do privilegio ao direito

Electronic copy available at: http://ssrn.com/abstract=1980681

FROM PRIVILEGE TO RIGHT—THEMES IN THEEMERGENCE OF LIMITED LIABILITY

COLIN MACKIE*

Despite widespread disagreement as to its merits, the doctrine of limited liabilitywas formally introduced into English law by the Limited Liability Act 1855. TheJoint Stock Companies Act 1856 substantially modified the 1855 Act, effectivelyrendering limited liability available as of right. It also extended the doctrine toScots law. Prior to these enactments, the emergence of limited liability in theUnited Kingdom had been a very gradual process, granted on rare occasions. Adramatic change in government policy, therefore, occurred between 1855 and1856 which, to date, has not been explored fully. This paper examines thepertinent legal, economic, social and political themes underlying this suddenchange. The Government’s desire to promote widespread investment, a change ofstrategy in its regulation of fraud and speculation in companies and the growinguse of contractual limitations of liability in commerce are identified as contribut-ing factors. However, this paper concludes that the political climate of 1855–1856explains both the timing of the change in policy and the form which the doctrineadopted. The 1855 Act was not only rushed but forced through Parliament at theheight of the widely unpopular Crimean War. This stemmed from a desire toappease growing class unrest with the privilege with which limited liability wasassociated and to increase government revenue, through the facilitation ofenterprise and investment, at a time of need. Rational and detailed debate as tothe wider implications of the doctrine was absent as a result. Importantly, theeffects of the legislation upon non-contractual creditors, such as tort and delictvictims, were not considered during the parliamentary debates. It is contendedthat the 1855 and 1856 Acts were not intended to apply to this category ofcreditor.

1. Introduction

The doctrine that the liability of a shareholder is limited to the amount, ifany, unpaid on the shares held by them, has been enshrined in the

statutory law of companies in the United Kingdom for over 150 years. Despitewidespread disagreement as to its merits, the doctrine of limited liability wasformally introduced into English law by the Limited Liability Act 1855.1 The1855 Act did not apply to Scotland.2 The doctrine was, however, extended to

* Doctoral candidate, University of Aberdeen (research funded by the Arts & HumanitiesResearch Council). An earlier draft of this paper was presented at the Company Law session ofthe Society of Legal Scholars’ Annual Conference held at the University of Cambridge onSeptember 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 RIGHT—THEMES IN THE EMERGENCE OF LIMITED LIABILITY294

Scots law by the Joint Stock Companies Act 18563 one year later. Prior tothese enactments, the emergence of limited liability in the United Kingdomcould only be characterised as a, ‘‘long drawn out, gradual process’’, grantedon rare occasions.4 However, a ‘‘sudden and sharp break’’ occurred between1855 and 1856 whereby: ‘‘Not only was the pace suddenly quickened, but thelaw itself turned upside down.’’5 All previous discussions on the subject oflimited liability had considered its role within limited partnerships, specificallythe French societe en commandite,6 rather than joint stock companies. Indeed,in 1854, a Mercantile Law Commission had recommended against theintroduction of limited liability into partnership law.7 The legislation was alsoenacted at a time of deep political unrest in the United Kingdom, with aparliamentary session mid-way through the widely unpopular Crimean War,8being chosen to enact companies’ legislation of such fundamental importance.A dramatic change in government policy, therefore, occurred between 1855and 1856 which, to date, has not been explored fully.

This paper will examine the reasons for the ‘‘sudden’’ change throughanalysis of the pertinent legal, social, economic and political themes of thetime. The significance of this investigation lies in the fact that the doctrineremains as controversial now as it was in the mid-nineteenth century. In recentdecades, inter alia, it has received sustained criticism in relation to its use bycorporate groups as a ‘‘shield’’ from liabilities to third parties such as tort anddelict victims.9 The ability to use the doctrine in this way has the potential topromote socially irresponsible corporate behaviour. Analysis of the reasons forthe sudden change in government policy between 1855 and 1856 may shedsome valuable light upon the aims and intentions of the originators of the1855 and 1856 Acts. This will provide the foundation for later research todetermine whether the doctrine continues to service the aim(s) and inten-tion(s) of its originators or whether its modern usage has been contorted outof all recognition. Three main arguments will be developed: first, the tensepolitical climate of 1855–1856 explains both the timing of the Government’schange 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 1830–1914: The Finance and Organization of English

Manufacturing Industry (London: Methuen, 1983), p.54.5 Cottrell, Industrial Finance 1830–1914, p.54.6 This was a form of partnership, common on the Continent, whereby ‘‘sleeping’’ partners

could deposit capital into the firm but would not be liable for losses beyond the extent of theirinvestment.

7 See the Commissioners on Mercantile Laws, First Report of the Commissioners on MercantileLaws (HMSO, 1854), BPP, Vol.XXVII.

8 The Crimean War (March 1854–February 1856) was a conflict fought between the RussianEmpire 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 RIGHT—THEMES IN THE EMERGENCE OF LIMITED LIABILITY 295

forced through Parliament at the height of the Crimean War to appeasegrowing class unrest with the privilege with which limited liability wasassociated and to increase government revenue, through the facilitation ofenterprise and investment, at a time of need; secondly, a failure to considerthe effect of the 1855 and 1856 Acts upon non-contractual creditors, such astort and delict victims, when the respective Bills were being debated inParliament, may indicate that they were not intended to apply to this categoryof creditor; finally, an approach preferable to a statutory conferral of limitedliability would have been for the courts to have implied limitations of liabilityinto corporate contracts.

2. From privilege to right

The overarching theme which may describe the movement towards thestatutory 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 Stateand was generally reserved for transportation or utility ventures with largecapital demands and likely consequential public benefit.10 The rarity withwhich limited liability and incorporation generally was conferred,11 pointsfirmly to its status as a privilege. The Joint Stock Companies Registration,Incorporation and Regulation Act 1844,12 which did not apply to joint stockcompanies established in Scotland,13 provided the first move towards a right toincorporation upon satisfaction of certain conditions. However, shareholders,existing and former, remained personally liable for claims against the companyfor up to three years after they had ceased to be a shareholder.14

Wholesale changes were introduced under the 1855 Act. Limited liabilitywould be conferred on the condition that the following requirements weremet: company capital was to be divided into shares of at least £10 each; thedeed of settlement was to be executed by a minimum of 25 shareholders whomust have held at least 75 per cent of the company capital; each of the 25shareholders must have paid up at least 20 per cent of the value of their sharesand two promoters must have declared that was so; and finally ‘‘Limited’’ wasto be included in the corporate title.15 For Jefferys, the high denomination anduncalled character of the shares required under the 1855 Act was influencedby partnership tradition and practice and was, ‘‘in the spirit of the band ofadventurers, 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.53–55, 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.


investing heavily and exercising direct control of the undertaking.’’16 Theinfluence of partnership principles is demonstrated further by the fact that therequirement for 25 shareholders appears to have been taken from the 1844Act’s definition of a large partnership.17

The 1856 Act, however, removed many of the ‘‘safeguards’’ provided by the1855 Act. With the exception of compulsory registration provisions, the onlyrequirements for the attainment of limited liability was that there were sevenor more subscribers who held at least one share each and that ‘‘Limited’’ wasto be in the corporate title.18 There was no minimum share denomination norwas there a minimal percentage to be paid up on each share. In theory, alimited company could now be incorporated by seven subscribers, ‘‘eachholding a farthing share’’.19 In one year, the form of the doctrine had changeddramatically. An association could now incorporate, ‘‘by mere registration’’thus gain the protection of limited liability for its shareholders, ‘‘as a matter ofright’’.20 Upon introducing the Joint Stock Companies Bill to Parliament,Robert Lowe21 contended that this ‘‘right’’ was based on the principle of:

‘‘[F]reedom of contract, and the right of unlimited association—the rightof people to make what contracts they please on behalf of themselves . . .as long as they do not commit fraud, or otherwise act contrary to thegeneral policy of the law’’.22

The overarching theme, ‘‘from privilege to right’’, is supported by fourinterconnected themes: ‘‘the impact of the Crimean War’’; ‘‘a change ofregulatory strategy’’; ‘‘the contractualisation of limited liability’’; and ‘‘thefacilitation of enterprise and investment’’. It is to these themes which we willnow turn.

(a) The impact of the Crimean War

The political economy of 1855, a parliamentary session mid-way through thewidely unpopular Crimean War, was instrumental in bringing the debatesurrounding limited liability to a head. When war broke out in March 1854,

16 J.B. Jefferys, ‘‘The Denomination and Character of Shares, 1855–1885’’ (1946) 16(1) E.H.R.45, 47.

17 M. Lobban, ‘‘Corporate Identity and Limited Liability in France and England 1825–67’’(1996) 25 Anglo-Am. L. Rev. 397, 428, citing a letter from Lord Denman to The Times, August18, 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 1856–April 1858).22 Hansard, Vol.140, col.129 (February 1, 1856).


Britain still possessed an, ‘‘aristocratic social and political structure’’.23

However, significant reform was called for by the public following theperceived failings of the aristocracy in dealing with the practicalities ofmodern warfare. With the advent of the first war correspondents during theCrimea, the British public heard of calamities, such as the charge of the LightBrigade, almost as soon as they occurred.24 A direct political consequence ofthese failings was the resignation of the Prime Minister, Lord Aberdeen, aftera Commons vote of no confidence on January 30, 1855.25 The position of theincumbent Aberdeen Peelite and Whig (or Liberal as they now referred tothemselves) coalition was untenable as a result, with its downfall beingprecipitated by the resignation of Lord Russell.26 Lord Palmerston, whose‘‘reputation qualified him to restore confidence in the ability of his class torule an ever more urban, industrial, and imperially minded state’’, wasappointed Prime Minister on February 6, 1855.27 The coalition changedmarkedly again in late February 1855, when the departure of some Peelitesand the absorption of the rest, rendered it a Liberal Government.28 Emergingfrom a period of unpopularity and instability, the Government will have beenseeking to make its mark in the face of severe public outcry.

As 1855 progressed, the ‘‘influence of the war unmistakably made itself felt’’and began to pervade the broader sphere of domestic politics and policy.29 Theatmosphere of, ‘‘deepening gloom and hysteria’’ which developed after failingto achieve a quick victory in the Crimea brought about a, ‘‘violent expressionof class feeling’’ amongst the middle class and a, ‘‘varied series of attacks onexisting institutions, liberalism and a free government’’.30 The attacks led byinfluential 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 CrimeanWar (London: Macmillan, 1967), p.102.

24 Alastair W. Massie, ‘‘The charge of the light brigade and the Crimean War’’ (OxfordUniversity Press, 2004). Oxford Dictionary of National Biography, http://www.oxforddnb.com/view/theme/92728 [Accessed November 2, 2011].

25 Muriel Chamberlain, ‘‘Gordon, George Hamilton—fourth earl of Aberdeen (1784–1860)’’(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 Hamilton—fourth earl of Aberdeen (1784–1860)’’(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 (1784–1865)’’ (OxfordUniversity 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 (1784–1865)’’ (OxfordUniversity 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 thisinstance that they had a law which gave to the rich an enormous advantage which they withheldfrom the poor?’’: Hansard, Vol.139, col.352 (June 29, 1855).


‘‘focused public attention upon certain special aspects of domestic issues in apeculiarly intensive way’’, with the, ‘‘grandiose arraignments of parliamentarygovernment, centralizing bureaucracy and aristocratic privilege’’, being fore-most on the radar.32 For Anderson, the argument that the absence of a generalright to limited liability conferred, ‘‘unfair privilege upon rich and powerfulcompanies’’, was forceful enough in the tense atmosphere of 1855 toprecipitate the, ‘‘great leap forward’’ towards statutory conferral of thedoctrine.33

The Government’s response to the potency of this argument is illustrated bythe content and timing of the Limited Liability Bill. When the Bill wasoriginally introduced to the Commons, it was proposed that limited liabilitywould be granted to those companies which possessed a capital of £20,000 andshares of £25 each, upon which 20 per cent was to be paid up. As we haveseen, the final outcome differed markedly. Sir Hugh Cairns, a Tory who wouldlater become Lord Chancellor, believed that as the Limited Liability Bill was,‘‘popular out of doors’’ the Government sought to take advantage of this andhad, ‘‘made concessions to the popular desire’’ as a result.34 These concernswere also echoed by members of the Lords.35 Whilst it is inevitable that theparliamentary debates will have been conducted from a party-political stance,the suggestion was that the Government had reacted to public opinion andcompromised on the content of the Bill to ensure that it was passed. The viewsof the ‘‘rising middle class’’ will have played a vital role here given that theystood to ‘‘benefit most’’ from the introduction of limited liability.36 Three keyreasons may be cited for this: first, as investors, it would open up a greaterrange of safe ‘‘investment outlets’’ for their accumulating savings; secondly, itwould allow, ‘‘small to medium business people’’ to compete with the,‘‘leviathans of English industry’’ without the fear of personal bankruptcy; andthirdly, the ‘‘professional members’’ of the middle classes, notably the lawyersand accountants, could expect a rise in advisory work resulting from thelegislation.37 Ireland highlights the political power of this rentier class as moreimportant in the advent of limited liability than economic or efficiencyimperatives.38 Given the immense political pressure that the Government wasunder, it is not improbable that the changes made to the Bill were to appeasepublic 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 mostcareful consideration’’: Hansard, Vol.139, col.1904 (August 7, 1855).

36 Rob McQueen, A Social History of Company Law: Great Britain and the Australian Colonies1854–1920 (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.


There was, however, the strong feeling that key details in the Bill, ‘‘werewanting 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 arequirement for an independent audit to determine the solvency of corpora-tions registered under the 1855 Act.40 Others believed that all corporationstrading with limited liability should have a minimum capital.41 A willingness topander to public opinion was also apparent in the parliamentary debates ofthe 1856 Bill. Lowe acknowledged that the large number of amendmentsmade to the Bill as it passed through Parliament, ‘‘were attributable to thegreat interest which was taken in the subject by the public’’.42 This is significantas it suggests that the form which the doctrine of limited liability took underthe 1855 Act and the 1856 Act, was dictated by a desire to reduce oppositionto the respective Bills rather than by, ‘‘efficiency-driven evolution’’.43

Secondly, with regard to timing, there was widespread feeling in bothHouses that the Government was attempting to rush the Bill throughParliament. For Saville, the Bill was, ‘‘pushed hard through the Commons andliterally rammed down the throat of the Lords’’.44 It was suggested that a Billhad been ready in February 1854 but was delayed four times by theGovernment during the 1855 parliamentary session.45 Many of the Lords werehostile to this delay given that they had issued a standing order declaring thatthey would not give a second reading to any further Bill in the remainingsession after July 24, 1855. When the Bill finally reached the Lords on August7, 1855 for its second reading, this left a matter of days until the end of theparliamentary session for its contents to be debated. For many, it was‘‘absurd’’ that a measure of such importance to commerce could be dulyconsidered in such a short timescale.46 For Lord Redesdale, the Government’sattempt to the ‘‘force’’ the Bill through Parliament was merely:

‘‘[A] convenient method either of getting rid of the measure with the leastpossible difficulty, or of obtaining the eclat of having done something in aParliament which otherwise had not been very fruitful in useful legislativemeasures.’’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 final theme, this may have been driven by a desire to increase government revenueduring 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).


The content and the timing of the Bill may be seen as part of a strategicpolitical manoeuvre by the Government to pacify the escalating pressurewhich was being levied upon it. The question, however, arises as to whetherthe statutory conferral of limited liability would have arrived had the war nottaken place. Anderson suggests that the war simply, ‘‘strengthened andaccelerated certain political and social developments which were in realityalready present although not yet obvious’’, representing, ‘‘not a turning pointbut a landmark’’.48 The war may, therefore, have merely acted as a catalyst forthe general conferral of limited liability. Indeed, for as long as commerce hasexisted, people have sought to eliminate, or at the very least, minimise theirliabilities.49 As we shall see, the attainment of limited liability through contractwas prevalent in the commercial practice of the time. However, if limitedliability had not been legislated for by, ‘‘persons in a state of excitement’’50 aswas the case in 1855 and 1856, it may have taken a dramatically differentform. For example, many of the safeguards provided in the original LimitedLiability Bill and the subsequent 1855 Act may not have been removed by the1856 Act. Alternatively, as we shall see below, the courts could have impliedlimitations of liability into corporate contracts. Arguably, the floodgates hadbeen opened in the tail end of the 1855 parliamentary session by a particularlysusceptible Liberal Government eager to appear less aristocratic at a time ofimmense public scrutiny and criticism.

(b) A change of regulatory strategy

Under the 1855 and 1856 Acts, the State permitted all undertakings toincorporate and attain limited liability provided that certain registrationformalities and disclosure requirements were complied with. Whilst this‘‘register and disclose’’ approach remains at the heart of our moderncompanies’ legislation,51 it contrasts markedly with the strategy adoptedthroughout the eighteenth and early nineteenth centuries. There, legislationwas enacted which sought to protect society from imprudent undertakings.The protective approach developed in two stages: first, pre-1825 prohibitivelegislation as to the formation of corporations and transferability of sharesunder the Bubble Act 172052; and secondly, post-1825 restrictive conferral ofthe 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’’).


Companies Act 1825,53 the Letters Patent Acts,54 and the 1844 Act.55 As theState could determine unilaterally those companies which should be possessedof privileges, such as limited liability, in theory, companies which the Stateconsidered to be less than bona fide, could be eliminated at source.

However, not only was this strategy unsustainable and economically ineffi-cient but the prohibitive legislation was subject to flagrant abuse.56 Further-more, the vast numbers of joint stock companies which had developed incontravention of the Bubble Act were arguably too important to the economyto prohibit their operation.57 This led the Government to reassess the mosteffective means of regulating fraud and speculation in these companies. Ageneral right to incorporation and subsequent conferral of limited liabilityupon shareholders, in conjunction with registration and corporate disclosurerequirements lay at the heart of the new, efficiency driven regulatory strategy.Four factors which favour the general conferral of limited liability may be seento support this change of strategy. First, the existing strategy was procedurallyunfair. Upon introducing the Limited Liability Bill to Parliament, EdwardPleydell-Bouverie,58 a ‘‘staunch Liberal’’ but who, ‘‘belonged to the old whigschool’’59 was highly critical of the incumbent legislative regime. Foremost onhis 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, fulllimited liability was conferred only once in 30 applications: Bishop C. Hunt, The Development ofthe Business Corporation in England, 1800–1867 (Massachusetts: Harvard University Press, 1936),p.58.

54 Grants of Privileges to Companies Act 1834 (4 & 5 Will. 4 c.94) (the ‘‘1834 Act’’); CharteredCompanies Act 1837 (7 Will. 4 & 1 Vict. c.73) (the ‘‘1837 Act’’); between 1834 and 1837, onlythree or four out of 25 applications were approved: Hunt, The Development of the BusinessCorporation in England, 1800–1867, p.60; Levi found that from 1837 to 1855, 163 applicationswere 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 ofthe remaining six applications.

55 From 1844 to 1853, 135 Acts of Parliament for the incorporation of companies with limitedliability were passed: Levi, ‘‘On Joint Stock Companies’’ (1870) 33 Journal of the Statistical Societyof London 1, 14.

56 In Scotland, the large number of joint stock companies operating illegally under the BubbleAct 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 itwas 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 thecourts.

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 inEconomic History, Vol.1, p.360.

58 Vice President of the Board of Trade (March 1855–August 1855).59 George Boase, ‘‘Bouverie, Edward Pleydell (1818–1889)’’ (Oxford University Press, 2004).

Oxford Dictionary of National Biography, http://www.oxforddnb.com/view/article/3016 [AccessedOctober 19, 2011].


applications for letters patent60 and Private Acts of Parliament. Under theserules,61 privileges would only be granted if a company’s objects were of,‘‘general public advantage’’. Circumstances, inter alia, satisfying this test waswhere the capital required was, ‘‘of so large an amount that no singlepartnership could be expected to support the expense, as in the case ofRailways, Canals, Docks and works of that description’’.62 The board’sapproach seemingly mirrored Adam Smith’s63 influential, yet arguably out-dated views on the relative inefficiencies of joint stock companies.64 Bouveriebelieved the ‘‘general public advantage’’ test to be not only arbitrary butsubjective. Decisions were arbitrary in that many unsuccessful applicantsbelonged to industries where Private Acts of Parliament had been granted. Hecontended that if it was right to grant privileges in those cases, ‘‘it was alsoright to grant them generally’’.65 Bouverie was also critical of the subjectivity ofdecision making, as applications were dependent upon, ‘‘the caprice of thosewho 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. Thestatutory conferral of limited liability would alleviate the concern that theapplications of a privileged few were being favoured.

Secondly, the existing strategy stifled enterprise in furtherance of theprevention of fraud. Whilst one of the ‘‘great objects’’ of the Bill was toprevent 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 hadbeen the Government’s approach to date. Rather, all undertakings would beallowed to incorporate, with fraud being ‘‘detected and punished’’ ex post.69

Detection was to be facilitated by the requirement for companies to discloseinformation on share capital and share holdings. The reasoning behind thischange of strategy is captured well by Lowe’s statement that the Governmentcould not, ‘‘supersede the vigilance of individuals, who are actuated by thestrongest 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 aPrivate Act of Parliament or charter.

61 Cited in Hunt, The Development of the Business Corporation in England, 1800–1867, pp.57, 58.62 Hunt, The Development of the Business Corporation in England, 1800–1867, p.58.63 See Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Oxford:

Clarendon, 1976), pp.744–756.64 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).


acknowledging efficiency considerations, it is clear that these underpinned thenew strategy; individuals had a greater economic incentive to detect fraud asthey had the most to lose. From the investors’ perspective, with the protectionof limited liability, they would be sheltered from financial ruin shouldfraudulent antics subsequently emerge.

Thirdly, the market was more effective than the State in weeding outspeculative, or what Bouverie termed, ‘‘rash or imprudent’’ undertakings.71

Under the post-1856 Act strategy, Parliament would, ‘‘not throw the slightestobstacle in the way of limited companies being formed’’.72 Market forceswould determine whether a venture was rash or imprudent. This, however, wassubject to an important caveat, namely that the ‘‘greatest publicity’’ should begiven to the affairs of limited companies.73 For Bouverie, the most effectivemeans of protecting shareholders and creditors from the effects of speculationin the long run was to, ‘‘call on them to protect themselves’’.74 Armed with theinformation provided by corporations under statutory disclosure requirements,creditors and investors could assess the financial standing of a proposeddebtor or investment and thus make a decision as to risk. Investors would becaught by the ‘‘safety net’’ of limited liability should the information provedeficient or the prudence of an investment be incorrectly assessed.

Fourthly, the statutory conferral of limited liability would permit the law ofjoint stock companies in Scotland and England to be assimilated. Prior to1856, joint stock companies established in Scotland were left, ‘‘to theoperation 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, ‘‘didnot much need to be applied’’ north of the border.76 Under Scots commonlaw, a joint stock company was regarded as a separate persona and thusconferred one of the ‘‘great advantages’’ available to English companies underthe 1844 Act.77 The free transferability of shares in joint stock companies alsoappears to have been permitted under Scots common law despite beingprohibited by the Bubble Act.78 As the 1855 Act only applied to companiesregistered under the 1844 Act,79 it would have been difficult 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.


Scotland. In any event, the Mercantile Law Commission of 1855 believedthere to be flaws in both systems. An Act of Parliament, conferring ‘‘acomplete 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 liabilityupon members of Scottish joint stock companies,81 it also permitted theGovernment to extend its new regulatory strategy uniformly across the UnitedKingdom.

For the purpose of this paper, these findings are important for a number ofreasons. First, limited liability may be seen as a necessary feature of theGovernment’s new, efficiency driven regulatory strategy. A strategy whichplaces less emphasis upon protective regulation and more upon freedom ofcontract and the disclosure of information reduces regulatory costs for theGovernment. However, with cost reduction came the prospect of a rise infraud and speculation. A statutory right to limited liability would, however,shelter investors in such companies from the fallout emanating from the newstrategy. Alongside key roles which will be discussed later, limited liabilitymay, therefore, be seen as a compromise in the trade-off between highregulatory costs and the prospect of a rise in fraud and speculation. Secondly,freedom of contract and the education of decision-making through corporatedisclosure was now the prime driver in a corporation’s relationship with itscreditors and shareholders. However, this highlights the plight of creditors,such as tort and delict victims who, invariably, are not party to the contractualor decision-making process. Finally, it points to an acknowledgment by theGovernment that it, or more specifically 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 expertisebut also legitimacy. This realisation is closely related to the previous theme asit may have been a direct response to the scrutiny under which theGovernment’s machinery had been subjected. The existing strategy may havebeen seen as part of the centralised ‘‘bureaucracy’’ and ‘‘aristocratic privilege’’which had been under attack following the events in the Crimea. This, inconjunction with the fact that a streamlining of costs will have been high onthe Government’s agenda in 1855, may explain the timing of the change ofstrategy 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 JohnStevenson & 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 compelledto pay any more money to the stock than the sum which they had subscribed. A claim by acreditor against individual members was rejected; the members were not liable beyond theirsubscriptions. However, ‘‘the question never arose for many years thereafter’’ and so the decisionwas, ‘‘gradually but generally forgotten through the increasing influence of English decisions’’:Campbell, ‘‘The Law and the Joint-Stock Company in Scotland’’ in Payne, Studies in ScottishBusiness History, p.148.


(c) The contractualisation of limited liability

With the exception of those applicants which surmounted the ‘‘insuperabledifficulties’’82 of obtaining a charter or Private Act of Parliament, undertakingswere forced to operate as unincorporated joint stock companies. UnderEnglish83 and Scots84 common law, their shareholders had unlimited personalliability for the debts and obligations of the company. This, in conjunctionwith the, ‘‘large scale of these concerns, the impersonal connections, and thefrequent 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 By1844, it had become commonplace for joint stock companies in the insuranceindustry to insert clauses into policies limiting the liability of shareholders tothe extent of their unpaid shares.87 This practice was extended to tradingcompanies.88 Maitland notes that whilst the courts were ‘‘very unwilling’’ toconcede that parties had agreed to such a clause, they ‘‘had to admit thatpersonal liability could be excluded through sufficiently explicit words’’.89

The freedom of contract argument was endorsed under English commonlaw in a series of cases concerning the use of limitation of liability clauses ininsurance policies. In Halket v The Merchant Traders’ Ship, Loan andInsurance Association,90 a clause in an insurance policy provided that sub-scribers of a company registered under the 1844 Act were not liable beyondthe amount of their respective shares. In upholding the clause, Lord DenmanC.J. held that the 1844 Act did not apply as it was, ‘‘not intended to do awaywith the effect of any special contract entered into with companies’’.91 Theunlimited personal liability for shareholders prescribed by the 1844 Act could,therefore, be contracted around. The lawfulness and validity of such limitationclauses in the deeds of joint stock companies was confirmed in Hallett v

82 Laurence C.B. Gower et al, Gower’s 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-stockand 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 Lawof Scotland, Vol.1, p.286.

85 Ron Harris, Industrializing English Law: Entrepreneurship & Business Organization, 1720–1844(Cambridge: Cambridge University Press, 2000), p.143.

86 Phillip I. Blumberg, The Multinational Challenge to Corporate Law: The Search for a NewCorporate Personality (Oxford: Oxford University Press, 1993), p.15.

87 Hunt, The Development of the Business Corporation in England, 1800–1867, p.100.88 Hunt, The Development of the Business Corporation in England, 1800–1867, 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.


Dowdall.92 In Hallett, the plaintiff had entered into an insurance policy with ajoint stock company to cover his interest in a ship. The plaintiff brought aclaim against certain shareholders for non-payment under the policy. Underits terms, no shareholder of the company was to be liable beyond the amountof 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, theplaintiff 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 ofsuch disputes.

Unless a limitation of liability had been contractually agreed, it did notseem possible to infer such a limitation. In Walburn v Ingilby,95 LordBrougham held that a clause in the deed of a joint stock company whichlimited the liability of a subscriber to the extent of his share was, ‘‘whollynugatory . . . as between the company and strangers’’, and could, ‘‘serve nopurpose whatever, unless to give notice’’ to those who ‘‘deal’’ with thecompany.96 Members could not agree amongst themselves to restrict theirliability to third parties.97 In Sea Fire and Life Assurance Co,98 the court drewan important distinction between the creditor’s notice of such a clause in thedeed of a partnership or joint stock company and the creditor’s agreement tothe clause. Lord Cranworth held that even if a person dealing with apartnership had notice of a limitation of liability clause in the deed ofpartnership, then this was ‘‘quite immaterial’’, for the partners, ‘‘might havealready incurred debts with other persons to the extent provided, and thus itwould not be possible for [the creditor] to ascertain the limit of theirliability’’.99 The rights of creditors were, ‘‘wholly extrinsic of any suchengagements’’.100 Notice by itself was insufficient to engage the clause. Thecreditor’s agreement to a limitation of liability clause was essential.

The timing of these decisions (1849, 1852, 1833 and 1854 respectively) issignificant as it points to a strong developing trend in the common law beforethe 1855 and 1856 Acts were introduced. Indeed, Butler contends that thedecision in Hallet was the ‘‘major event’’ that explained the arrival of astatutory 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 Int’l Rev. L. & Econ. 169, 182.


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 LimitedLiability Bill did not propose anything ‘‘new’’ as under the common law, ‘‘anytwo persons under a special contract could limit their liability’’.102 All that theBill proposed was that a, ‘‘general measure should supersede the necessity forspecial contracts’’.103 A number of observations may be made here. First,Farrar et al note that the general conferral of limited liability was importantfrom an, ‘‘economic point of view’’104 as it reduced the cost of transactions.Lawyers would no longer be required to draft express limitations of liabilityclauses into contracts. However, where a contract was still required by thenature of the transaction, for example, insurance policies or other high valuecontracts, cost savings will have been minimal given that such limitationclauses will have been of standard form. Secondly, whilst special contractscould be used in, ‘‘uniform deals or ones of high value’’ they were impracticalin those, ‘‘numerous lesser deals, oral or implicit, made in the course of dailybusiness’’.105 The general conferral of limited liability, therefore, extended theprotection afforded by the doctrine to the full spectrum of transactions andtraders.

Thirdly, it is submitted that something new was proposed by the Bill; alimitation on liability for tortious and delictual debts. Prior to this, onlycontractually agreed limitations with third parties under special contracts hadbeen 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, ‘‘onlypartial’’.107 Under the regime of statutory limited liability prescribed by the1855 Act,108 the claims of non-contractual creditors or what Lord Broughamreferred to as ‘‘strangers’’ in Walburn v Ingilby, who had not agreed torelinquish their rights, were to become limited to company funds inclusive ofany uncalled share capital. With the exception of any amount unpaid onshares held, a ‘‘complete’’ limitation of liability was conferred upon membersof 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), Farrar’s Company Law, 3rd edn (London: Butterworths, 1991),

p.21.105 Harris, Industrializing English Law: Entrepreneurship & Business Organization, 1720–1844,



p.143.108 If there were insufficient, ‘‘Property or Effects’’ within a company to, ‘‘levy or enforce’’ any,

‘‘Execution, Sequestration, or other Process in the Nature of Execution’’ made against it, noshareholder could be pursued for a sum greater than an amount, ‘‘equal to the Portion of hisShares not paid up’’: 1855 Act s.8.


Sea Fire and Life Assurance Co only one year previous. Fourthly, Parliamentfailed to consider the effect of the 1855 and 1856 Acts upon non-contractualcreditors, such as tort and delict victims. Indeed, neither House expresslyconsidered this body of creditor in the respective parliamentary debates. Thelegislature’s predominant focus was on contractual debts. This emphasis washighlighted by Lowe in his introduction of the Joint Stock Companies Bill toParliament. His object was, ‘‘not to urge the adoption of limited liability’’ butto argue, ‘‘in favour of human liberty—that people may be permitted to dealhow and with whom they choose, without the officious interference of theState’’.109 The emphasis on dealing was clearly of fundamental importance.Atiyah contends that if Parliament had not passed the 1855 Act, it waspossible that the courts would have ‘‘implied’’ contractual terms limitingliability at common law.110 From the perspective of non-contractual creditors,this would have been preferable as limited liability would only have beengranted in relation to contractual claims. Tortious and delictual debts wouldnot be covered. This approach would have conferred many of the sameadvantages provided by the statutory form of the doctrine.

(d) The facilitation of enterprise and investment

As the Limited Liability Bill passed through Parliament, concerns wereexpressed regarding the impact which existing legislation was having uponenterprise and investment in the United Kingdom. It was believed that therewas an, ‘‘immense amount of capital in the country ready to be at onceemployed’’, but which could not be accumulated and utilised under the 1844Act.111 Significantly, a Mercantile Law Commission Report of 1854 came to avery different conclusion. They found no evidence of a ‘‘want’’ of capital forthe purposes of trade.112 Rather113:

‘‘[T]he annual increasing wealth of the country and the difficulty offinding profitable investments for it [were] sufficient guarantees that anadequate amount will always be devoted to any mercantile enterprise thatholds out a reasonable prospect of gain’’.

The Government, however, now appeared to believe that the existing lawswere distorting market forces and thus sought to mobilise the more efficient

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.


circulation of capital in the economy. The railways and canals, which hadoperated under a regime of limited liability, were hailed as a great success andit was believed that if unlimited personal liability under the 1844 Act wasremoved, further advantages would accrue to the country. For Bouverie, ‘‘aslegislators [they] ought not to place any dam across the channels in whichcapital was disposed to run’’.114

There are three strands to the argument that the statutory conferral oflimited liability would facilitate enterprise and investment within the UnitedKingdom. First, Bouverie believed that the 1844 Act, ‘‘deterred prudent menof capital’’ from investing in the types of ventures which required, ‘‘theassociation of persons of large means, experience, and judgment’’.115 In theabsence of limited liability:

‘‘[T]he wealthy industrial capitalists and financial aristocracy, from whomthe bulk of industrial capital would ultimately have to come, but who hadthe most to lose, would not invest’’.116

With the spoils of the Industrial Revolution in hand, they sought outlets fortheir new found wealth. Although government debt, railway and utilitycompany shares and land provided opportunities, they were, ‘‘limited in scopeand did not generally offer particularly good returns’’.117 Investment in limitedcompanies was perceived as the solution.

Secondly, the Prime Minister, Lord Palmerston, believed that there was, ‘‘agreat quantity of small capital locked up’’ which, ‘‘might be employed for thebenefit of those who possess them, and also for the advantage of thecommunity at large’’.118 There were two issues here. First, there was a concernthat the present law deterred the middle and working classes from investing.The ‘‘rigours of unlimited liability’’ associated with many domestic joint stockcompanies was the cause.119 Saville notes the growing recognition in the early1850s, espoused particularly by, ‘‘a group of middle-class philanthropists, mostof whom accepted the title of Christian Socialist’’, that the conditions of themiddle and working classes could be improved by providing facilities for thesafe investment of their savings.120 Indeed, he contends that the initial impetusin 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.


come from investors, entrepreneurs, nor advocates of freedom of contract butfrom this ‘‘Christian Socialist’’ movement.121 Limited liability was seen asproviding such a facility. Not only would it protect the middle and workingclasses from financial ruin but by providing the legal conditions conducive tothe formation of limited companies, it would create a broader range ofproductive outlets for their capital. Secondly, there was a concern that thepresent law prevented the middle and working classes from associating for thepurpose of enterprise. Those aspiring entrepreneurs with, ‘‘small to moderateamounts 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 befound until the spectre of personal liability was banished. For the influential,Liberal political economist of the time, John Stuart Mill, co-operativeproduction was not only key to establish ‘‘independence’’ in the workingclasses but it would allow them to discover the, ‘‘moral, intellectual, andindustrial’’ conditions which were, ‘‘indispensably necessary for effecting . . .the social regeneration they aspire to’’.123 Thus, for Hunt, the argument forlimited liability had acquired a, ‘‘clear tinge of social amelioration’’.124

Thirdly, there was growing concern regarding the ‘‘capital flight’’ fromEngland during the 1850s.125 This ‘‘flight’’ of capital came in two forms. ForMcQueen, many investors were choosing to invest overseas, particularly intothose companies offering limited liability.126 Secondly, British entrepreneurswere incorporating companies in Paris and the United States to attain limitedcompany status.127 Between 1853 and 1855, at least 20 companies werebelieved to have been formed in France solely for the purpose of obtaininglimited liability.128 These companies paid a heavy duty to the French Govern-ment which was effectively, ‘‘money taken from this country’’.129 This was thefirst 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 morenumerous and soon monopolise the whole’’.131 Despite being allies in theCrimean War, a desire to ensure that Paris did not become the, ‘‘great centreof European industrial enterprise’’ will, undoubtedly, have been a majorinsecurity 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, 1800–1867, 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).


Four key observations may be made upon the Government’s desire tomobilise the more efficient circulation of capital. First, under the 1855 and1856 Acts, the Government adopted two fundamentally different strategies topromote this goal. Traditional partnership principles were deployed under the1855 Act; a high share denomination was coupled with a minimum paid-upshare capital. These requirements were dropped by the 1856 Act. In seeking arejection of the need for 20 per cent of the share capital to have been paid up,Lowe contended that not only did many bona fide companies have a, ‘‘greatdeal of difficulty’’133 meeting the requirement but that in many companies, thecapital sat dormant until it is was required. This capital could be moreeffectively and efficiently utilised by the entrepreneurs. Furthermore, inrelation to the share denomination, one of the ‘‘most powerful arguments’’against a large share value was that if shares were small they would be moreaccessible to the ‘‘poor’’ and, as we have seen above, it was deemed desirablethat the capital of this category of investor could be obtained.134 The reductionof entry costs to the market for both entrepreneurs and investors wasperceived as the most effective means of facilitating enterprise and invest-ment. However, as we shall see, this philosophy appeared to be driven more bypolitical ideology than commercial reality.

Secondly, there was a lack of correlation between the Government’s visionof increasing accessibility to shares and the commercial practice of the time. Inthe years following the 1855 and 1856 Acts, share denominations remainedhigh when, ‘‘measured against the £1 standard’’ and the partly paid share wascommon.135 The financial advice given to founders of limited companies, toensure its security and high standing, was to ‘‘maintain a high reserve ofuncalled capital, fix a high share denomination, and confine the shareholdingsto those who know the trade’’.136 Attempts to, ‘‘appeal to a wider group ofinvestors with lower shares fully paid were strongly criticized’’.137 Whilst a‘‘few’’ companies in certain industries offered, ‘‘shares of a denomination andcharacter, 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, ‘‘TheDenomination and Character of Shares, 1855–1885’’ (1946) 16(1) E.H.R. 45, 45, 46. It was notuntil the 1880s that the, ‘‘trend towards the small fully paid up share’’ was established: Jefferys,‘‘The Denomination and Character of Shares, 1855–1885’’ (1946) 16(1) E.H.R. 45, 54.

136 Jefferys, ‘‘The Denomination and Character of Shares, 1855–1885’’ (1946) 16(1) E.H.R. 45,48.

137 Jefferys, ‘‘The Denomination and Character of Shares, 1855–1885’’ (1946) 16(1) E.H.R. 45,48.

138 Jefferys, ‘‘The Denomination and Character of Shares, 1855–1885’’ (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 limitedcompanies: Jefferys, ‘‘The Denomination and Character of Shares, 1855–1885’’ (1946) 16(1)E.H.R. 45, 52.


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 significant factorin the decision to adopt limited liability. Church notes that in the 1850s, thosemanufacturers who had visited industrial exhibitions in Europe or mechanisedfactories in the United States, were only too aware that internationalcompetition was, ‘‘a fact, would intensify, and would require appropriateentrepreneurial response’’.139 Domestic capitalism was seen to be, ‘‘losing itsedge’’ and would be, ‘‘overtaken by overseas capitalists if something was notdone to revive the competitiveness which had characterized the eighteenthcentury’’.140 The United Kingdom will have been anxious to ensure that it wasnot left behind by its contemporaries on the Continent and across the Atlanticduring a period of great political and economic uncertainty.

Finally, it is submitted that the timing of the desire to mobilise capitalwithin the economy was driven, in large part, by the ongoing Crimean War. Asthe Limited Liability Bill was being debated, the war was coming into itssecond year and, as was highlighted in the Commons, if ‘‘there ever was a timewhen [small capital] combinations ought to be encouraged, it was now’’.141 Byproviding legal conditions conducive to the facilitation of enterprise andinvestment this would indirectly aid the war effort as it would stimulateproduction within the economy and consequently increase government rev-enue. The vast cost of undertaking a conflict abroad will have been at theforefront of the Government’s mind and it will have sought to generaterevenue from every available avenue. Thus, the relationship with the firsttheme is clear.

3. Conclusion

The 1855 Act came as a bolt from the blue despite a Mercantile LawCommission recommendation to the contrary. It has been demonstrated that acomplex array of factors led to the emergence of a statutory limited liability in1855–1856. It is difficult to pinpoint one factor which tipped the balance infavour of the statutory conferral of limited liability. Theories which seek toexplain the emergence of limited liability as a mere statutory tool to promoteinvestment are, therefore, overly simplistic. It has been suggested that fourinterconnected themes may explain the ‘‘sudden’’ change in governmentpolicy. Whilst the final three themes all played their own complex roles in theemergence of limited liability, it was the political climate present during thewar that ultimately led to the enactment of the 1855 and 1856 Acts in the formthat they took. As we have seen, the impact of the war pervaded and had asignificant role to play in each of the other themes.

139 Roy A. Church, The Great Victorian Boom 1850–1873 (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).


Three important findings have been derived from these themes: first, thestatutory conferral of limited liability arrived as a result of immediate politicaland economic necessity. The 1855 Act was not only rushed, but forced throughParliament at the height of a widely unpopular war. Rational and detaileddebate as to the wider implications of the doctrine was absent as a result. Thegreat speed with which the 1855 Act was passed may be explained by a desireby the new Liberal Government to not only appease severe public discontentwith the privilege to which limited liability was associated but to increasegovernment revenue at a time of war. The latter would be achieved byproviding legal conditions conducive to the facilitation of enterprise andinvestment and stemming the ‘‘capital flight’’ from the United Kingdom whichhad become common in the 1850s. The general conferral of the doctrinewould also significantly reduce the Government’s costs associated with theregulation of fraud and speculation in companies. Secondly, non-contractualcreditors received no consideration during the parliamentary debates. Whilststatutory conferral of limited liability, inter alia, superseded the need forspecial contracts, this argument was irrelevant for non-contractual creditors.The common law, prior to the enactment of the 1855 Act, had permitted thecontractual limitation of liability but had explicitly rejected the inference ofsuch a limitation in the absence of contract. This adds weight to the argumentthat the 1855 and 1856 Acts were not intended to apply to non-contractualdebts. Finally, if the courts had chosen to imply limitations of liability intocorporate contracts, statutory conferral of the doctrine would have beenunnecessary. This would have been preferable for non-contractual creditors.

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