information:classification
Limited liability

However, there was still no limited liability and company members could still be held responsible for unlimited losses by the company. The next, crucial development, then, was the Limited Liability Act 1855, passed at the behest of the then Vice President of the Board of Trade, Robert Lowe. This allowed investors to limit their liability in the event of business failure to the amount they invested in the company – shareholders were still liable directly to creditors, but just for the unpaid portion of their shares. (The principle that shareholders are liable to the corporation had been introduced in the Joint Stock Companies Act 1844).

The 1855 Act allowed limited liability to companies of more than 25 members (shareholders). Insurance companies were excluded from the act, though it was standard practice for insurance contracts to exclude action against individual members. Limited liability for insurance companies was allowed by the Companies Act 1862.

This prompted the English periodical The Economist to write in 1855 that "never, perhaps, was a change so vehemently and generally demanded, of which the importance was so much overrated." The major error of this judgment was recognised by the same magazine more than 70 years later, when it claimed that, "he economic historian of the future... may be inclined to assign to the nameless inventor of the principle of limited liability, as applied to trade corporations, a place of honour with Watt and Stephenson, and other pioneers of the Industrial Revolution. "

These two features – a simple registration procedure and limited liability – were subsequently codified into the landmark 1856 Joint Stock Companies Act. This was subsequently consolidated with a number of other statutes in the Companies Act 1862, which remained in force for the rest of the century, up to and including the time of the decision in Salomon v A Salomon & Co Ltd.

The legislation shortly gave way to a railway boom, and from then, the numbers of companies formed soared. In the later nineteenth century, depression took hold, and just as company numbers had boomed, many began to implode and fall into insolvency. Much strong academic, legislative and judicial opinion was opposed to the notion that businessmen could escape accountability for their role in the failing businesses.