§ Moved, That the House do now resolve itself into a Committee.
§ EARL GREY
inquired if the noble Earl the President of the Board of Trade could give the House some explanation with regard to the working and results of the Limited Liability Act.
THE EARL OF DONOUGHMORE
said, he was afraid he could not give the noble Earl all the information he required; but he would with the aid of the Returns of the Registrar of Joint-Stock Companies give all that he could. The first Act enabling joint-stock companies to constitute themselves with limited liability passed in 1855. This Act extended only to England, and excepted banking and insurance companies. In 1856 another Act passed, giving increased facilities, and admitting companies to the privilege of limited liability on the mere registration of a memorandum of association. Banking and insurance companies were still excluded, but the Act extended to the whole of the United Kingdom. In 1858, banking companies were admitted under special restrictions, and the Bill now before your Lordships proposed to admit insurance companies to registration with limited liability. The number of companies registered under the Act of 1856 was 1,098 with a nominal capital of £75,442,887. Of these 68, with a capital of £7,439,000 had been dissolved, some by the voluntary action of the shareholders, others by the adverse proceedings of creditors; and there remained in apparent existence 1,030 companies with a nominal capital of £68,000,000. Many of the companies had not made any return. There was a penalty of £5 a day for not making the Return, but when a limited liability company had spent all its capital it was impossible to enforce the penalty. Of these 1,030 companies he had ascertained that 207, with a nominal capital of 679 £13,000,000, were three months in arrear of Returns, so that assuming that these 207 had ceased to trade, the actual number of companies now trading would probably be 823, with a nominal capital of nearly £55,000,000. With regard to the question as to how the system had worked, he could not pretend to give any accurate statement; as far as he had been able to ascertain the great majority of the companies that had been dissolved had been dissolved by the voluntary act of the shareholders themselves. There were a great number of others that had ceased to trade, though not formally dissolved. A company that had limited liability was obliged to have the word "limited" on all the bills and documents it issued, and in other ways to announce that it was thus constituted; and the effect of that was, that the public was extremely careful in giving them credit. Perhaps it would be worth while to consider the effect which this change of the law had made in companies without limited liability. It appeared that 361 companies, with a nominal capital of £9,439,436, formerly carrying on business with unlimited liability, had been registered under the Act of 1856. Since the passing of the Act only fourteen companies, with a nominal capital of £181,000 had been formed without limited liability; and sixteen with a nominal capital of £1,227,000 had been dissolved; thus leaving 359, with a nominal capital of £8,393,536; of which 101, with a nominal capital of £3,063,884 were three months or upwards in arrear with their returns. So that there were probably remaining 258 with a nominal capital of £5,329,652. With regard to the effect of the Act of 1858 upon banking companies, by the same Returns he found that there were at present registered under the Act, with unlimited liability, eleven banking companies, with a nominal capital of £4,317,750; but of these two, with a nominal capital of £1,167,750, had been registered for the mere purpose of dissolution. Thus, there were nine banking companies with unlimited liability, now working under the Act, with a nominal capital of £3,150,000. Two banking companies only had availed themselves of the Act of 1858, and had obtained limited liability, they were not, strictly speaking, English banking companies; they were the Agra and United Service Bank, with a nominal capital of £2,000,000, and the Bank of Tunis, with a nominal capital of £100,000—together £2,100,000.
§ LORD OVERSTONE
thought it the imperative duty of Government and of Parliament to watch with jealous and vigilant attention the operations of great commercial changes; but he very much feared that the time had not yet arrived for forming a comprehensive or safe judgment on the alteration now under discussion. Great changes in commercial law were like great changes in the cultivation of the soil; it was impossible to learn fully and accurately the result of the change until a complete cycle of the seasons had been passed through. Doubtless we had the returns quoted by the President of the Board of Trade; but whilst thankful for the facts thus laid before us we must still regret that the official sources at his command were not sufficient to afford more full, accurate, and instructive information. There were, however, circumstances from which some useful information might be gleaned and some warnings obtained. From the noble Earl's statement it appeared that in round numbers, 1,100 companies had been registered under the privilege of limited liability. It had been ascertained with certainty that of this number from sixty to seventy had been wound up; and there was a strong presumption that 200 more, or thereabouts, were defunct for all practical purposes. That would leave something more than 800 of those companies to be accounted for. Well, of this 800 there could be no doubt that some considerable number would have existed under unlimited liability if the old law had remained. He thought, then, we might safely conclude that there yet remained in comparative activity from 500 to 600 companies generated under the Limited Liability Act, and which would not have come into existence but for that Act. The President of the Board of Trade however was unable to state what was the amount of capital paid up of those companies, on what proportion of the shares the capital was paid, and on what proportion of the shares the calls remained unpaid. He was also unable to state in which of the companies the calls had been wholly paid, in which paid partly, and in which not at all. Neither could he give any information as to how much of the capital had been lost, what had been the consequent suffering inflicted on the shareholders, and other details necessary to a conclusive judgment on the permanent effects of the new system of commercial legislation. There were facts, however, within reach, from which some though imperfect instruction might be derived. 681 When the Act was under the consideration of the Legislature he felt it to be his duty to offer to it all the resistance in his power, under a deep conviction that the measure was founded on dishonest principles as regarded the obligations between debtor and creditor in the trading world. The limited liability principle, he then contended, offered facilities for fraud; it enabled speculators to present a specious but delusive snare to the ignorant and confiding, offering an inducement to placing small earnings at the disposal of the reckless advenurer, and thus involving the un-instructed and confiding owners in ruin. And how far had those apprehensions been verified by results? He would not weary their Lordships by accumulating instances, but he would quote a single case, which might be taken as a type of the whole class of cases. Not many weeks since there appeared in the public papers, the usual record of proceedings in the Bankruptcy Court. The very name of the case was suggestive of the result. It was headed, "In re the Bog Mining Company." In the official Return the company was described as constituted with a capital of £30,000, subscribed for the purpose of prosecuting mining operations in the parish of Wentmore, in Shropshire. What were the facts? The proceedings in bankruptcy were instituted by Thomas Mitchell, of a parish in Sussex, farm labourer, who petitioned for a winding-tip order. The affidavit set forth that the company was projected by the manager, in the form of 20,000 shares, at 30s. each. The petitioner became a holder of forty shares, all of which were paid up. He was an ordinary farm labourer, and the £60 paid up by him was probably the result of the savings of his honest labours during a whole life. Well, he alleged that the whole of the capital was spent, and debts incurred to the amount of £500; that the shares had been paid up in unequal proportions, and the assets dealt: with in a manner wholly unauthorized, for the personal advantages of the manager; that the manager had signed for 15,620 shares, but he never paid so much as a shilling in respect of them, yet he had sold them and applied the proceeds to his own use. In the year 1857 the manager prevailed on the directors to pass a resolution; that 3,000 shares should be allotted to him for securing the mine, and that all of those shares above that number, not having been paid up, should be declared forfeited. The manager afterwards sold and disposed of many of the 3,000 shares, and caused the 682 names of the purchasers to be duly registered; and that such resolutions and proceedings, the petitioner alleged, were wholly unauthorized by the articles of the association, The directors had had shares given to them to qualify as directors; and in this way the manager had the entire control of the company. Most of the shareholders were in humble circumstances, and they had been induced by the reports of the proceedings of the company to accept the shares, believing them to be bonâ fide investments for their small savings. Three-fourths of the property had been wasted. The counsel who appeared to support the petition mentioned other circumstances, one of which was, that of the 145 persons in humble circumstances who had taken shares, seventy-six were servants—butlers, footmen, cooks, and so on—in the neighbourhood of Eaton Square. Mr. Lawrence, for the shareholders, said, "That by consenting to the petition the directors avoided disclosures of an unusual character." He quoted that case as the type of a large class, and no one of right feeling could contemplate it without sympathy and sorrow for the unfortunate shareholders. The very next day there was a similar case reported; but the company in this case bore a more ambitious style and title. It was the "East India Company, Limited;" and the only remark which the case elicited was that it was fully entitled to the appellation "limited," for it existed only six weeks. Again, on Saturday last there appeared two more of these cases in the Court of Bankruptcy. One was the "Metropolitan Saloon Omnibus Company," and another company—the type was so small he could not read the name—for carrying on some smelting operations. In the first of these cases the proceedings (a Motion for a winding-up order) were adjourned for a month; but it was naively stated by the counsel that in these companies the first act was invariably to seek a secretary, and that that being done, it was quite surprising with how small a capital they were enabled to obtain credit. What must be the effect of spreading throughout the country these short-lived companies, producing ruin among the shareholders, and throwing into confusion the long settled course of trade? Paley, in his celebrated chapter on the wisdom and benevolence of the Deity, sought his favourite illustration from the case of those animals which, born with the first dawn of morning light, and terminating their existence with the setting 683 sun, pass their brief life in uninterrupted vigour and happiness. Apply that principle to the present case. What must we think of the wisdom or of the beneficent results of that system of legislation which fills the trading world with a mass of short lived and ephemoral concerns—measuring their existence, not by those lengthened periods which characterize really sound and useful concerns; but maintaining themselves only for weeks, or at most for months, and during this short period disturbing the legitimate arrangements of trade and causing loss more or less severe to the shareholders and to all who trust them. If the sense of full responsibility as necessarily associated with full appropriation of the profits be removed or weakened, as is the case in companies constituted under limited liability, trading associations must, of necessity, discard those prudential considerations which alone prevent them from degenerating into reckless speculations. He had on a former occasion expressed his apprehension, that under the influence of this principle, parties, prudent and successful in the conduct of their private concerns, would, when associated under the demoralizing influence of limited liability, at once forget their habits of caution, and involve themselves in all the consequences of reckless speculation. In verification of this, he would now ask their Lordships' attention to the case of a large concern of immense capital, and conducted by parties of the highest respectability and greatest prudence in the management of their own private concerns. He referred to the European and Australian Royal Mail Company, the directors of which had squandered nearly £700,000. The facts of this case rested upon unimpeachable testimony, which, with their Lordships' permission, he would read:—The European and Australian Royal Mail Company was formed about September, 1856. It originated very much through the success of some influential parties in Glasgow who realized a large sum by chartering two screw-steamers to Government during the Crimean war. These vessels were named the European and the Columbian, and the company was named the European and Columbian Company, Soon after the close of the Russian war, Government advertised for tenders for the Australian Mail service. One given in by the European and Columbian Company was preferred to a cheaper one by the Pen insular and Oriental Company, the annual subsidy for carrying being £185,000 with monthly services, and the contract to endure for five years. The penalty for the non-fulfilment of the contract was heavy, increasing prodigiously with each day's delay. In consequence of this great undertaking, it was necessary to enlarge the company and 684 greatly to increase the number of its vessels, and, accordingly, a now company was formed on the limited principle, under the name of the 'European and Australian Royal Mail Company (limited),' whom Government accepted for the contract. The nominal capital was £500,000, but I believe not more than £420,000 were subscribed, the balance being purposely reserved, as the promoters expected it to command a large premium. The list of proprietors is one of the best I have seen of any company, all the shareholders, eighty-four in number, being selected men residing chiefly in Glasgow and neighbourhood, London, Liverpool, and Manchester. £400,000 were ultimately paid up. The first meeting of the new company was held on the 3rd of September, 1856, but it was of course some months before their plans got developed, and time was lost in negotiation with other companies to sell their contract for a bonus, or to get some other advantage. As this was not arranged the European and Columbian were taken over from the old company, other vessels were chartered for immediate requirements, a vessel called the Oneida, by which £60,000 were ultimately lost, was purchased, and two other vessels contracted for at £100,000 and £120,000. It was soon apparent that the company had started with too small a capital, and that there was a total want of experience in the management. Establishments had to be organized in Glasgow, London, and Southampton, in the colony, the Mediterranean, and the Red Sea, which required large outlays of money, and, to be efficiently done, much experience and judgment. It was also found that the time within which each monthly passage was contracted to be performed was too short, and that the penalties were too heavy, and further that the class of vessels was too large to be filled up with passengers and light goods. After borrowing considerable sums upon the security of their vessels and otherwise, the directors found that it was necessary to make arrangements with another company to work the service, which they ultimately did with the Royal Mail (West India) Company. An arrangement for an amalgamation of the two concerns was also very nearly completed, when the shareholders of the latter company refused to confirm the bargain made by the directors. This and the events of last autumn (1857) brought matters to a crisis, so that almost within a twelvemonth of the formation of the company it was known that they were practically insolvent, and they have since placed themselves under the Act and gone into voluntary liquidation. Besides the loss of £400,000 of capital, the debts including mortgages appear to be about £270,000, against which they have the steamers, subject to some disputed claims of the Royal Mail Company, in whose hands some of them are. There is some hope that the steamers may realize sufficiently to pay the debts, but in the present state of shipping and aspect of the questions with the Royal Mail Company this seems to be doubtful. The following appear to be the heavier items of expense and loss:—Abandoning steamers, £25,000; placing steamers on stations, £37,000; loss on voyages, £70,000; interest, management, and depreciation, £77,000; loss on Oneida, and expense of bringing home, £61,000; total, £270,000; but there will be a further heavy loss in realizing the four steamers still belonging to the company, and the plant they have at Sydney—King George's Sound, Aden, 685 and Point de Galle. These stand in the books at about £370,000, at least they did so on the 30th of April last. The result of this unfortunate concern is like many others, not creditable to the management; all the directors hold largo interests in it, and became responsible for some of the debts, along with various of the shareholders. The undertaking of such a serious contract by inexperienced parties was most absurd, and the attempt to carry it out, without the aid of parties having the knowledge and resources of the peculiar kind required, was worse.Such is the report which has been furnish to me of the fate of this great company, and which I submit to your Lordships in confirmation of my prediction that the sense of limited liability must, even under the most favourable circumstances, tend seriously to weaken those habits of caution and prudence which are essential to the stability and success of trade. In this case the money had been lost only by the parties concerned, and their loss might be said to be a just penalty upon their rashness and want of judgment. But he need not remind their Lordships that the aggregate wealth of the community consists of the separate wealth of each individual, and the aggregate amount of such losses forms a serious diminution of the national wealth. Another point worthy of consideration was the derangement produced by the operation of these companies upon the sound and legitimate concerns of the prudent trader. He was anxious to ascertain whether there was any case of a joint-stock company the creditors of which had not been paid in full, and in answer to his inquiries he had received the following letter from a gentleman who had an official and accurate knowledge of the facts:—In answer to your inquiry, whether I have knowledge of any joint-stock company (limited) the creditors of which have not been paid in full, I submit to you the case of the West Ham Distillery Company. The company was formed in May 1856, with a nominal capital of £200,000, in 20,000 shares of £10 each, upon which a deposit of £2 per share was to be paid on allotment. Only 1,500 shares were subscribed for, and deposits paid thereon of £3,000, when in September, 1856, the directors entered into a contract to pay £50,000 for the purchase of the distillery, to be completed according to specifications, payment to be made to the contractor in 10,000 shares of the company, representing £2 per share as if paid up and the remaining £30,000 in cash as the works might be completed. But, as there was not sufficient cash for works of such magnitude, bills were given in lieu thereof, and renewed from time to time as they became due, till at length, in December, 1857, executions were levied upon the distillery, the difficulties of the company became overpowering, and a petition was presented to the Court of Bankruptcy for a winding-up order. Between 686 the formation of the company in May, 1856, and the winding-up order in December 1857 (independent of the 10,000 shares already referred to is issued to the contractor), the total shares issued were 4,780 to 108 shareholders, of whom 68 have paid in full, 35 have paid in part, and 5 have made no payment whatever. Among the latter are the four directors of the company, one of whom, however, alleges he is a creditor. Altogether there has been paid by the shareholders £11,012 against calls made to the full extent of their liability, leaving £35,888, for the most part irrecoverable, still due from them. The debts and liabilities of the company have been estimated at £78,000, upon which such a sum has been paid into court as will suffice to pay the creditors 2s. in the pound. The result is that the shareholders have lost £11,912, being all their paid-up capital, and the creditors will lose upwards of £70,000.He asked their Lordships to consider what must be the effect of multiplying trading concerns of which he had given them such examples, many of them concocted and undertaken in such a manner that whatever of profit might accrue from them would find its way into the pockets of the promoters, while the heavy weight of the losses would fall upon others. The noble and learned Lord, not content with limiting himself to the object he proposed to undertake—namely, the consolidation of the laws as they now exist—had sought to introduce a new and still more complicated form of limited liability. He did not pretend to understand the full effect of the proposed provision, but he put it to their Lordships whether they had yet had sufficient experience to induce them to go further in this matter? For himself, he believed the good sense of the community would repudiate the proposal to develope still further the very questionable and dangerous principle of limited liability.
LORD STANLEY or ALDERLEY
begged to remind their Lordships that all the arguments used by the noble Lord who spoke last had been urged three years ago when the Bill for limiting liability was introduced; and that although a few cases of fraud might have occurred since the passing of the Act, there had been nothing to justify the prognostics of the noble Lord. Had they, he asked, heard of any gigantic frauds committed upon shareholders under the new law, at all similar to those which had been committed by private individuals and by joint-stock companies with limited liability? Look at the frauds which had been committed by the Western Bank of Scotland, the Royal British Bank in London, and by individuals such as Paul, Strahan, and Co. The fact that so few examples could be cited where injury had 687 been done to the interests of creditors, was, he thought, one of the best proofs of the advantages of limited liability, which he thought, on the whole, had worked satisfactorily.
§ EARL GREY
said, so far from agreeing with his noble Friend (Lord Stanley of Alderley), he thought with his noble Friend (Lord Overstone) that, considering how short a time the new law had been in operation, they had already seen great reason for apprehending danger from its working. In his (Earl Grey's) opinion it tend ed to rash speculation, and would entail grievous loss upon individuals. Why then stimulate a desire for speculation, and give facilities for deluding the unwary to enter upon such transactions? It had been shown that business was already carried on by companies with limited liability which ought to be entrusted to individuals. He was, however, in hope that what had passed that evening in their Lordships' House would not be without some effect in preventing the evil effects of the present law, and that it would be a caution to people not to entrust one shilling to a company with limited liability. For himself, he should act upon that principle, and if a check upon any bank having limited liability were paid to him, he would hardly keep it the necessary time that must elapse before he could present it.
THE MARQUESS OF CLANRICARDE
called attention to the fact, that although the noble Lord (Lord Overstone) and the noble Earl who spoke last had dwelt upon the evils of limited liability, they had not said a single word about the advantages which had accrued from the introduction of the principle. Those companies had conferred great benefits, although those benefits had not been apparent to every eye; but he admitted they were not looked upon with great favour by large capitalists, upon whom they imposed a wholesome check.
§ Motion agreed to.
§ House in Committee accordingly.
§ Amendments made. The Report thereof to be received To-morrow.