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upon commerce, and has the effect of retarding the development of many new inventions, but that a still greater evil is the impediment which it forms to family arrangements as connected with trading operations.
A successful trader is naturally averse to closing a business which it may have been the object of his life to establish. The existing law however gives him no alternative but to do so, or to risk not only the capital which he may have embarked in the concern, but also the accumulations of a life of industry and care. Take the common case of a man of sixty, desiring to retire from active business. His business is probably one producing a steady and considerable income, and he feels that it would be a great sacrifice to abandon it, and perhaps his other resources are not sufficient to justify his so doing. As the law stands he has no alternative but to do so, or to continue his operations, unless he is willing to run the risk attendant upon leaving his interests in the hands of a partner. Doubtless under such circumstances partners of integrity and ability are frequently found, but there is great and unnecessary risk in such arrangements. It may be said that the retiring merchant might leave his capital in the business without the responsibilities of unlimited liability, but unless in the case of a near relative he has seldom any inducement to do so, for the ordinary rate of interest is not more than he could obtain from comparatively secure investments; and although the usury laws have been relaxed, that relaxation does not meet the evil, for it is impossible to fix a rate of interest which would be fair to both parties, having regard to the vicissitudes of trade. What is wanted is a rate of remuneration proportioned to the profits, and a consequent liability to contribute to a reasonable extent towards losses which may be incurred in the ordinary course of business. Such an arrangement would not only afford fair compensation to the retiring merchant for his interest in the business, and the capital he might have in it, but it would protect the younger man from an unfair burthen in the shape of heavy interest in adverse times, and moreover ensure to him that which is often still more important, viz., the active co-operation, assistance, and advice of his more experienced and better known predecessors. No doubt the latter objects could be attained without any actual joint interest in the profits, but however affluent a man may be, a direct pecuniary interest in the result of any undertaking which may engage his attention is generally a useful stimulant, especially to one who has been actively and successfully engaged in business for many years.
But if the present state of the law raises impediments to the arrangements of traders who may voluntarily desire to retire from business, the evils are often much more strongly felt when death or illness may necessitate the change. Take, for instance, the case of a man in the prime of life who may have established a prosperous and lucrative business, and be then seized with a fatal illness. He may have sufficient property upon winding up his business to provide for his widow and young family, but the sacrifice in closing his transactions is enormous. Had he lived, the business which he had spent years in establishing would have formed an abundant provision for at least one of his sons ; but he has now no alternative but to close the affairs, or to expose his widow and family to the risk of utter ruin by allowing the business to be carried on under the management of a confidential clerk, or a partner probably as competent as himself to conduct it. He however naturally feels a repugnance to run such a risk, however great his confidence ie his clerk or partner, and therefore he unwillingly directs his executors to wind up hin affairs, and the business is lost to his family. If the law would have allowed him to have left a certain capital in the concern in exchange for a share of the profits—in other words, ailowed his widow, or executors, to have remained partners, with no greater risk than the money embarked, or with a fixed risk beyond the sum left in the concern—the unfortunate father would gladly have availed himself of such an arrangement, and would have thought little of the chance of losing any given sum, whereas the bare possibility of his wife and family becoming penniless through the errors or frauds of a partner left him no alternative but to protect them from such a disaster at all hazards.
It must not be supposed that these are merely imaginary cases. There is little doubt that any solicitor engaged for mercantile clients could readily call to mind many instances in which valuable businesses have been closed and lost upon the grounds stated. At all events numerous cases of this nature are fresh in my memory, and so apparent has been the evil, that in several instances within my own experience it has been determined to disregard the prudent directions of the testator, and to run the hazards of continuing, rather than closing: a business calculated to produce present income to the widow and young family, and future provision for the latter upon their attaining a competent age.
I conceive that the evils of which I complain would be met by limiting the responsibility of partners. A testator would then leave his business, or share of business, to his wife or children, and it could be carried on by a new and competent partner, or by the surviving partners, with no risk beyond that of the capital embarked, or at utmost a fixed additional sum. His executors might be partners with little or no personal risk, and relatives or friends might be found to act in such a trusteeship, who would under the present system be inost imprudent to do so.
It is needless to dwell upon the impediments which the present law raises to arrangements for carrying out patents, &c. Almost any solicitor can refer to numerous cases in which he has been compelled to dissuade his clients from entering into such undertakings on account of the risks attendant upon a joint trading speculation.
3. I think that the law should be modified as to partnership debts in general, except as to partnerships for banking purposes. Banking partnerships have hitherto been placed upon a different footing from others, and it is conceived with good cause, for even in cases in which the bank does not issue notes the public are almost necessarily compelled to trust it to greater or less extent, and the very nature of the business is one which obviously ought to be carried on with extreme caution, and under heavy responsibil ties. I have yood reason for believing that several joint stock banks would have been established in Londou within the last few years if the law had been less stringent with respect to such companies; and although it may perhaps be questioned whether these banks, if established, would not have afforded increased facilities to trade, the prosperous state of most of the London joint stock banks shows that the present law does not prevent the esta blishment of such companies; and I expect that their lists of shareholders would show that wealthy and prudent men are not deterred from holding shares in a well conducted bank.
The evils attendant upon too much competition amongst bankers, or too great eagerness for business, have been so often within the last few years exemplified in the case of country joint stock banks, that it is unnecessary to refer to them.
I see no necessity for making the protection dependent upon the number of partners. For the reasons I have given, I certainly think that it should apply to private partnerships, and it seems to me that there is no good reason against extending it, under proper restrictions, to joint stock companies.
I would, however, undoubtedly fix a maximum and a minimum capital.
If a joint stock company could be formed with unlimited liability and a gigantic capital, it might in time approach a monopoly, and would be a great evil; but this evil would not be greater than that which might result from small partnerships with shares of trifling amount. For instance, if trading companies could be established with limited liability, in shares of 51., an immense number of such undertakings would, I conceive, be got up, and the poorer classes would be induced to subscribe their earnings in the hope of obtaining large profits, and a door would be opened to frauds on the part of speculative and unprincipled men. It seems to me that in order to guard against this evil, the shares should, where limited liability is desired, be paid up in full, and that the amount of each share should not be less than 100l. This would prevent the establishment of such companies for stock exchange purposes, and would ensure a bona fide stake for each shareholder.
As to the maximum capital to be allowed such joint stock companies, I will not venture an opinion, as the Commissioners have many other means of obtaining information from those more competent to give it.
With regard to the minimum capital which should be allowed any one partner in a private partnership, where limited liability is desired, I think that it should not be a very small sum, and I would suggest that it certainly should not be less than 1,0001.
As to the number of partners, I see no reason why the proposed boon should be confined to private partnerships composed of a limited number of individuals, but there would necessarily be a distinction between joint stock companies and private partnerships with restricted liability. The provisions of the Joint Stock Companies Registration Act would, with certain amendments, still apply to partnerships consisting of more than twenty-five persons; and as to private partnerships composed of a less number of partners, I would suggest that some provision should be made for registration of the names and extent of capital of the partners.
4. I have just adverted to the expediency of registering the names and capital of the respective partners, and I would suggest that each partner, whether in the case of a joint stock company or a private partnership, should be liable to be called upon for an additional sum, equal to the amount originally subscribed, in conformity with the provisions often inserted in colonial bank and other charters. Thus, a man subscribing 1007. to a trading joint stock company would risk in the whole 2001. ; and a man joining another as partner with limited liability, and providing a capital of 50001., would risk 10,0001. Of course, in the latter case it would be necessary to provide for the event of capital having been withdrawn, in which case the dormant partner would be liable for the capital abstracted as well as the additional 5000l., thus making his total loss in the event of insolvency double the amount originally subscribed.
This liability to contribute to losses would, I think, prevent recklessness, and would he a safeguard to creditors. If found an unnecessary restriction to the operation of the proposed new principle it could be modified or removed.
The protection against fraud upon creditors in cases of private partnership, which I would suggest, is a positive prohibition to trade in the name of the partner whose liability may be limited. In all private partnerships there should be at least one person whose liability should be unrestricted, and the creditors will have themselves to blame if they choose to rely upon others whose names do not appear. The ostensible partner, on the other hand, will have no difficulty in getting credit if he has a fair amount of paid-up capital at his command, and no inconvenience would in practice result from this course, as there must necessarily in all cases be a manager of the business; and it is reasonable that lie should be responsible for his own acts. If partners were now merely liable for their own proceedings, there would be no necessity for altering the law, but the main
objection to the present system is, that innocent persons may be totally ruined by the partner's fraudulent use of the partnership firm to bills of exchange, &c.
11. For the reason already stated, I do not think that one common principle should apply to all companies ; it seems to me important to restrict the limitation of liability to public and private partnerships established upon certain principles. As to others, the law might fairly be left as at present.
14. I have already suggested that, to ensure limited liability, the partner seeking that protection should be registered with the true amount of his capital, and that he should be liable to contribute in case of insolvency a further sum of equal amount. It would be open for the Bankruptcy Court, in case of insolvency, to enquire whether he had, at the time of bankruptcy, the capital originally subscribed for in the business, and if he had not, to compel him to refund the amount withdrawn; and if it should be found that he had intentionally returned less capital than the sum invested, with the view of lessening his ultimate liability, or that the arrangement was not bonâ fide, the restriction should cease, and the partner so offending should be left liable as at present.
16. It does not appear to me necessary to interfere with private partnerships further than to give dormant partners the protection already referred to. All other matters may fairly be left for arrangement between the partners themselves. It would be objectionable to allow a transfer of the share of one partner unless stipulated for, but very reasonable to permit it if agreed upon.
Of course, shares in joint stock companies would remain transferable as at present.
17. The contribution of a further sum is the remedy which I suggest for the evil referred to.
18. There would be great difficulty in enforcing such provisions, and I think that the remedy must be sought in an amendment of the Law of Bankruptcy.
19. I have already suggested that the business should not be carried on in the names of partners with limited liability—to prohibit them from giving advice would destroy one of the advantages sought for.
20, 21, 22. In cases of joint stock companies with limited liability, it would doubtless be better that there should be some known denomination to mark the nature of the undertaking, and of course the deed, &c., would be registered as at present.
But with regard to private partnerships the object would in great measure be defeated if further particulars were given than the amount of capital. No provision in such cases for filing accounts, &c., however stringent, would be complied with, and it seems to be unnecessary if the names of the dormant partners are not used for the purpose of obtaining credit.
28, 29. I have already stated that I think limited liability would be very injurious if extended to such cases.
31. In some cases the course suggested might meet the object required, but I think that such arrangements would facilitate frauds upon bona fide creditors, as the money so lent would be withdrawn at a period of pretended solvency but of actual insolvency. It seems to me better that such an agreement should involve a partnership with reasonable restrictions against the risk of total ruin, which is now necessarily attendant upon all partnership arrangements.
No. 57.-H. BELLENDEN KER, Lincoln's Inn.—4th February 1854.
H. Bellenden Ker. In answer to the questions which the commissioners have done me the honour to send, I beg to state that in the main, my opinion on the law of partnership, and as to limited and unlimited liability, remains nearly the same as it did when I gave evidence before Mr. Slaney's committee in 1850. I must, however, owr that since that time I have observed that many, whose opinions are justly entitled to great weight, have entered the field as advocates for the adoption of a general system of limited liability. Although their arguments have, to a certain extent, made me less confident in my original opinion, yet, after reconsidering the question, I still think that it would be unwise at once to allow partnerships either on the general principle of limited liability, or on what is called the commandite principle, to be introduced into England. I think that it would be advisable to allow partnerships, with limited liability, so as they were sanctioned by some board or otticer, who should judge of the expediency of the undertaking, and see, as in the case of a joint stock company authorized by Act of Parliament or charter, that due protection was afforded to the shareholders and to the creditors of the company. And if, after a time, this change was found to be beneficial, then that greater relaxation should be made. I think it must be admitted that it is not likely any partnership could be conducted with any chance of success, where the capital employed did not enable the company or partnership to pay responsible directors in the case of a common joint stock company, or, the managing partners, liable in solido in case of a partnership en commandite, a sufficient salary, so as to obtain the services of responsible and intelligent men.
I think the immediate consequence of any general law allowing the formation of companies with limited liability having a small capital would, at least for a time, lead to fraud
H. Bellenden Ker. and ruin. It has been urged, that it is the right of the poor and the middle classes to be
allowed to make the experiment. I think this may be questioned. It might not be proper to take away any subsisting right; but I do not think it follows that it is wise to alter a law, if it is reasonable to apprehend that much evil may arise from the change.
In some printed observations appended to my evidence before referred to, I have explained my views more in detail. As these were printed for private distribution I have appended an extract from them, as best showing my general views on the subject in question.
57 A.--EXTRACT from Mr. H. BELLENDEN KER's Pamphlet on the Law of Partnership
and the Investment of Savings of the Poor. “ This point involves two questions,—viz., the merits of what is usually termed commandite, or limited liability ; and next, the present state of the law, especially as regards partnerships of many persons, or joint-stock companies
. “ As regards the law of limited liability, I am aware that in principle there are many strong arguments in favour of its adoption, and, moreover, I think it very difficult to see the true ground of the rule of law which makes a person not known to the public, but who has an interest in the profits, (a secret partner) liable, to the whole amount of his property, for the whole debts of the partnership. The question
The question of limited liability is admirably discussed in the evidence appended to the report which was made to the Board of Trade on the subject of partnership law. I do not think there exists a body of evidence containing the opinions of persons of nearly all classes so competent to advise and instruct, as is contained in that appendix. Though there are great names in favour of limited liability, yet I think the preponderance is in favour of retaining the existing law, seeing that in this country there is no want of capital for all purposes of commercial enterprise ; but I have on no occasion given any opinion on the point. I foresee evil from the change, but I do not say that ultimately a large balance of advantage may not be obtained; and I think the question is one that may, with great advantage, be further discussed, especially as it may be urged that those who gave their opinion against comnandite were many of them persons with large capital, and who might be supposed inclined to support the monopoly which such capital gave to them. In the paper furnished to Mr. Slaney's committee, after observing on this question, I say,
“It may be considered that I have disposed of the question of limited liability partnerships without due consideration, but I think all change is evil. And change of any kind affecting the present complex state of the law, affecting the habits and notions of the people as to commercial responsibility, &c. &c., must, even if the general result were advantageous, bring with it a large quantity of evil. And if I find no want of capital for ordinary commercial concerns, and being satisfied that ordinary parties engaged in trade, as a general rule, employ more skill and vigilance than paid directors—and, moreover, taking some note of former joint stock company projects, and looking to what is going on under the Winding-up Acts, I think it would be unwise to let loose a new element of fraud and reckless speculation, and to allow it to be introduced in small doses, so as to fit the means of the humble.
“What I meant by the words all change is an evil,' was that all change in a complex state of law) was per se an evil; that the most careful propounding of a law on a subject so complex must bring with it some evil, and that I would let well alone,' unless a balance of advantage could be fairly anticipated ; but when I said ' let well alone,' I did mean that I would not even improve the existing law where it was defective. willing to admit that I ought perhaps to have been more guarded as regards this expression. But though, for the reason I have stated, I was averse to the immediate change, I was for facilitating the investment of capital in undertakings not within the reach of ordinary commercial enterprise, by rendering charters conferring limited liability less expensive than they now are, and allowing them to be granted more liberally than they now are, either by the Board of Trade or by some other like body or minister. This would avoid the possible, or, as I think, certain evil of change, and probably, if the altered law were administered in a liberal spirit, would afford all the facilities to commercial enterprise or investment of capital which might be required; or, at all events, if the measure were found too narrow, the experience obtained by its working would furnish good data on which to found a more extensive change.
"I may here refer to a point on which I think persons desiring to amend our laws are apt to be misled, namely, the considering how a particular law works in other countries, and deducing an argument from this, in favour of the introduction of the same law into this country. Knowing the niceties and difficulties existing in a system of any law of partnership, (and since I gave my evidence I find that even in Holland there are plenty of difficult points,) I own I should despair of being able to draw up a code of partnership law, based on the law of Holland, that would not give rise to many difficulties and doubtful points. Perhaps I am prejudiced in the mistrust with which I listen to sweeping references to the laws of other countries (generally made by persons not very perfectly acquainted with either the principles or the detail, either of the foreign law exhibited as A pattern, or of our own law sought to be amended or improved).
"The next and only point raised by the committee was the present state of the law of A. Bellenaen Ker. partnership. The law now legalizes the formation of joint-stock companies, though each partner, is liable, in solido, for the debts of the co-partnership: till lately these companies were in effect illegal, and I may mention that, the repeal of the Bubble Act during Lord Liverpool's administration was carried against 'ie all-powerful Tord Eldon, much to his disgust. Nothing, however, can be more cumbrous and useless than the law of jointstock companies as now propounded. I do not believe that the safeguards attempted to be made have done any good as to affording security to the creditors of the company, whilst the arrangements are only cumbrous and costly, and only useful or profitable to the registrar and his clerks. I believe there is but one opinion on the subject; judges profess themselves unable to understand the law--counsel advise on its provisions with hesitation and both solicitors and counsel are often bewildered in attempting to find out the meaning of the complex and inconsistent clauses. Now, as regards the smaller partnerships, and especially those relating to the working classes, I repeat what I have stated in my evidence, that I think the law should be made to suit partnerships of this kind, as well indeed as all other kinds of partnerships. I think the working classes are entitled to require facilities for the formation of partnerships, and thus to be enabled to invest profitably their capital (labour) to the best advantage. And furthermore, if the Board I have alluded to were formed, I have no doubt but that, on a proper case being shown, and with proper safeguards, limited liability would, in most instances, be granted to such associations. The attempts at improvement of the law of joint-stock companies, which in fact shortly followed my report on the Law of Partnership, have been a subject of deep mortification to me: first, in seeing how little has been done ; and, secondly, how badly what has been attempted has been executed ; and, moreover, my name having been connected in some measure with the subject, I have in many instances had to bear the blame of the mass of failure and confusion which has been the result of these laws. The history of the legislation on this subject is as curious as it is instructive, and the consideration of it will in some degree palliate, at least, what I have said about 'all change being an evil.'
“ On the report on partnership* being published, the first attempt at reform was to enable the Crown to confer on joint-stock partnerships the privilege of suing and being sued by a public officer, and any modifications short of absolute unlimited liability which might be thought fit, provided the partnership had been formed by a deed, and provisions had been made for the registry of shareholders : this was to save the cost and delay of the usual Act of Parliament obtained by private companies. In the appendix to my report will be found suggestions of what I conceived such a bill ought to have been. The Letters Patent Act was prepared by me, with the assistance of others well acquainted with the subject ; but when the bill had undergone revision and alteration, the cutting away of one part, and altering another, it was indeed changed at nurse, and I did not know my own child when it was introduced into the house : some of the provisions were incomprehensible. I recollect the Duke of Wellington, at the last moment, added one clause, the object of which is not very plain. Owing to the imperfections of the enactments, persons continued to insist as before, on applying for private Acts of Parliament, and I do not think that half-a-dozen Letters Patent have been granted under the powers of the Act, especially seeing that nything was done to diminish the cost, which is in fact nearly equal to that of obtaining a private Act.
“Xu the evils relating to the imperfect state of the law concerning joint-stock companies remained. Unmanageable suits were begun in chancery that were never to end, because of the hosts of parties necessary to the litigation. When Mr. Gladstone came into office, he had a committee for inquiring into the whole subject, and before that committee I was examined. On the report of that committee a bill was prepared for legalizing joint-stock partnerships, and compelling the registration of their deeds, the names of shareholders, &c. On the plan of this measure I was not consulted, but the bill was submitted to me after it had been framed. I found it quite impossible to settle it in such a manner as I considered would answer the end proposed, and it was ultimately settled by others, who, though of considerable attainment, were not very conversant with the existing law of partnership, and therefore not very competent to fit on a complex new measure to a very complex existing law. The result was the present Joint-Stock Companies' Act and the Act for its amendment. There was another bill for the winding-up of the affairs of insolvent companies; that, however, was principally settled by Mr. Holroyd, the Bankrupt Commissioner ; before it passed I was convinced by Mr. Field, who took a great interest in the measure, that it would not answer its object. Amongst other powers which it contained, there was one for the Chancellor, &c., to make rules, &c., for working out the details of the measure: these rules the Chancellor never made, and no wonder, seeing how difficult it was to prepare them, and how many other things a Chancellor has to do. The continued perseverance of Mr. Field (who had some client interested in the winding-up of the concerns of an insolvent company) at last persuaded the Government to consent to a measure for giving effect to the existing Act, and the result, after some two or three years' struggle, was the measure (the Winding-up Act, 1848,) in the
Mr. H. Bellenden Ker's Report to the President of the Board of Trade. 1837