The concept of limited liability arguably underpins the upsurge in prosperity since the Industrial Revolution. The facility of limiting one’s risk in an enterprise to the extent of the capital deployed in it, without endangering the rest of one’s personal assets, allowed people to invest in multiple joint stock companies. Pools of savings could thus be brought together to fund gigantic limited liability companies that spanned continents, funded exploration and innovation and created new jobs, incomes and prosperity that raised billions out of poverty, gave governments the fiscal power to dream and act big, and spawned consuming masses who fuelled further growth in a virtuous cycle. The concept of limited liability is under renewed threat in India.
Take the recent statement by Insolvency and Bankruptcy Board of India (IBBI) chairman M S Sahoo that suspension of the Insolvency and Bankruptcy Code for ayear, to give respite to Covid-affected businesses, does not bar invoking personal guarantees given to corporate debtors. The IBBI chairman’s technical clarification highlights the pervasive excoriation of limited liability in India by banks lending to a company seeking personal guarantees from its directors. In the ongoing litigation over paying the government its due share of telecom operators’ adjusted gross revenue, while considering the telecom operators’ plea, backed by the government, to be given more time to pay the dues, Justice Arun Mishra wondered aloud about the viability of seeking directors’ guarantees for their companies’ obligation to cough up their dues over an extended period.
Banks have to learn to assess risk, and resolve insolvencies fast, not protect themselves by throttling limited liability by seeking personal guarantees for corporate debt.