, First Report of the Commissioners on Mercantile Laws,
pp.5, 6.
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 309
circulation of capital in the economy. The railways and canals, which had
operated under a regime of limited liability, were hailed as a great success and
it was believed that if unlimited personal liability under the 1844 Act was
removed, further advantages would accrue to the country. For Bouverie, as
legislators [they] ought not to place any dam across the channels in which
capital was disposed to run.
114
There are three strands to the argument that the statutory conferral of
limited liability would facilitate enterprise and investment within the United
Kingdom. First, Bouverie believed that the 1844 Act, deterred prudent men
of capital from investing in the types of ventures which required, the
association of persons of large means, experience, and judgment.
115
In the
absence of limited liability:
[T]he wealthy industrial capitalists and nancial aristocracy, from whom
the bulk of industrial capital would ultimately have to come, but who had
the most to lose, would not invest.
116
With the spoils of the Industrial Revolution in hand, they sought outlets for
their new found wealth. Although government debt, railway and utility
company shares and land provided opportunities, they were, limited in scope
and did not generally offer particularly good returns.
117
Investment in limited
companies was perceived as the solution.
Secondly, the Prime Minister, Lord Palmerston, believed that there was, a
great quantity of small capital locked up which, might be employed for the
benet of those who possess them, and also for the advantage of the
community at large.
118
There were two issues here. First, there was a concern
that the present law deterred the middle and working classes from investing.
The rigours of unlimited liability associated with many domestic joint stock
companies was the cause.
119
Saville notes the growing recognition in the early
1850s, espoused particularly by, a group of middle-class philanthropists, most
of whom accepted the title of Christian Socialist, that the conditions of the
middle and working classes could be improved by providing facilities for the
safe investment of their savings.
120
Indeed, he contends that the initial impetus
in the early 1850s that led to the coming of general limited liability did not
114
Hansard, Vol.139, col.329 (June 29, 1855).
115
Hansard, Vol.139, cols 340, 322 (June 29, 1855).
116
R.A. Bryer, The Mercantile Laws Commission of 1854 and the Political Economy of
Limited Liability (1997) 50(1) E.H.R. 37, 40.
117
Ireland, Limited liability, shareholder rights and the problem of corporate irresponsibility
(2010) 34 Camb. J. Econ. 837, 841; Saville estimated returns to be, little more than 3 per cent:
Saville, Sleeping Partnership and Limited Liability (1956) 8(3) E.H.R. 418, 425.
118
Viscount Palmerston, Hansard, Vol.139, col.1390 (July 26, 1855).
119
McQueen, A Social History of Company Law, p.124.
120
Saville, Sleeping Partnership and Limited Liability (1956) 8(3) E.H.R. 418, 419.
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 310
come from investors, entrepreneurs, nor advocates of freedom of contract but
from this Christian Socialist movement.
121
Limited liability was seen as
providing such a facility. Not only would it protect the middle and working
classes from nancial ruin but by providing the legal conditions conducive to
the formation of limited companies, it would create a broader range of
productive outlets for their capital. Secondly, there was a concern that the
present law prevented the middle and working classes from associating for the
purpose of enterprise. Those aspiring entrepreneurs with, small to moderate
amounts of capital or, new inventions or ideas but with little or no capital
were prejudiced by the lack of limited liability.
122
Investors would not be
found until the spectre of personal liability was banished. For the inuential,
Liberal political economist of the time, John Stuart Mill, co-operative
production was not only key to establish independence in the working
classes but it would allow them to discover the, moral, intellectual, and
industrial conditions which were, indispensably necessary for effecting . . .
the social regeneration they aspire to.
123
Thus, for Hunt, the argument for
limited liability had acquired a, clear tinge of social amelioration.
124
Thirdly, there was growing concern regarding the capital ight from
England during the 1850s.
125
This ight of capital came in two forms. For
McQueen, many investors were choosing to invest overseas, particularly into
those companies offering limited liability.
126
Secondly, British entrepreneurs
were incorporating companies in Paris and the United States to attain limited
company status.
127
Between 1853 and 1855, at least 20 companies were
believed to have been formed in France solely for the purpose of obtaining
limited liability.
128
These companies paid a heavy duty to the French Govern-
ment which was effectively, money taken from this country.
129
This was the
rst time in English history where capital movements of such magnitude
had occurred.
130
There was the concern that if the law was not altered:
Companies formed in France and the United States [would] become more
numerous and soon monopolise the whole.
131
Despite being allies in the
Crimean War, a desire to ensure that Paris did not become the, great centre
of European industrial enterprise will, undoubtedly, have been a major
insecurity for the United Kingdom.
132
121
Saville, Sleeping Partnership and Limited Liability (1956) 8(3) E.H.R. 418, 419.
122
McQueen, A Social History of Company Law, pp.81, 82.
123
John Stuart Mill, Principles of Political Economy with some of their Applications to Social
Philosophy, 7th edn (London: Longmans, Green & Co, 1909), p.1048.
124
Hunt, The Development of the Business Corporation in England, 18001867, p.120.
125
McQueen, A Social History of Company Law, p.99.
126
McQueen, A Social History of Company Law, p.99.
127
Hansard, Vol.139, col.323 (June 29, 1855).
128
Hansard, Vol.139, col.323 (June 29, 1855).
129
Mr Edward Pleydell-Bouverie, Hansard, Vol.139, col.323 (June 29, 1855).
130
McQueen, A Social History of Company Law, p.99.
131
Hansard, Vol.139, col.323 (June 29, 1855).
132
Mr Samuel Laing, Hansard, Vol.139, col.1393 (July 26, 1855).
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 311
Four key observations may be made upon the Governments desire to
mobilise the more efcient circulation of capital. First, under the 1855 and
1856 Acts, the Government adopted two fundamentally different strategies to
promote this goal. Traditional partnership principles were deployed under the
1855 Act; a high share denomination was coupled with a minimum paid-up
share capital. These requirements were dropped by the 1856 Act. In seeking a
rejection of the need for 20 per cent of the share capital to have been paid up,
Lowe contended that not only did many bona de companies have a, great
deal of difculty
133
meeting the requirement but that in many companies, the
capital sat dormant until it is was required. This capital could be more
effectively and efciently utilised by the entrepreneurs. Furthermore, in
relation to the share denomination, one of the most powerful arguments
against a large share value was that if shares were small they would be more
accessible to the poor and, as we have seen above, it was deemed desirable
that the capital of this category of investor could be obtained.
134
The reduction
of entry costs to the market for both entrepreneurs and investors was
perceived as the most effective means of facilitating enterprise and invest-
ment. However, as we shall see, this philosophy appeared to be driven more by
political ideology than commercial reality.
Secondly, there was a lack of correlation between the Governments vision
of increasing accessibility to shares and the commercial practice of the time. In
the years following the 1855 and 1856 Acts, share denominations remained
high when, measured against the 1 standard and the partly paid share was
common.
135
The nancial advice given to founders of limited companies, to
ensure its security and high standing, was to maintain a high reserve of
uncalled capital, x a high share denomination, and conne the shareholdings
to those who know the trade.
136
Attempts to, appeal to a wider group of
investors with lower shares fully paid were strongly criticized.
137
Whilst a
few companies in certain industries offered, shares of a denomination and
character, small and fully paid up, that would make an appeal to [the safe
investor], the majority of companies catered for the wealthy investor.
138
The
133
Hansard, Vol.140, col.126 (February 1, 1856).
134
Hansard, Vol.140, col.127 (February 1, 1856).
135
Jefferys found that of the 3,720 companies formed between 1856 and 1865 inclusive, only
16% had shares below 5 in value and 52% had shares from 10 up to 100: Jefferys, The
Denomination and Character of Shares, 18551885 (1946) 16(1) E.H.R. 45, 45, 46. It was not
until the 1880s that the, trend towards the small fully paid up share was established: Jefferys,
The Denomination and Character of Shares, 18551885 (1946) 16(1) E.H.R. 45, 54.
136
Jefferys, The Denomination and Character of Shares, 18551885 (1946) 16(1) E.H.R. 45,
48.
137
Jefferys, The Denomination and Character of Shares, 18551885 (1946) 16(1) E.H.R. 45,
48.
138
Jefferys, The Denomination and Character of Shares, 18551885 (1946) 16(1) E.H.R. 45,
50. It was not until the 1870s that the middle classes began to invest in the shares of limited
companies: Jefferys, The Denomination and Character of Shares, 18551885 (1946) 16(1)
E.H.R. 45, 52.
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 312
strategy to facilitate widespread enterprise and investment was, therefore,
more limited than it intended to be.
Thirdly, wider competitive pressures will also have been a signicant factor
in the decision to adopt limited liability. Church notes that in the 1850s, those
manufacturers who had visited industrial exhibitions in Europe or mechanised
factories in the United States, were only too aware that international
competition was, a fact, would intensify, and would require appropriate
entrepreneurial response.
139
Domestic capitalism was seen to be, losing its
edge and would be, overtaken by overseas capitalists if something was not
done to revive the competitiveness which had characterized the eighteenth
century.
140
The United Kingdom will have been anxious to ensure that it was
not left behind by its contemporaries on the Continent and across the Atlantic
during a period of great political and economic uncertainty.
Finally, it is submitted that the timing of the desire to mobilise capital
within the economy was driven, in large part, by the ongoing Crimean War. As
the Limited Liability Bill was being debated, the war was coming into its
second year and, as was highlighted in the Commons, if there ever was a time
when [small capital] combinations ought to be encouraged, it was now.
141
By
providing legal conditions conducive to the facilitation of enterprise and
investment this would indirectly aid the war effort as it would stimulate
production within the economy and consequently increase government rev-
enue. The vast cost of undertaking a conict abroad will have been at the
forefront of the Governments mind and it will have sought to generate
revenue from every available avenue. Thus, the relationship with the rst
theme is clear.
3. Conclusion
The 1855 Act came as a bolt from the blue despite a Mercantile Law
Commission recommendation to the contrary. It has been demonstrated that a
complex array of factors led to the emergence of a statutory limited liability in
18551856. It is difcult to pinpoint one factor which tipped the balance in
favour of the statutory conferral of limited liability. Theories which seek to
explain the emergence of limited liability as a mere statutory tool to promote
investment are, therefore, overly simplistic. It has been suggested that four
interconnected themes may explain the sudden change in government
policy. Whilst the nal three themes all played their own complex roles in the
emergence of limited liability, it was the political climate present during the
war that ultimately led to the enactment of the 1855 and 1856 Acts in the form
that they took. As we have seen, the impact of the war pervaded and had a
signicant role to play in each of the other themes.
139
Roy A. Church, The Great Victorian Boom 18501873 (London: Macmillan, 1975), p.48.
140
McQueen, A Social History of Company Law, p.125.
141
Mr Edward Ball, Hansard, Vol.139, col.1384 (July 26, 1855).
FROM PRIVILEGE TO RIGHTTHEMES IN THE EMERGENCE OF LIMITED LIABILITY 313
Three important ndings have been derived from these themes: rst, the
statutory conferral of limited liability arrived as a result of immediate political
and economic necessity. The 1855 Act was not only rushed, but forced through
Parliament at the height of a widely unpopular war. Rational and detailed
debate as to the wider implications of the doctrine was absent as a result. The
great speed with which the 1855 Act was passed may be explained by a desire
by the new Liberal Government to not only appease severe public discontent
with the privilege to which limited liability was associated but to increase
government revenue at a time of war. The latter would be achieved by
providing legal conditions conducive to the facilitation of enterprise and
investment and stemming the capital ight from the United Kingdom which
had become common in the 1850s. The general conferral of the doctrine
would also signicantly reduce the Governments costs associated with the
regulation of fraud and speculation in companies. Secondly, non-contractual
creditors received no consideration during the parliamentary debates. Whilst
statutory conferral of limited liability, inter alia, superseded the need for
special contracts, this argument was irrelevant for non-contractual creditors.
The common law, prior to the enactment of the 1855 Act, had permitted the
contractual limitation of liability but had explicitly rejected the inference of
such a limitation in the absence of contract. This adds weight to the argument
that the 1855 and 1856 Acts were not intended to apply to non-contractual
debts. Finally, if the courts had chosen to imply limitations of liability into
corporate contracts, statutory conferral of the doctrine would have been
unnecessary. This would have been preferable for non-contractual creditors.