So is it time to ask whether limited liability should be denied to the directors of limited companies? Shareholders need it: they are given remarkably little information to decide upon with regards to the affairs of the corporation in which they have invested, and so it is appropriate that their risk is limited. This is, however, not true of the directors: they are meant to know what is going on, and in that situation to limit their liability simply encourages recklessness. And it cannot be argued that it would be unfair that they carry such risk. As evidence look at what is happening in Carillion: most of the directors will walk away without a penny of personal loss. Many of their employees, most of their pensioners, many of their small suppliers, and many of those small suppliers own employees, will walk away with considerable personal loss arising as a consequence of the recklessness of the action of this Board of Directors.
Sigh. Who would be a director without limited liability? A partner, sure, but then they do get paid rather a lot in a partnership that size, don’t they?
Companies exist to fail. That is the whole purpose of why we created the concept. Many seem to be wholly ignorant of this.
If only the government would introduce Part 10 A of the Companies Act 2006 with criminal and civil safeguards to the actions of Directors and running to over 100 sections.
If only Spud had the slightest idea of what the fuck he was talking about.
Point 12 is the funniest. He’s suggesting no more government outsourcing ie nationalisation.
I miss the 1970s, they were such fun.
many of those small suppliers own employees
Crikey! Murphy reveals a slavery network at the heart of public sector contracting!
It’s like the idiots demanding that senior managers should invest all their money and their pension pots in the companies they run, without understanding the implications of this – extreme risk aversion and if things go wrong, gambling for resurrection.
If, on the other hand, people who ran NGOs had unlimited liability perhaps a lot fewer people would be running Oxbridge colleges. Given they would be in jail.
Oh, Andrew C, if he knew of what a spoke, even a nursery rhyme would be beyond him.
.
he
I do have some sympathy for Spuds views here, though not not in this precise case. I think that directors who are also significant shareholders in their own business should lose their limited liability status. Its too easy for Joe Bloggs to start a company with him as sole shareholder and director (and the wife to make up the numbers) then run his company into the ground on purpose leaving a trail of bad debts to suppliers, then put the company into bankruptcy, and start again. Its the whole fox in charge of the hen house scenario.
It happens all the time at the local level. Bloke obviously has loads of money (big house,flash cars, boats, the works) yet his companies go belly up owning thousands and the small man never gets paid, sometimes forced into bankruptcy himself. Ought not to be allowed at that sort of level.
Small private companies should have far less limited liability to prevent fraud.
@SMFS – do I detect a reference to the (Out-of)Work Foundation there?
I doubt he’ll let my comment through so cross-posted here;
——
“The losses that will arise as a result of this failure will be to many classes of stakeholder including customers, suppliers, employees, tax authorities, local communities and others”.
1. Customers – mainly the government but all customers should have contingency and business continuity plans if the services were critical. Most services contracts have Step In clauses, for example.
2. Suppliers – unfortunately that’s a risk one takes. Insurance and limiting credit can be used as mitigation, as can not being reliant on a single “whale” client.
3. Employees – uncertainty is unpleasant but, presumably the work still needs to be done so they are likely to carry on. See the point above about Step In.
4. Tax authorities – well, corporation tax is paid on profits so that’s gone, but if the work still continues people will still be paid to do it and therefore the NI and PAYE continues.
5. Local communities – not sure I follow this line if thought.
You missed shareholders and bond holders from that list and they will be burned, as Capitalism requires of failed investments.
It’s a mess and someone is likely to spend some time in the big house if the reporting allegations are correct but it’s still a great example of Capitalism doing its magic. All the other systems we’ve tried end up with far more risk of the moral hazard you are concerned about.
(Screenshot in anticipation of your usual editing).
———
It’s almost as if he doesn’t realise the differences between an owner-managed company, where the shareholders are the directors and essentially are the company, and a large public company where the directors probably do own shares but not a significant proportion. Surely he must know the differences?
In any case, as stated above, if directors continue to run a company while knowing that they can’t pay the bills, there are substantial penalties. Limited liability does not come into the equation
William of Ockham
Dick Tater’s response will be along the lines of neo-liberal sophistry – bluster – wasting my time – bluster – your time here is done etc.
“In any case, as stated above, if directors continue to run a company while knowing that they can’t pay the bills, there are substantial penalties. Limited liability does not come into the equation”
How often does anyone ever get prosecuted for such behaviour? Hardly ever. And they they start up again with their wife as the director and shareholder instead, but they are the one pulling the stings.
There may be all sorts of laws in theory, in practice small private companies are a legalised form of theft.
Jim
Hence, isn’t the real problem not enacting laws that we already have?
What? So if someone abuses something (and there are existing laws in place to counter that), then that’s it, all use of it is condemned?
I missed something there, as there are very large numbers of small companies in the UK that are most definitely not engaged in any sort of theft?
“What? So if someone abuses something (and there are existing laws in place to counter that), then that’s it, all use of it is condemned?”
Yes, if the State refuses to enforce the laws it has enacted, and is having rings run around it by fraudsters then the whole system comes into disrepute.
I personally will not deal with private companies, sole traders only. I know they have some skin in the game then, not just able to walk away the moment things get a bit sticky.
Its just not right that the shareholders and directors of failed companies can walk away from their debts, despite having more than enough personal wealth to make good on what is owed. Its downright immoral.
All company shareholders and directors should have personal liability of at least 100k. That would focus their minds a bit.
It does surprise me rather that there’s no lower limit to share capital risked in a limited company. In Switzerland it’s CHF 20k minimum for a GmbH/Sàrl, 100k for an AG/SA.
But a non-shareholding director still has zero skin in the game.
So is it time to ask whether limited liability should be denied to the members of LLPs? Shareholders in companies need it: they are given remarkably little information to decide upon with regards to the affairs of the corporation in which they have invested, and so it is appropriate that their risk is limited. This is, however, not true of members of LLPs: they are meant to know what is going on, and in that situation to limit their liability simply encourages recklessness.
As abacab says, that’s perhaps more an argument for increased minimum share capital?
I’ll argue for the status quo, and let those that don’t want to do business with them do precisely that – free world and less regulation. In my experience the vast majority of small companies are perfectly kosher.
To me, it’s a bit like arguing against the use of cars simply because of some bad drivers (or any other analogy)? Driving licence sure (is that a minimum share capital, or having a director on board who is deemed to understand the CA requirements / obligations? It used to be a mandatory audit, however small?) but not assuming that they are all crooks.
No mention of scrapping limited liability for members of LLP’s, particularly highly artificial LLP’s where one partner has a 99% interest. I think we can all guess why!
The official receiver will investigate the past few years and specifically the actions of the directors.
While action against directors is rare it does happen – particularly in high value problems.
The director who made bad decision with £10k isn’t worth bothering with, the one who did it with £10 million is worth a closer look.
But its not for outsiders to judge, they won’t have the facts and they won’t be interviewing the directors.
There may be all sorts of laws in theory, in practice small private companies are a legalised form of theft.
FFS
You crash your car, you have to pay an excess.
When sole traders or investors become limited co directors is there any excess they have to pay if it goes belly up?
FFS people
Go read the 111 sections of Part 10A Companies Act 2006 and then see if you still feel there’s no comeback on directors.
Bongo said:
“You crash your car, you have to pay an excess.
When sole traders or investors become limited co directors is there any excess they have to pay if it goes belly up?”
Yes, it’s the share capital. They lose it.
If you’re not happy dealing with companies where the shareholders don’t have much to lose, check in the accounts to see what their share capital is.
But for most of us, it’s more important to judge the commercial risk, which is usually low.
One interesting thing about Carillion is that the CEO and CFO plus a number of other directors only came on board during 2017. I am sure the eyes of the financial industry are on the people who they replaced.
Most senior executives in large companies will have a lot of compensation in the form of shares, either current or deferred. To say that the destruction of all that realised or potential value is “not a penny of personal loss” is sophistry of the highest order
Bongo – not unless a decision is made that they have liability.
For instance if trading after becoming insolvent or if criminal acts such as nicking money belonging to creditors.
There is stress. Depending on whether an insolvency practitioner is used (usual) or the spongebob method is used (for those companies unable to afford insolvency) (and yes that is its name) there can be no work or considerable work needed to deal with the company.
Been there done that had the company dissolved. I only lost £30k.
My skin in the game was, as is common with limited company directors, what they put into the business over time or was owed by the business.
So what we have here is Murphy offering a simplistic yet counterproductive solution to a problem that does not exist.
Sounds like every other day of the year.
Re: Carrillion. Surely the auditors must bear some responsibility? To go from a market value of a ouple of £billion to zero in 12 months or so, suggests to me that maybe they should have questioned its going concern status. Especially as interest rates are so low. I also wonder about the legality of their paying dividends in such circumstances, but maybe that’s not covered….?
Of course, this doesn’t stop stupid lefties complaining that the company has been making fate profits at the expense of the tax-payer, even when the exact opposite is shown.
“Go read the 111 sections of Part 10A Companies Act 2006 and then see if you still feel there’s no comeback on directors.”
That theory, not reality. The usual attitude is exactly as shown by Martin above – go bust for under a 100k, could happen to anyone, no further action. Doesn’t help the small contractors who are in for thousands and don’t get their money…..
Limited liability is a massive advantage to the business owner, it should cost them an arm and a leg to get it in the first place. Minimum share capital of £100k.
Jim…
Limited liability is a massive advantage to the business owner, it should cost them an arm and a leg to get it in the first place. Minimum share capital of £100k.
So, only rich people should be able to start limited companies?
The usual attitude is exactly as shown by Martin above – go bust for under a 100k, could happen to anyone, no further action. Doesn’t help the small contractors who are in for thousands and don’t get their money…..
Suppliers have to decide whether or not to extend credit to limited companies. They can decide not to at all, or only to do so up to a limit with which they are comfortable. Or they can take out insurance.
It is probably not good business to extend large amounts of credit over an extended period to any customer, especially whist continuing to work for them. Sometimes, like now, sadly, they get burned.
An interesting read
http://www.ukbusinessforums.co.uk/threads/the-spongebob-plan.268551/
Jim, there are laws. If you don’t want to apply them then that is your decision. It does not follow that limited liability is a crooks’ charter. For example, if you have not been paid, then withhold future services or send a letter threatening court action. It is cheap to get a court claim issued and it usually works a treat. Either that or it forces a more timely liquidation. But the bad debt remains on the record
The state should not be allowed to accept the credit risk of a company that has no unlimited director liability, unless the state has a note from its mummy.
Jim, with a large share capital requirement then people would simply not set up businesses in the UK. Would set them up overseas where the system is better for business.
Doesn’t bother me, currently a business set up in Eire or Germany can trade in the UK without trouble. And UK corporation tax not payable.
How much corporation tax would the UK government lose if you required £100k share capital for limited UK companies?
Suppliers extend credit after doing their own risk assessment on the business. They can also pay for insurance on the debt.
And if you have been following business news this is not the first time anyone was aware Carillion had troubles – would take a major idiotic decision to extend credit to them afterwards.
Jim, when a company goes under it goes from decent value, decent stock level etc to suddenly hardly worth anything very quickly. The value of stock is a fraction of the wholesale value when sold off. A business can go from doing OK to insolvent in just a few weeks and £20k wholesale value of stock, worth £50k retail, can overnight turn into £1k – £2k when cashed in. Doesn’t go far between creditors hence why companies tend to go under owing a considerable amount.
If there had been an investigation of our conduct as directors then we would have not been in trouble. Decent records, decent decisions.
Its quite possible the directors at Carillion will not be penalised. There is a massive difference between bad decisions and illegal decisions. Hindsight is wonderful but cannot be used to make decisions at the time.
I work as a contractor through Agency V doing work for Carillion’s subsidiary A. Subsidiary A is very likely to be bought in the firesale by Company S and merged with their Subsidiary Q that does the same work, that I work for through Agency C, and that is likely to be repeated for many of Carillion’s “employees”. The only change will be a different logo on my sweatshirt.
Martin
Presence / trading in the UK (branch)?
But agreed, that doesn’t change the essence of freedom of location of incorporation / weight of regulation etc.
Jim: “in practice small private companies are a legalised form of theft.”
Quite the offensive comment, no? Especially as every private company hoists a large flag telling everyone to be careful by using the words Inc, Ltd or PLC or GMBh or whatever. Sane businessmen don’t do risky deals with private companies without security or pay other than COD. My wife and I own six private companies which have never defaulted on a penny since our first incorporation in 1982. We deal with dozens of other small private companies, mostly incorporated tradesmen and suppliers, and have never lost a penny to them.
You were apparently burned. Is it possible that it was your fault for being too trusting and not doing your due diligence?
There are thieves and crooks everywhere and if you think dealing with sole proprietors will save you, you’re wrong. Dealing only with sole proprietors opens you to being duped by a shill whose wife or brother owns the assets.
I see Murphy has established a relationship with Warren Mosler and is involved in running a Q+A session on MMT. The cynic in me would like to know what benefit Murphy sees for himself in this new venture.
@Andrew C, Richard & Martin : Thank you!
Actually, I think I have answered my own question.
By seeking questions on MMT that will be answered by another person, Murphy will have a piggy-backed bank of answers on MMT ready for his own future use at no cost or intellectual effort on his own part.
What a sneaky cvnt our learned Prof is!
Completely OT, but Tim Newman’s book is now available:
http://www.desertsun.co.uk/books/
Jim
Circumstances when the corporate veil is pierced –
https://en.wikipedia.org/wiki/Piercing_the_corporate_veil
Not sure about the UK, but directors and officers carry quite a bit of liability in the States, hence the market for often pricey Directors’ and Officers’ Insurance.
“You were apparently burned. Is it possible that it was your fault for being too trusting and not doing your due diligence?”
I’ve never been burned by one of the sharp suited ‘Company Director’ types. But I know plenty of small businesses, often sole traders who have suffered badly at their hands, thats why I think its immoral that people can walk away from debts when they have the wherewithal to make good on them, but hide behind limited liability.
“It does not follow that limited liability is a crooks’ charter. For example, if you have not been paid, then withhold future services or send a letter threatening court action. It is cheap to get a court claim issued and it usually works a treat. Either that or it forces a more timely liquidation. But the bad debt remains on the record”
There’s how things work in theory, and how they work in practice. In practise the people who run these companies know exactly how to run things on the right side of the law, but still leave a trail of bad debts behind them at every turn. Its never their fault, they’re just ‘unlucky’. Strange it always happens to the same people tho………..
@William of Ockham, January 16, 2018 at 11:23 am
Well done, you beat spud so he resorts to ban.
Corp. Jones “…rhey don’t like it up ’em”
@Jim
OK. So only people rich enough to have £100k start a business and that helps?
How much about business do you know?
So, I start a business, I invest £100k. What do think happens to that £100k? It sits in a box? Of course not. It would be spent to help the company get going. Might be on assets. Might be on stock. Might be on salaries.
Would that £100k be there if the company went under? Maybe, maybe not. Probably not. Companies tend to go under as a last resort, having spent every penny they have and then some.
But at least you’ve stopped poor people from starting companies.
And certainly small groups of companies would be stopped dead. Want to set up a hold co. with 2 subsidiaries to handle two different trades? That’ll be £300k please.
@Jim, January 16, 2018 at 9:48 pm
Unfortunately we cannot eliminate people with no conscience, morals or ethics. Be it rogues who defraud the vulnerable, the gullible and the elderly to those at the top that defraud their employees & suppliers and MPs/Gov’t that defraud taxpayers.
Laws have to be balanced in favour of allowing the honest majority to succeed.
Jim, your reply to me about getting burned was evasive. I didn’t ask about directors in sharp suits, I asked about small limited liability companies.
Burned by one or not? If so, honestly, how much of it was your fault? If not, why so hostile?
PF – where is head office in the EU?
Local presence does not generate local corporation tax. Local sales do not generate local corporation tax.
Jim. Any business owner should not be shy about asking for a client’s financial statements and a personal guarantee from the owners. In fact, the personal guarantee should be part of your standard agreement. Big corporations won’t sign it, but they generally aren’t the credit risk. Most any business will likely experience a few bad debts, but if you’re selling to a client whose default could really hurt you, a little up front caution can mitigate that. I have successfully enforced personal guarantees. Takes a bit of time, but a court order and a lien slapped on their homes forced them to cough up eventually. (and the lien can be sold if you don’t want to wait)
Martin,
I did day “presence / trading”. I thought that was sufficient for a Timothy thread!
@Jim
I agree with Martin
I once had to apply for a striking-off order after I naively agreed to help an ex-colleague on a part-time basis and the company’s MD had a nervous breakdown. The company’s directors were the largest unpaid creditors, accounting, betweeen them, for an overall majority of its debts. Fortunately I had savings so I could afford it but it did affect my standard of living in the short term; the Chairman lost less cash but all the benefits he should have expected from three years work building up the company during which time he was paid little more than the cost of his season ticket.
@Pcar,
Thanks. I always enjiy correcting people on the internet rather than spending time with my family. Oh, hang on….
Murphy is a bully and I really hate bullies. Note his first resort is to be insulting despite there being no hint of animosity in my original reply.
As for the denial of editing comments; pathetic and easily disproved.
“Who would be a director without limited liability?”
People who are now getting paid an order of magnitude more than LL Directors for taking on this massive personal risk – which Ritchie would then complain about the *even larger* distance between what senior officers and the rest of the staff make.
And in the end we still wouldn’t get better directors – only those who are better at compartmentalizing their income streams.
“Burned by one or not? If so, honestly, how much of it was your fault? If not, why so hostile?”
I have never lost a penny to any limited company that went bust, liquidated, bankrupt. That good enough for you?
Why so hostile? Because I’ve seen good men reduced to tears because the work they done is not going to get paid, because some oily fucker has pulled the plug on his company and walked away from his debts, while driving around in a flash car and owning a big house in the expensive part of town.
If you’ve taken good money out of a company, you should have to put it back if the company goes tits up. Otherwise its just the case that the company owners gets all the profits when times are good but walks from the losses when times are bad.
If the owners of a company have been taking big profits for years out of a company, why should they be allowed to walk away the moment it starts making losses?
In the States the courts can claw back significant payments made to officers, directors, shareholders and even vendors made within 6 months of filing for bankruptcy.