Monday 17 March 2014

UK: England and Wales: unlimited companies and the liability of their members

Judgment was given last Friday in Re Lehman Brothers International (Europe) & Ors [2014] EWHC 704 (Ch). This is an important and interesting judgment concerning, amongst other things, the liability of unlimited company members. The trial judge held, for example, that the obligation of members to contribute under section 74(1) of the Insolvency Act 1986 extended not only to proved debts but also to the statutory interest on those debts and un-provable liabilities. It was also held that the so-called contributory rule - the rule that a company contributory in liquidation cannot recover anything in respect of any claims he may have as a creditor until his obligations as a contributory are fully discharged - did not apply in an administration. The judgment also contains some discussion of the history of unlimited companies in the United Kingdom, the trial judge observing (at para. [132]):
As the limited liability of members, together with a simple process of registration and incorporation, were the principal advantages of the mid-nineteenth century reforms, it is not surprising that there has been only a sparse use of unlimited companies. It appears that their introduction by the Companies Act 1862 was to compensate for the prohibition of partnerships or joint stock companies with more than twenty members or, in the case of banks, ten members. If members wished to have an association which most closely resembled the old joint stock company, the unlimited company was introduced for that purpose. There remained in some circles some stigma attached to limited liability and there were a number of businesses, including banks and building societies, which were incorporated as unlimited companies. A number of cases, though far fewer than those concerned with limited companies, dealt with issues arising out of the liability of members of unlimited companies. The use of unlimited companies, never great, declined during the nineteenth century. In the twentieth century, their principal advantage was an exemption from ad valorem stamp duty, and later capital duty, payable on the issue of new capital by a company. For this reason, their principal use for many years was as estate or investment companies, where estates or other property were transferred to companies in exchange for shares issued to or owned for the benefit of the families owning them. For the same reason, they were sometimes used in complex corporate restructurings and transactions. As appears from the facts of the present case, unlimited companies have found a place in corporate planning for US tax purposes."

Update (17 March 2014) - a summary of the decision has been published by the ICLR: see here.

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