25.07.2011

Rethinking Limited Liability, Article by Ali Imanalin, Lawyer, GRATA Law Firm

Both contractual and tortious claims made against a company do not affect company members when a limitation is placed on their liability for the debts of their company. Members enjoying the protection of limited liability may desire the business to perform operations in a manner they would not have wished it to operate had their liability not been limited. The legal developments in the 1980s preventing directors, including de facto and shadow directors, from defrauding creditors and wrongful trading, and disqualification procedures that were put in place as a check on directors’ propriety have removed the need to introduce unlimited liability for one-man companies, but have essentially failed to resolve the deficiency in the law of business organisations in respect of company groups. Double insulation of limited liability prevents creditors of an insolvent company from bringing claims against other solvent companies in a company group. Tort victims, in particular, are at the most disadvantageous position, as they cannot negotiate around liability for the debts of an insolvent company and cannot mitigate their losses by taking security. Despite the shift of the focus from sorting out the consequences of a business failure to rescuing companies, it is time to rethink the doctrine before another industrial accident takes place, leading to transnational mass tort litigation.