Sangkuhl, Elfriede --- "Rethinking Limited Liability" [2007] UWSLawRw 5; (2007) 11(1) University of Western Sydney Law Review 124

RETHINKING LIMITED LIABILITY

ELFRIEDE SANGKUHL^[*]

I. INTRODUCTION

The justification for the existence of companies and company law underpins the western model of capitalism and ‘provides the theoretical justification for the basic organisation of industry and commerce throughout most of the western world.’^[1] Even though

the ownership and control of business enterprises, and the distribution of profits arising in them, can be structured in any number of ways … the important question is how we came to accept as so fundamental the structure which we now have?^[2]

That is, how did we come to accept the structure of the limited liability company? In other words how is it that the corporate form of business organisation is accepted almost unquestioningly as the basic form of business organisation in the western world?

The purpose of the paper is to examine the flawed arguments that lead to the acceptance of limited liability as the corporate form and modern arguments that support the continuance of limited liability. The paper proposes that the negative impacts of limited liability be moderated by replacing boards of directors with public auditors, and to make senior corporate investors and substantial corporate shareholders personally liable for corporate violations of the law.

Examining the history of the limited liability company discloses that the traditional arguments raised for the necessity for limited liability as a pre-condition of the success of the corporate form were flawed. The continuation of limited liability as an acceptable corporate form has lead to disastrous consequences for victims of limited liability companies. These victims can include shareholders, other investors, creditors, employees, customers and the environment.

This paper limits the discussion of limited liability to corporations of publicly traded shares. The small private company, called the closely held company in some jurisdictions, is not considered here. This is because, first, in small companies shareholders have the ability to control,^[3] and, second, in practice,

limited liability is not of particular consequence for the very closely held corporation, given the likelihood that voluntary creditors will ask for personal guarantees and that shareholders, acting as corporate agents, will already be liable for their own torts.^[4]

The concept of the company as a legal person distinct from its shareholders was not finally settled until 1897. In the case of Salomon v Salomon & Co Ltd^[5] it was finally, on appeal from two earlier contrary decisions,^[6] decided unanimously by the House of Lords that the modern limited liability company was legally acceptable. As Lord Herschell stated,

[t]he very object of the creation of the company and the transfer to it of the business is, whereas the liability of the partners for debts incurred was without limit, the liability of the members for the debts incurred by the company shall be limited.^[7]

In England ‘the trading company was a direct development from the medieval gilds and companies formed by charter for the regulation of specific trades and skills.’^[8] Trading charters were granted from about the 1530s.^[9] However it took over 350 years, that is, until 1897 for the distinct legal personality of companies and the limited liability of their members to be legally recognised. This makes all the more surprising that, in the barely 100 years since the decision in Salomon v Salomon & Co Ltd, the concept of limited liability is now taken for granted. In Australia, support for the ‘principle of the separateness of legal personality … is enshrined in section 124 of the Corporations Act’^[10] which grants a company the legal capacity and powers of an individual.^[11]

A standard company law text, Ford’s Principles of Corporations Law, in chapter one titled, ‘The Nature and Functions of Companies’, states as follows:

The privilege of limited liability achievable by formation of a company is not a fundamental human right. It is a franchise given by society to save the members from having to seek limitations of liability by more cumbersome means.^[12]

The more cumbersome means of limiting liability are to be found in contract law that ‘provides a rudimentary and incomplete facility’.^[13] Ford holds that limiting liability through contract

is not satisfactory in business because care would have to be taken to ensure that each contract contained the stipulation and, in informal contracts, it would be necessary to show that the other party was aware of them. Moreover, it cannot protect against unexpected liability such as vicarious liability for torts committed by employees in the course of their employment. Insurance is then needed.^[14]

Ford acknowledges that a

company can be constituted as an unlimited company whose members stand to lose all their property if their company is wound up without being able to discharge all its debts in full.^[15]

This is not an attractive prospect for members, but an attractive prospect for those doing business with such a company. Creditors would be heartened to know that the personal assets of the owners of a company were at stake if the company failed. This would give the creditors increased assurance that they were dealing with people willing to risk their personal assets in their business venture, which may give creditors increased payout in the event of company failure. Creditors dealing with unlimited ventures would have recourse to the assets of the venture and the personal assets of the investors in the event of the commercial failure of the venture.

II. ARGUMENTS FOR THE LIMITED LIABILITY COMPANY

When the concept of limited liability was being advocated in England the main arguments in favour of limited liability were that limited liability would:

a) Encourage capital accumulation necessary to power the industrial revolution;^[16] and

b) Encourage broad participation in the stock market which would improve law and order.^[17]

A. Encourage capital accumulation necessary to power the industrial revolution.

An essential requirement of modern capitalism is large agglomerations of capital. Hadden, and many corporate commentators, hold that the ability to raise capital from large numbers of investors who are able to withdraw their capital from an investment without damaging the investment makes the corporate form essential to capitalism. It was considered that unlimited liability would ‘discourage men of substance from buying shares in enterprises in which there was any degree of risk’.^[18]

1. Three major flaws with this argument

Firstly, ‘men of substance’ who held the majority of the shares in a corporation should be bearing the risks of that corporation disproportionately to more modest shareholders. This is because majority shareholders are the shareholders with more of a say in the decision making process of the company and so should carry the risks associated with their decisions.

The founding father of modern economics widely agreed to be Adam Smith published his great economic treatise, An Inquiry into the Nature and Causes of the Wealth of Nations, in 1776. In it Smith states that

[t]he wealth of a nation results from the diligent pursuit by each of its citizens of his own interests – when he reaps the resulting reward or suffers any resulting penalties. In serving his own interests, the individual serves the public interest.^[19]

Smith was clearly no advocate of limited liability, believing that only a diligent pursuit of one’s own interest, where the consequences of success and failure are borne by the individual, is the public interest best served.

Secondly, before the advent of the limited liability joint stock enterprise or company in England in 1856^[20] the railway boom, which required huge sums of capital, had proceeded unimpeded by the disadvantage of unlimited liability. In England,

between 1825 and 1849 the amount of capital raised by railways, mainly through joint-stock companies increased from £200,000 to £230 million, more than one thousand fold.^[21]

The lack of ‘protection’ afforded to investors by limited liability was clearly no bar to capital accumulation.

Thirdly, the degree of financial risk that attached to holding a share in an unlimited liability joint stock enterprise was in practice negligible. In 1844, English legislators adopted ‘a system for liquidation with full liability for all shareholders’^[22]. In the late 1840s this system was found to

be virtually unworkable … (because) … it was often impossible to ascertain which shareholders should be personally responsible in the event of a failure, since many of them were likely to have sold or bought their shares after the main losses had been incurred^[23].

This negligible risk is even more negligible for a shareholder in a listed company today. Shares in listed companies are held by individuals, insurance companies and superannuation funds and other companies and trusts and, are constantly being traded. Any plaintiff seeking to allocate damages on the basis of the modern share register would face a costly, lengthy and practically impossible task.

B. Encourage broad participation in the stock market which would improve law and order

The committee that was established to consider limited liability, the Select Committee on Partnerships (England) 1851, reported that ‘[l]imited liability would allow those of moderate means to take shares in investments with their richer neighbours’^[24] and that this would mean that ‘their self-respect [would be] upheld, their intelligence encouraged and an additional motive given to preserve order and respect for the laws of property.’^[25]

Broad participation in the stock market has been achieved in Australia. An Australian Stock Exchange (‘ASX’) study of share investors in 2004 revealed that 55% of the Australian adult population (approximately eight million people) owned shares directly or indirectly (via a managed fund or self-managed superannuation fund), and 44% (about 6.4 million) held shares directly.^[26]

Adam Smith foresaw that broad participation in company ownership would necessarily divorce company ownership from management which would lead to less responsibility being taken by management and less regard for law and order. Smith was deeply opposed to joint-stock companies, the forerunner of modern corporations. Of shareholders he said,

[they] seldom pretend to understand anything of the business of the company; and when the spirit of faction happens not to prevail among them, give themselves no trouble about it, but receive contentedly such half-yearly or yearly dividend, as the directors think proper to make them.^[27]

And of directors he added that, as managers of other people’s money rather than of their own, they would not be as diligent as if they were managing their own affairs.^[28]

III. ARGUMENT AGAINST LIMITED LIABILITY: UNDERMINE PERSONAL RESPONSIBILITY

The main argument against the concept of limited liability was that limited liability would undermine personal responsibility.

A parliamentarian speaking against the introduction of limited liability in England in the 19^th century said that the ‘first and most natural principle of commercial legislation … that every man was bound to pay the debts he had contracted, so long as he was able to do so’^[29] would be undermined by limited liability because it would ‘enable persons to embark in trade with a limited chance of loss, but with an unlimited chance of gain.’^[30]

This sentiment was expressed by Gilbert and Sullivan in 1893. Their operetta, Utopia, Limited, was scathing about the effects of limited liability provided by the corporate form. In the first act the concept of the limited liability was explained. The company promoter, Mr Gold, extolling the virtues of limited liability, explains to the incredulous King of Utopia that with a limited liability company, ‘If you come to grief, and your creditors are craving … you merely file a Winding-up petition, and start another company at once.’^[31]

The damage that Gilbert and Sullivan had in mind when a company ‘came to grief’ was limited to leaving creditors unpaid. They did not foresee the extent of the damage that could be caused by corporate collapse. This includes workers unpaid for their work, customers affected by shoddy or poisonous goods uncompensated for the damage they suffered, the environment left depleted and poisoned, and so on.

IV. THE FLAWED ARGUMENTS THAT SUSTAIN THE LIMITED LIABILITY COMPANY

Modern commentators supporting the existence of limited liability have updated the arguments in favour of limited liability. The modern arguments that sustain limited liability are that:

a) It promotes efficiency,^[32] and

b) It allows for perpetual succession.^[33]

A. Limited liability promotes efficiency

It is argued that limited liability makes the operations of corporations and securities markets efficient. Australia’s Federal Treasurer, Peter Costello, when he was Shadow Attorney-General summarised the argument for limited liability by stating,

The whole concept of the corporation is to limit the liability of persons who subscribe money or who control money in a collective enterprise so as to give them greater freedom to invest and use the money to create wealth and provide goods and services.^[34]

However, as it is ‘the public purse – which usually has to look after the abandoned victims’^[35] of limited liability the endorsement of the concept by political leaders is difficult to understand.

1. Limited liability decreases the need to monitor management

The existence of limited liability is taken to be ‘a logical consequence … for conducting economic activity.’^[36] The efficiency argument goes like this: modern production requires large amounts of capital and this necessitates the separation of investment and management. Limited liability reduces the costs of this separation and specialisation,^[37] that is, the separation of the functions of investment and management. Limited liability reduces the costs by decreasing the need to monitor management because investors hold diversified portfolios and do not have the expertise to monitor management.^[38]

This argument assumes that investors have sufficient funds and expertise to manage diversified portfolios of investments. Unfortunately, the smaller, less sophisticated, investors are those who can least afford to diversify (transaction costs) and can least afford to lose their capital. Evidence the distress of investors in the recent property fund collapses. For example, in July 2007 it was revealed that the property group Bridgecorp collapsed leaving 18,000 investors dealing with losses of up to $450 million.^[39] This equates to relatively ‘modest’ losses of only $25,000 per investor. However, as the receiver stated, ‘most of the company’s 18,000 investors were far from being high fliers who could afford to lose.’^[40] He went on to say, ‘Most of those I imagine are mums and pops at home, they tend to be the typical investors.’^[41] The collapse of Bridgecorp comes after the recent collapses of Westpoint, Fincorp and Australian Capital Reserve with combined losses estimated at $1.3 billion.^[42] After the collapse of Bridgecorp finance experts agreed that ‘the signs of risk and potential disaster had been on the public record for some time.’^[43] Unfortunately, even though the financial experts may have known the risks, this information did not get down to the mum and pop investors who lost their savings or retirement nest eggs.

Leaving management without oversight, from either investors or regulators, leads to the problems of negligence and mismanagement as predicted by Adam Smith.

Recent examples of corporate collapses exacerbated by financial statement fraud of management include Enron, WorldCom, Sunbeam and Parmalat.^[44]

2. Limited liability reduces the costs of monitoring other shareholders

A further argument with respect to costs is that limited liability reduces the costs of monitoring other shareholders.^[45] The argument is that, if the liability of shareholders were unlimited, shareholders of a company would have to monitor each other to determine if other shareholders were reducing their personal assets in order to escape any potential liability^[46].

The potential liability of shareholders in unlimited companies, even in the unsophisticated days of the 17^th Century when the case of Salmon v The Hamborough Company^[47] was decided, was easily evaded. In this case, the plaintiff, Doctor Salmon had lent the Company, an unlimited joint stock company, £2,000 on the security that the Company

had Power to make By-Laws, and to assess rates upon Cloaths (which was the Commodity they dealt in) and by Poll upon every Member to defray the necessary Charge of the Company.^[48]

The Company, however, refused to exercise that power, and, having several times failed to appear before the court, was ordered to make the necessary levy upon its members in order to pay the debt owed to Doctor Salmon.^[49] The court also ordered that if the Company failed to obey the orders then contempt proceedings would be issued against all the members of the Company and the court would levy the members in order to pay the debt owed to Doctor Salmon^[50].

In that case the shareholders of the unlimited liability company avoided their debts simply by failing to pay them and forcing the plaintiff to pursue them individually through the courts. In 1844, a system for liquidating companies in England was adopted making the liability of shareholders unlimited.^[51] Unlimited liability in liquidation was found to be ‘virtually unworkable’^[52] because of the difficulty of determining which shareholders were responsible since many shareholders would have either bought and/or sold their shares before or after the losses were incurred by the company in liquidation.^[53]

The large size and complexity of the modern listed company today means that if the liability of shareholders was unlimited creditors would face great difficulties in pursuing shareholders for their unpaid debts. The creditor would face the difficulty of the 1840s on a larger scale. More shareholders means there would be more difficulty in apportioning the company loss to those shareholders. The first difficulty would be in ascertaining when the corporation’s losses arose. Then the creditor would have to determine who the shareholders were at that time or part of that time. The shareholders would then have to be pursued in the relevant jurisdiction of the debt and of the residence of the shareholder - a daunting and expensive task.

In other words, shareholders in unlimited companies would not need to monitor the personal holdings of other shareholders in the company because the practical difficulties in pursuing shareholders for unpaid liabilities makes the likelihood of personal assets being pursued negligible.

3. Limited liability, by promoting the free transfer of shares, gives managers incentives to act efficiently^[54]

This argument states that managers of companies will act efficiently, that is, act to make the company as profitable as possible, to keep share prices high. If managers do not keep the share prices high the company will be taken over by other shareholders who will sack the management and install better management. There are two problems with this argument. Firstly, it assumes that the share price is an indicator of a profitable and well-run company. As share trading has become more and more speculative this is not always the case. Even if the share price represents a multiple of a company’s earnings, if shareholders are not monitoring management how can they determine whether the reported earnings are optimal for that company? Secondly, this argument ignores the reality that senior managements of companies are appointed by the boards of companies. Public company boards represent the interests of major shareholders. In other words, major shareholders already control senior management and sometimes are the senior management. They will therefore be unlikely to change the status quo by changing the management. For example, it would be highly unlikely for Rupert Murdoch (CEO of News Corp) or James Packer (CEO of Publishing and Broadcasting Limited) to face the sack from their corporations.

4. Limited liability allows more efficient diversification^[55]

This argument states that limited liability allows investors to diversify their investment portfolios which allow firms to raise capital at a lower cost ‘because investors need not bear the special risk associated with nondiversified holdings.’^[56] This argument fails because there is nothing special about limited liability that allows investors to diversify their investment holdings. An investor can diversify irrespective of whether the investment has limited liability or not.

5. Limited liability facilitates optimal investment decisions^[57]

This argument states that managers of limited liability companies can ‘maximize investors’ welfare by investing in any project with a positive net present value.’^[58] Managers would feel free to invest in projects that might otherwise be rejected as too risky because they know their investors have limited liability. This is an unacceptable attitude to risk because it assumes that managers do not have to concern themselves with any potential damage that their decisions could have to persons other than shareholders. One of the most appalling results of this type of ‘risk taking’ was the Ford Pinto case. In this case, management made the optimal investment decision to build a car which was known to be liable to explode if it was hit in the rear, because to stop the explosion would have cost about $11 per car. The company, rationally, decided that it would be to the company’s monetary advantage for people to die rather than implement the change that would have saved lives.

B. Limited liability allows for perpetual succession

The standard Australian text, Ford’s Principles of Corporations Law, offers perpetual succession as the only reason for the existence/need of corporations. The 1,400-page text deals with the need for corporations in two sentences plus a 1765 quote from the eminent English jurist, Sir William Blackstone.^[59] The entire entry in the text is as follows:

Makers of law find it necessary to create artificial legal entities. By doing so they facilitate enjoyment of legal rights by continuing institutions and groups free from limitations imposed by human mortality.^[60]

If legal immortality were all that was required in order to facilitate investment then the text overlooks many other forms of perpetual succession, for example, government, religious bodies, trades unions (specifically banned from using the corporate form in Australia) and members’ co-operatives (for example, the former National Roads and Motorists Association).

V. NEED FOR THE LARGE CORPORATION

The features of large corporations described by Galbraith in the 1970s are relevant today. They include the following:

1. The capital contributed by the original owners is negligible, ‘in each it could be paid off by a few hours’ or a few days’ earnings.’^[61]

2. The disenfranchisement of the shareholders.^[62] In very few instances, such as News Corporation, Microsoft, CNN, do individual shareholders have any power.

3. Influence in the markets in which it buys materials, components and labour; ‘the power of a monopsony.’^[63]

4. Influence in the markets where it sells its finished products; the power of monopoly.^[64]

Australia is a modern democratic industrialised nation. Australian residents take for granted the public capital that provides drinking water, electricity, sewerage works, telecommunications, schools, hospitals, road and rail infrastructure that are provided by the modern state. Even though these public capital goods are increasingly being privatised, they were provided by the state and, when privatised, are largely subsidised by the state in various ways.

However, there are private goods that we also take for granted - goods produced by the large privately owned corporations. The goods I used today, for example, were, my home and its contents, prescription drugs, a well-equipped kitchen supplied with goods from a supermarket, a motor vehicle, fuel, a privately owned toll road, a computer, books, the Internet, a café, a newspaper, a radio and a television. As Galbraith put it in The Age of Uncertainty, the ‘large corporation is here to stay … Large tasks require large organizations. That is how it is.’^[65]

These large organisations do not have to be privately owned limited liability corporations, but in our society they are – that is how it is.

Many large corporations are multinational, that is, they operate in many countries. Galbraith proposes that they be regulated by

multinational authority – government that is coordinate in scope with the corporations being regulated. The decline in national identity is paving the way for this solution. There is no danger, however, that it will come too soon. In Europe international authority is distantly in sight. Elsewhere it is not.^[66]

In the meantime, for national governments and national corporations,

the only answer is a strong framework of rules that align the exercise of corporate power with the public purpose. This is not an exercise in hope and prayer. It is one of the dominant trends of the times. What a corporation can do to air, water, landscape, truth and the health and safety of its customers and the public is far more carefully specified than it was a mere decade ago. Ralph Nader didn’t bring this regulation. The need brought Nader. It will continue.^[67]

Joel Bakan, in his recent work The Corporation concludes, ‘by the end of the century, the corporation had become the world’s dominant institution’.^[68] Bakan states that the corporation, an entirely legal construct, must ‘pursue, relentlessly and without exception, its own self-interest, regardless of the often harmful consequences it might cause to others.’^[69] The corporation must act in the interests of its shareholders as this is the entire reason for its existence.

Bakan’s entire work argues that ‘the corporation is a pathological institution, a dangerous possessor of great power it wields over people and societies.’^[70] In the pursuit of profits, corporations routinely and regularly harm others - workers, consumers, communities and the environment.^[71] These harms ‘tend to be viewed as inevitable and acceptable consequences of corporate activity – ‘externalities’ in the coolly technical jargon of economists.’^[72] Every person can think of a number of ‘externalities’ created by corporations that were not inevitable and unacceptable. A number that come to mind are the pain and suffering caused by the Dalkon Shield, the environmental damage caused by the Exxon Valdez, the chemical spill in Bhopal India, nicotine induced lung cancer. Examples are not difficult to find.

Bakan’s book acknowledges that regulations have failed to keep pace with the illegal activities of corporations and that when they have they have been ineffective. Bakan then suggests that the only way that corporate power can be curbed or civilised is by the use of more regulation.

Easterbrook and Fischel, while extolling the economic efficiencies of the limited liability company, recognise that this efficiency comes at a cost of ‘corporations in some circumstances to externalise the cost of risky activities.’^[73] The authors suggest that,

{in order] to reduce this social cost of limited liability, courts have pierced the corporate veil in situations where the incentive to engage in excessively risky activities is greatest. Other legal rules, such as managerial liability minimum capitalization requirements, and mandatory insurance, can also be understood as attempts to reduce the social costs of limited liability.’^[74]

Courts are more likely to ‘pierce the corporate veil’ only in cases of closely held corporations and are unlikely to ‘impose pass-through liability on the owners of publicly held corporations.’^[75] The major problem with these solutions is that injured parties would still bear the often onerous and sometimes impossible burden of proving the damage came from the corporation.

VI. MODERATING THE POTENTIAL NEGATIVE IMPACT OF THE LIMITED LIABILITY CORPORATION

A. Replace Boards of Directors with Public Auditors

Galbraith rejects the suggestion of putting representatives of various sectional interests, such as labour, minorities, women and the public onto company boards. Galbraith says that it would be ‘a dubious reform’ ^[76]:

Those members of the board of directors who do not participate in day-to-day management are, we have seen, without power. So accordingly will be the representatives of labor, consumers and the public who are added by this change.^[77]

Instead, Galbraith suggests boards of directors in large firms be abolished:

These would then be replaced a board of public auditors, which would keep out of management decisions but ensure the enforcement of public laws and regulations, report on matters of public interest, otherwise keep management honest and ratify or, in the event of inadequacy or failure, order changes in the top management command.^[78]

He recognises that the shareholder in the modern corporation ‘is without power and without function’^[79] and not really represented by the modern board anyway.

As the modern corporation becomes more socially indispensable, having public auditors overview the operations of a corporation makes sense, especially as government funding is increasingly used to underwrite corporate failure and corporate operations. In New South Wales, for example, the development in private/public partnerships for the provision of public infrastructure demonstrates how government is making the corporation socially indispensable. Private corporations are building and maintaining formerly public infrastructure and are, in return, being given licenses to earn money from the public who use the infrastructure. Written into the contracts between the state and the private corporation is an assurance to the private corporation that, should there be a danger of the corporation going broke, the public purse will prop up the profits of the private corporation. In NSW this happened in 2004, when the State Government had to step in and shore up the profits of the Central to Airport rail link in Sydney. Just recently it was revealed that the Sydney cross-city tunnel was in danger of not giving the private corporation the income it had projected. Details of the contract between the NSW government and the private operator of the tunnel revealed that the government was obliged to funnel traffic into the tunnel. The government has agreed to funnel (private vehicular, fee paying) traffic into the tunnel by closing roads and narrowing a major alternative road.^[80]

In Australia, public money also continues to be used to mitigate the effects of private corporate failures. In Australia, for example, in 2000,

the Federal Government provided $4 million to top up the entitlements of 342 workers at National Textiles, a Hunter Valley company of which Mr Howard’s [the Prime Minister at the time] brother was the non-executive chairman.^[81]

Another, larger example of public money being used to mitigate the effects of private corporate failures is HIH. HIH was Australia’s largest insurance company, which collapsed in 2001. Shortly after the collapse, the then Minister for Financial Services, Joe Hockey, announced that the federal government would be ‘spending $640 million over the next four years to assist those people in hardship as a result if the collapse of HIH.’^[82]

B. Human Actors to be prosecuted for Corporate Violations

Glasbeek suggests that each time corporations are caught violating the law, such as, trading while insolvent, causing environmental damage, failing to heed occupational health and safety laws, or product safety laws, etc, then the ‘senior executives who exercised control over the operations of the violating corporation’^[83] should be personally prosecuted. Glasbeek believes that this would encourage responsible behaviour by controlling executives, and act as a deterrent to unduly risky behaviour on the part of executives. Glasbeek also believes that holding executives personally responsible is fair considering that executives are the persons earning the ‘tangible rewards – such as increased bonuses and options’^[84] if the companies perform well.

C. Substantial Shareholders be prosecuted for Corporate Violations

In Australia, shareholders with a substantial holding in a corporation are defined by the Corporations Act 2000 (Cth) as persons who have a relevant interest in 5% or more of the total number of votes in the corporation.^[85] Australian corporations legislation requires shareholders with substantial holdings to provide information about their holdings to the relevant company.^[86] This is because the legislators recognise that ‘these people have inherent power that must be regulated to protect other corporate investors.’^[87] The legislation recognises that substantial shareholders are not ‘mere passive investors’^[88] but have influence in equity markets and therefore changes in their share ownership must be reported to the share market.^[89] Glasbeek contends that if the law recognises substantial shareholders as persons with influence over the corporation in which they hold their substantial shareholding it follows that they should also be held to account for corporate violations of the law. The other reason Glasbeek advances for lifting the corporate veil over substantial shareholders is that they benefit substantially from the proceeds of any corporate conduct or misconduct.^[90]

The above recommendations do not dismantle the limited liability concept. However, they would operate to moderate the operations of limited liability companies and moderate the effects of losses caused by those companies operating outside the law.

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^[*] Elfriede Sangkuhl has had a long career as a chartered accountant and is now a lecturer in the School of Law at University of Western Sydney. Elfriede is a doctoral candidate writing a thesis entitled ‘A New Look Corporations Tax’.

^[1] T Hadden, Company Law and Capitalism, (1972) 4.

^[2] Ibid.

^[3] Theresa A Gabaldon, ‘The Lemonade Stand: Feminist and Other Reflections on the Limited Liability of Corporate Shareholders’, (1992) 45 Vanderbilt Law Review 1387, 1401.

^[4] Ibid 1402.

^[5] [1896] UKHL 1; [1897] AC 22.

^[6] R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (12th ed, 2005) 112.

^[7] [1896] UKHL 1; [1897] AC 22 at 44

^[8] Hadden, above n 1, 5.

^[9] Ibid 6.

^[10] G V Puig, ‘A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine’, (2000) 7(3) Murdoch University Electronic Journal of Law [5].

^[11] Corporations Act 2001 (Cth), Section 124(1)

^[12] Austin and Ramsay, above n 6, 6.

^[13] Ibid.

^[14] Ibid.

^[15] Ibid.

^[16] Hadden, above n 1, 16.

^[17] J Bakan, The Corporation: The Pathological pursuit of Profit and Power, (2004) 11-12.

^[18] Hadden, above n 1, 16.

^[19] J K Galbraith, The Age of Uncertainty (1977) 22-23, quoting Adam Smith.

^[20] Ibid 17.

^[21] Bakan, above n 17, 11.

^[22] Hadden, above n 1, 16.

^[23] Ibid.

^[24] Bakan, above n 17, 11.

^[25] Ibid 11-2.

^[26] Australian Stock Exchange, Australia’s Share Owners: An ASX study of share investors in 2004, (2005) 4.

^[27] Galbraith, above n 19, 264, quoting Adam Smith.

^[28] Ibid 264-5.

^[29] Bakan, above n 17, 13

^[30] Ibid.

^[31] E Glinert (ed), The Complete Gilbert and Sullivan (2006) 658, from the operetta Utopia Limited, Act 1.

^[32] Gabaldon, above n 3, summarises the modern justifications for limited liability in her article. Also, Frank H Easterbrook and Daniel R Fischel outline the efficiency argument in their paper ‘Limited Liability and the Corporation’ (1985)(52) University of Chicago Law Review 89.

^[33] Austin and Ramsay, above n 6, 31.

^[34] P Costello, ‘Is the Corporations Law Working?’ (1992) 2(1) Australian Journal of Corporate Law 12, 17.

^[35] Glasbeek H, Wealth by Stealth (2002) 268. Here, Glasbeek is talking about the public purse paying out workers left unpaid by company failure. He later expands this to include other ‘victims’ of corporate failure, such as the environment.

^[36] Easterbrook and Fischel, above n 32, 93.

^[37] Ibid 94.

^[38] Ibid.

^[39] ABC Broadcasting, ‘Investors lose as property group collapses’, ABC News, 3 July 2007, <http://abc.net.au/news/stories/2007/07/03/1968956.htm?section=business> at 2 August 2007.

^[40] Ibid.

^[41] Ibid.

^[42] Ibid.

^[43] Ibid.

^[44] Australian Securities and Investment Commission, Financial Statement Fraud: Corporate Crime of the 21^st Century (2005) 4-5.

^[45] Easterbrook and Fischel, above n 32, 95.

^[46] Ibid.

^[47] [1671] EngR 4; [1671] 1 Ch Cas 204; [1671] 22 ER 763.

^[48] Ibid.

^[49] Ibid.

^[50] Ibid 764.

^[51] Hadden, above n 1, 16.

^[52] Ibid.

^[53] Ibid.

^[54] Easterbrook and Fischel, above n 32, 95.

^[55] Ibid 96.

^[56] Ibid.

^[57] Ibid 97.

^[58] Ibid.

^[59] Austin and Ramsay, above n 6, 31.

^[60] Ibid.

^[61] J K Galbraith, The New Industrial State, (3^rd ed, 1978) 75-6.

^[62] Ibid 76.

^[63] Ibid.

^[64] Ibid.

^[65] Galbraith, The Age of Uncertainty, above n 19, 277.

^[66] Ibid.

^[67] Ibid.

^[68] Bakan, above n 17, 139.

^[69] Ibid 1-2

^[70] Ibid 2.

^[71] Ibid 60.

^[72] Ibid.

^[73] Easterbrook and Fischel, above n 32, 117.

^[74] Ibid.

^[75] Gabaldon, above n 3, 1400.

^[76] Galbraith, The Age of Uncertainty, above n 19, 277-8

^[77] Ibid.

^[78] Ibid.

^[79] Ibid.

^[80] A Davies, ‘Tunnel Strategy: Wait for it to Fail’, Sydney Morning Herald, 18 November 2005, 3.

^[81] P Starick, ‘What’s the difference between these firms? Howard helped one but won’t answer phone for the other’, The Advertiser, Adelaide, 10 December 2004, 13.

^[82] J Hockey, Transcript, HIH Hardship Payments, 5 June 2001, <http://www.minfsr.treasury.gov.au/content/transcripts/2001/020.asp> .

^[83] Glasbeek, above n 35, 272.

^[84] Ibid.

^[85] Corporations Act 2001 (Cth), Section 9.

^[86] Corporations Act 2001 (Cth), Chapter 6C.

^[87] Glasbeek, above n 35, 272. Even though Glasbeek is referring to the Canadian share markets and Canadian corporate legislation, Australian legislation recognises also influence of ‘substantial shareholders’ on the equities market.

^[88] Ibid 272.

^[89] Ibid 272-3.

^[90] Ibid 273.