The problem of undercapitalisation in limited liability companies

Abstract

A limited liability company (hereinafter called "company") is defined as being one "formed by means of a capital divided into shares and has the liability of its members limited to the amount, if any, unpaid on the shares respectively held by them". There are certain fundamental characteristics which emerge from this definition. The first and without doubt, the most important characteristic is the limited liability of all the members composing a company. As Prof F. Cremona states, the limitation of liability is a valued privilege in itself in that it forms an exception to the fundamental principle governing obligations in general that whosoever has bound himself personally, is obliged to fulfil his obligations with all his property, present and future. The privilege of limited liability entails that no contribution may be required from a member exceeding the amount, if any, unpaid on the shares in re sped of which he is the holder and, further, that no member may be compelled to subscribe for more shares than the number held by him or increase in any way his liability to contribute money, unless he consents to this; in fact any provision to the contrary in the memorandum or articles will be null and void. However, in the case of small private limited companies the members' freedom from personal liability may, in practice prove to be largely illusory. Gower explains that banks and others who grant the private limited company formal credit facilities are likely to require the members, or such of them as are directors, personally to guarantee the company's indebtedness. If subsequently the company becomes insolvent, members or directors face personal liabilities which may bankrupt them. In this situation limited. liability protects .them only in respect of claims by trade creditors who have not been in a position to obtain personal guarantees and from claims in tort if they are not the particular tortfeasors who acted for the company.