LIMITED LIABILITY: A PATHWAY FOR CORPORATE RECKLESSNESS? Igho Lordson Dabor PhD SEPTEMBER 2016 LIMITED LIABILITY: A PATHWAY FOR CORPORATE RECKLESSNESS? By Igho Lordson Dabor A thesis submitted in partial fulfilment of the requirement of the University of Wolverhampton for the degree of Doctor of Philosophy September, 2016 Faculty of Social Sciences University of Wolverhampton Law School This work or any part therefore has not previously been presented in any form to the University or any other body whether for the purposes of assessment, publication or for any other purposes (unless otherwise indicated). Save for any express acknowledgements, references and/or bibliographies cited in the work, I confirm that the intellectual content of this work is the result of my own efforts and of no other person. The right of Igho Lordson Dabor to be identified as author of this work is asserted in accordance with ss.77 and 78 of the Copyright, Design and Patents Act 1988. At this date, the author owns copyright. Signature: …………………………………………… Igho Lordson Dabor Date: …………………………………………………. Dedication DEDICATION I dedicate this work first of all to the Almighty God, creator of heaven and earth, who has been my rock, my strength, and my salvation and to my lovely wife Mrs Adefolawe Yetunde Dabor and our lovely and wonderful children Joshua Omoyode Dabor, and Esther Avwerosuoghene Dabor. Dedication i Acknowledgement ACKNOWLEDGEMENT I extend my gratitude to the almighty God who gave me the grace, and ability to complete this work. I also extend my gratitude to all in the University Of Wolverhampton Law School who provided a fantastic environment in which to work and learn. Undertaking this research was difficult but became manageable through the environment you created. A special note of thanks must go to my Supervisors, Professor Stephen Griffin, who retired during my third year, Professor Peter Walton, and Dr Kimberley Barker for their insightful comments and encouragement along the way – thank you! For your support in this entire endeavour. Special thanks must also go to Mr Gregory Allan, who left the University before the completion of this work, for his suggestions and support during this work. I also would like to thank my family, especially my parents Mr and Mrs Sam Dabor, my aunty and her husband, Mr and Mrs Christopher Unuigbe, my brother Mr Cyril Dabor, and my sister Mrs Pamela Umunna. Special thanks also go to my in-laws Mr and Mrs Eyitayo Akinyandenu, Mr Adeniyi Akinyandenu, Mr Segun Akinyandenu and Miss Toyin Akinyandenu – thank you all! For your enormous support and prayers throughout this work. My most profound appreciation and utmost love go to my wife Mrs Adefolawe Yetunde Dabor – my Pepperless! Thank you for your love, care, support, sacrifice, perseverance and prayers throughout this daunting task. To our lovely and wonderful children Joshua Omoyode Dabor, and Esther Avwerosuoghene Dabor, thank you for your lovely smiles; it would not be the same without you. P a g e ii | 274 Abstract ABSTRACT This thesis argues that the twin concept of separate personality and limited liability from its historical beginnings, has entrenched corporate irresponsibility. It assesses the role that these concepts have played in tackling corporate irresponsibility from their historical origins to the present day, commenting on the lessons learnt. Whilst the institution of the company as a legal person is unquestionably the bedrock of modern company law,1 this thesis examines these concepts not necessarily from the position of disputing the philosophical, economic, or political imperatives, all of which are incredibly important – but from the viewpoint that historically, the principle of separate personality and limited liability entrenches corporate irresponsibility. As such, this thesis suggests a partial abandonment of the separate personality principle because it provides a mechanism for dishonest directors to escape liability for their fraudulent conduct. It also argues that the existing judicial evasion and concealment2 principles and the statutory fraudulent and wrongful trading provisions under the Insolvency Act 19863 are too restrictive, and ambiguous in combating corporate abuse. It is concluded that the existing common law and statutory rules geared towards combating abuse of limited liability provides no coherent format upon which the courts and legislature may effectively curb abuse of the corporate form. As such, these laws in light of their inability to make dishonest directors personally liable for their fraudulent conducts ought to be challenged. There is a need to challenge the existing rules in order to show the effect abuse of limited liability has on creditors, the public and the economy. This research indicates that there ought to be an adequate and effective alternative law which provides balance and support for genuine enterprise whilst providing a robust system whereby those who abuse the corporate form can be easily made liable for corporate debts. 1 Salomon v A Salomon [1897] AC 22. 2 Prest v Petrodel Resources Ltd [2013] UKSC 34; [2013] 3 WLR 1. 3 Section 213 and 214. P a g e iii | 274 TABLE of CONTENTS TABLE OF CONTENTS DEDICATION ....................................................................................................................... i ACKNOWLEDGEMENT ..................................................................................................... ii ABSTRACT ......................................................................................................................... iii TABLE OF CONTENTS ..................................................................................................... iv LIMITED LIABILITY AND CORPORATE RECKLESSNESS ......................................... 1 I. Introduction .......................................................................................................................... 1 II. Research Aims ........................................................................................................................ 3 III. Methodology .......................................................................................................................... 4 IV. Scope of the Work ................................................................................................................. 5 V. Overview of Chapters ............................................................................................................. 5 CHAPTER 1 .......................................................................................................................... 1 THE UK HISTORY OF LIMITED LIABILITY 1400 -1671 .............................................. 1 1.1 Introduction ............................................................................................................................ 1 1.1.1 Limited or Unlimited Liability ........................................................................................ 1 1.2 The origins of the concept of limited liability in Roman Times ............................................ 2 1.3 The Societas as modern form of business in Roman Times .................................................. 4 1.4 Limitation of Liability in Ancient Rome ............................................................................... 5 1.5 Early forms of the corporation in England ............................................................................ 6 1.6 Commenda ........................................................................................................................... 10 1.7 Chartered Companies in England ........................................................................................ 13 1.7.1 Characteristics of the Chartered Company ................................................................... 14 1.7.2 Development of Joint Stock Corporations .................................................................... 16 1.8 Traces of Limited Liability in Chartered Companies .......................................................... 18 P a g e iv | 274 TABLE OF CONTENTS 1.8.1 Reasons for the shareholder exclusion from the bankruptcy law in respect of some chartered companies ............................................................................................................... 22 1.8.2 Attempts to make insolvent corporations liable for corporate debts ............................ 24 1.8.3 Preventing corporate abuse through the Writ of Distringas? ....................................... 25 1.8.4 Move towards the unlimited liability of company shareholders ................................... 27 1.9 Conclusion ........................................................................................................................... 31 CHAPTER 2 ........................................................................................................................ 33 THE GROWTH AND DANGERS IN THE CORPORATE FORM IN THE 1700 AND 1800S AND THE EMERGENCE AND SIGNIFICANCE OF THE CONCEPT OF LIMITED LIABILITY ......................................................................................................................... 33 2.1 Introduction .......................................................................................................................... 33 2.2 Setting the stage for the South Sea Bubble: The Sword Blade Company and the Bank of England .....................................................................................................................................