Risk To Creditors Of Trading With A Limited Liability Company

Risk To Creditors Of Trading With A Limited Liability Company Overview

Richard Murphy’s article “Limited liability is now the preserve of the free-loaders” dated 21 August 2023 highlights the risk to creditors of trading with a Limited Liability Company. 

It does seem that the protections for creditors may presently be insufficient.

Ownership Without Obligation Of Limited Liability Companies

Richard Murphy’s article says matters have now descended into what he says: “This is ownership without obligation being passed into law” as he explains that:

….every protection for society from abuse by those owning limited companies has been removed whilst simultaneously the scale of those companies in terms of size, number and impact on society has grown out of all proportion to that which any Victorian who first enacted legislation to permit their widespread use could have imagined.

Creditor Protection Suggestions

He lists a series of suggested measures which if implemented would heavily roll back the current structure for a Limited liability company but nevertheless they would appear beneficial:

1) Companies must have a capital commensurate to their level of trading and those not doing so should be able to call on their shareholders to make good the deficiency in the event of an insolvency. Shareholding cannot be seen to be a risk free activity when it clearly is not.

2) All company accounts should be available on public record, in full, and accounting standards should ensure that they are designed to meet all shareholder needs.

3) Companies failing to file accounts on time should lose the benefit of limited liability until they do so.

4) Details of all directors and shareholders should be on public record. Those companies not filing correct data should lose their limited liability.

5) All companies must be required to file tax returns annually (most do not at present). Those that do not should have personal liability imposed on the directors for tax owing.

6) No company should be struck from the Register of Companies without filing accounts, including creditor lists, if insolvent. Anyone missed from the list should have a personal claim against the directors of the company.

7) Banks must be required to share with Companies House and HMRC annually the details that they should on the company, its trading addresses, the shareholders and directors and must supply a figurine for sums deposited in all bank accounts that they holds for it. In the absence of company supplied data this information should be placed on company record in place of company supplied data.

Indeed further measures might also be warranted such as:

• The existence of Shadow / De Facto Directors means no limited liability for such companies making use of those categories of Company Officer.
• Imposing the weight of fiduciary duty on Company Directors via removal of limited liability for any transaction that reduces a company’s distributable reserves (ie. a payment) when there has been a failure to keep a full and proper contemporaneous entry in the books which both records and evidences the purpose of a relevant transaction.
• As I mentioned in the post Funding Gap For Liquidation Investigations,, there should be a stern and effective Court system enabling robust enforcement by Insolvency Service investigators and Liquidators, looking to both unscramble an insolvent / dissolved company’s affairs and pursue recoveries actions in respect of transactions entered into for the benefit of Directors/Members but made at the expense of creditors.
• The existence of contingent liabilities should mean dividends are prohibited without full provision made for them, as opposed to the current system in which there appears a worrying level of protection, somewhat reliant on the nebulous concept of the ‘Creditor Duty‘. Furthermore, there is also the potentially inadequate provisioning provided when assessing the likelihood of liabilities crystallising using concepts like the ‘probable’ or ‘possible’ – instead again, full provision should perhaps replace that.