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Yet there is scarcely any country whose laws do not throw great, and in most cases, intentional obstacles in the way of the formation of any numerous partnership. In England it is already a serious discouragement, that differences among partners are, practically speaking, only capable of adjudication by the Court of Chancery: which is often worse than placing such questions out of the pale of all law; since any one of the disputant parties, who is either dishonest or litigious, can involve the others at his pleasure in the expense, trouble, and anxiety, which are the unavoidable accompaniments of a Chancery suit, without their having the power of freeing themselves from the infliction even by breaking up the association.* Besides this, it required, until lately, a separate act of the legislature before any joint-stock association could legally constitute itself, and be empowered to act as one body. By a statute passed a few years ago, this necessity is done away; but the statute in question is described by competent authorities as a “mass of confusion,” of which they say that there “never was such an infliction” on persons entering
* Mr. Cecil Fane, the Commissioner of the Bankruptcy Court, in his evidence before the Committee on the Law of Partnership, says: “I remember a short time ago reading a written statement by two eminent solici. tors, who said that they had known many partnership accounts go into Chancery, but that they never knew one come out. . . . . Very few of the persons who would be disposed to engage in partnerships of this kind” (co-operative associations of "...# men) “have any idea of the truth, namely, that the decision of questions arising amongst partners is really impractieable.
“Do they not know that one partner may rob the other without any possibility of his obtaining redress P-The fact is so; but whether they know it or not I cannot undertake to say.”
This flagrant injustice is, in Mr. Fane's opinion, wholly attributable to the defects of the tribunal. “My opinion is, that if there is one thing more easy than another, it is the settlement of partnership questions, and for the simple reason, that everything which is done in a partnership is entered in the books; the evidence therefore is at hand; if therefore a rational mode of proceeding were once adopted, the difficulty would altogether Yanish.”—Minutes of Evidence annexed to the *Pg. of the Select Committee on the Law of Partnership (1851), pp. 85–7.
into partnership. When a number of
persons, whether few or many, freely
desire to unite their funds for a com
mon undertaking, not asking any pecu.
liar privilege, nor the power to dispos.
sess any one of property, the law can
have no good reason for throwing dis.
ficulties in the way of the realization
of the project. On compliance with a
few simple conditions of publicity, any
body of persons ought to have the
power of constituting themselves into
a joint-stock company, or société en nom collectif, without asking leave either of any public officer or of parliament. As an association of many partners must practically be under the management of a few, every facility ought to be afforded to the body for exercising the necessary control and check over those few, whether they be themselves members of the association, or merely its hired servants: and in this point the English system is still at a lamentable distance from the standard of perfection.
§ 6.. Whatever facilities, however, English law might give to associations formed on the principles of ordinary partnership, there is one sort of jointstock association which until the year 1855 it absolutely disallowed, and which could only be called into existence by a special act either of the legislature or of the crown. I mean, associations with limited liability.
Associations with limited liability are of two kinds: in one, the liability of all the partners is limited, in the other that of some of them only. The first is the Anonymous Society of the French law, which in England had until lately no other name than that of “chartered company:” meaning thereby a joint-stock company whose shareholders, by a charter from the crown or a special enactment of the legislature, stood exempted from any liability for the debts .# the concern, beyond the amount of their subscriptions. The other species of limited partnership is that known to the French law under the name of commandite; of this, which
f Report, ut supra, p. 167.
in England is still unrecognised and illegal, I shall speak presently. If a number of persons choose to associate for carrying on any operation of commerce or industry, agreeing among themselves and announcing to those with whom they deal that the members of the association do not undertake to be responsible beyond the amount of the subscribed capital; is there any reason that the law should raise objections to this proceeding, and should impose on them the unlimited responsibility which they disclaim 2 For whose sake? Not for that of the partners themselves; for it is they whom the limitation of responsibility benefits and protects. It must therefore be for the sake of third parties; namely, those who may have transactions with the association, and to whom it may run in debt beyond what the subscribed capital suffices to pay. But nobody is obliged to deal with the association; still less is any one obliged to give it unlimited credit. The class of persons with whom such associations have dealings are in general perfectly capable of taking care of themselves, and there seems no reason that the law should be more careful of their interest than they will themselves be ; provided no false representation is held out, and they are aware from the first what they have to trust to. The law is warranted in requiring, from all joint-stock associations, with limited responsibility, not only that the amount of capital on which they profess to carry on business should either be actually paid up or security given for it (if, indeed, with complete publicity, such a requirement would be necessary) but also that such accounts should be kept, accessible to individuals, and if modifi, published to the world, as shall render it possible to ascertain at any time the existing state of the company's affairs, and to learn whether the capital which is the sole security for the engagements into which they enter, still subsist unimpaired: the fidelity of such accounts being guarded by sufficient penalties. When the law has thus afforded to individuals all practicable means of knowing the cir
cumstances which ought to enter into their prudential calculations in dealing with the company, there seems no more need for interfering with indivi. dual judgment in this sort of transac. tions, than in any other par of the private business of life. The reason usually urged for such interference is, that the managers of an association with limited responsibility, not risking their whole fortunes in the event of loss, while in case of gain they might profit largely, are not sufficiently interested in exercising due circumspection, and are under the temptation of exposing the funds of the association to improper hazards. It is, however, well ascertained that associations with unlimited responsi. bility, if they have rich shareholders, can obtain, even when known to be reckless in their transactions, improper credit to an extent far exceeding what would be given to companies equally ill-conducted whose creditors had only the subscribed capital to rely on.* To whichever side the balance of evil inclines, it is a consideration of more importance to the shareholders themselves than to third parties; since, with proper securities for publicity, the capital of an association with limited liability could not be engaged in hazards beyond those ordinarily incident to the business it carries on without the fact's being known, and becoming the subject of comments by which the credit of the body would be likely to be affected in quite as great a degree as the circumstances would justify. If, under securities for publicity, it were found in practice that companies, formed on the principle of unlimited responsibility, were more skilfully and more cautiously managed, companies with limited liability would be unable to maintain an equal competition with them; and would therefore rarely be formed, unless when such limitation was the only condition on which the necessary amount of capital could be raised: and in that case it would be very unreasonable to say that their formation ought to be prevented.
* See the Report already referred to pp. 145–158.
It may further be remarked, that although, with equality of capital, a company of limited liability offers a somewhat less security to those who deal with it, than one in which every shareholder is responsible with his whole fortune, yet even the weaker of these two securities is in some respects stronger than that which an individual capitalist can afford. In the case of an individual, there is such security as can be founded on his unlimited liability, but not that derived from publicity of transactions, or from a known and large amount of paid-up capital. This topic is well treated in an able paper by M. Coquelin, published in the Revue des Deux Mondes for July 1843. *
“While third parties who trade with individuals,” says this writer, “scarcely ever know, except by approximation, and even that most vague and uncertain, what is the amount of capital responsible for the performance of contracts made with them, those who trade with an anonymous societ can obtain full information if they see it, and perform their operations with a feeling of confidence that cannot exist in the other case. , Again, nothing is easier than for an individual trader to conceal the extent of his engagements, as no one can know it certainly but himself. Even his confidential clerk may be ignorant of it, as the loans he finds himself compelled to make may not all be of a character to require that they be entered in his day-book. It is a secret confined to himself; one which transpires rarely, and always slowly; one which is unveiled onl when the catastrophe has o On the contrary, the anonymous society neither can nor ought to borrow, without the fact becoming known to all the world—directors, clerks, shareholders, and the public. Its operations partake in some respects, of the nature of those of governments. The light of day penetrates in every direction, and there can be no secrets from those who
* The quotation is from a translation published by Mr. H. C. Carey, in an American
eriodical, Hunt's Merchant's Magazine, for May and June 1845,
seek for information. Thus all is fixed, recorded, known, of the capital and debts in the case of the anonymous society, while all is uncertain and unknown in the case of the individual trader. Which of the two, we would ask the reader, presents the most favourable aspect, or the surest gua. rantee, to the view of those who trade with them 2 “Again, availing himself of the obscurity in which his affairs are shrouded, and which he desires to increase, the private trader is enabled, so long as his business appears pros. perous, to produce impressions in regard to his means far exceeding the reality, and thus to establish a credit not justified by those means. When losses occur, and he sees himself threatened with bankruptcy, the world is still ignorant of his condition, and he finds himself enabled to contract debts far beyond the possibility of payment. The fatal day arrives, and the creditors find a debt much greater than had been anticipated, while the means of payment are as much less. Even this is not all. The same ob. scurity which has served him so well thus far, when desiring to magnify his capital and increase his credit, now affords him the opportunity of placing a part of that capital beyond the reach of his creditors. It becomes diminished, if not annihilated. It hides itself, and not even legal remedies, nor the activity of creditors, can bring it forth from the dark corners in which it is placed. . . . . Our readers can readily determine for themselves if practices of this kind are equally easy in the case of the anonymous society. We do not doubt that such things are possible, but we think that they will agree with us that from its nature, its organization, and the necessary publicity that attends all its actions, the liability to such occurrences is very greatly diminished.” The laws of most countries, England included, have erred in a twofold man. ner with regard to joint-stock com. panies. While they have been most unreasonably jealous of allowing such associations to exist, especially with
limited responsibility, they have generally neglected the enforcement of publicity; the best security, to the public against any danger which might arise from this description of partnerships; and a security quite as much required in the case of those associations of the kind in question, which, by an exception from their general ractice, they suffered to exist. Even in the instance of the Bank of England, which holds a monopoly from the legislature, and has had partial control over a matter of so much public intefest as the state of the circulating medium, it is only within these few years that any publicity has been enforced; and the publicity was at first of an extremely incomplete character, though now, for most practical purposes, probably at length sufficient.
§ 7. The other kind of limited partnership which demands our attention, is that in which the managing partner or partners are responsible with their whole fortunes for the engagements of the concern, but have others associated with them who contribute only definite sums, and are not liable for anything beyond, though they participate in the profits according to any rule which may be agreed on. This is called partnership in commandite; and the partners with limited liability (to whom, by the French law, all interference in the management of the concern is interdicted) are known by the name commanditaires. Such partnerships are not allowed by English law: in all private partnerships, whoever shares in the profits is liable for the debts, to as plenary an extent as the managing partner.
For such prohibition no satisfactory defence has ever, so far as I am aware, been made. Even the insufficient reason given against limiting the responsibility of shareholders in a jointstock company, does not apply here; there being no diminution of the motives to circumspect management, since all who take any part in the direction of the concern are liable with their whole fortunes. To third parties, again, the scourity is improved by the
existence of commandite; since the amount subscribed by commanditaires is all of it available to creditors, the commanditaires losing their whole investment before any creditor can lose anything; while, if instead of becoming partners to that amount, they had lent the sum at an interest equal to the Fo they derived from it, they would ave shared with the other creditors in the residue of the estate, diminishing pro rata the dividend obtained by all. While the practice of commandite thus conduces to the interest of creditors, it is often highly desirable for the contracting parties themselves. The managers are enabled to obtain the aid of a much greater amount of capital than they could borrow on their own security; and persons are induced to aid useful undertakings, by embarking limited portions of capital in them, when they would not, and often could not prudently, have risked their whole fortunes on the chances of the enterprise. It may perhaps be thought that where due facilities are afforded to joint-stock companies, commandite partnerships are not required. But there are classes of cases to which the commandite principle must always be better adapted than the jointstock principle. “Suppose,” says M. Coquelin, “an inventor seeking for a capital to carry his invention into practice. To obtain the aid of capitalists, he must offer them a share of the anticipated benefit; they must associate themselves with him in the chances of its success. In such a case, which of the forms would he select? Not a common partnership, certainly;” for various reasons, and especially the extreme difficulty of finding a partner with capital, willing to risk his whole fortune on the success of the invention.* “Neither would he select the * “There has been a great deal of commiseration professed,” says Mr. Duncan, solicitor, “towards the poor inventor; he has been opo. by the high cost of patents; but his chief *. has been the partnership law, which prevents his getting any one to help him to develop his invention. He is a poor man, and therefore
cannot §: security to a creditor; no one will lend him money; the *g § interest Anonymous Society,” or any other form of joint-stock company, “in which he might be superseded as manager. He would stand, in such an association, on no better footing than any other shareholder, and he might be lost in the crowd; whereas, the association existing, as it were, by and for him, the management would appear to belong to him as a matter of right. Cases occur in which a merchant or a manufacturer, without being precisely an inventor, has undeniable claims to the management of an undertaking, from the possession of qualities peculiarly calculated to promote its success. So great, indeed,” continues M. Coquelin, “is the necessity, in many cases, for the limited partnership, that it is difficult to conceive how we could disense with or replace it:” and in reerence to his own country he is probably in the right. Where there is so great a readiness as in England, on the part of the public, to form joint-stock associations, even without the encouragement of a limitation of responsibility; commandite partnership, though its prohibition is in principle quite indefensible, cannot be deemed to be, in a merely eco
offered, however o it may be, is not an attraction. . But, if by the alteration of the law he could allow capitalists to take an interest with him and share the profits, while the risk should be confined to the capital they embarked, there is very little doubt at all that he would frequently get assistance from capitalists; , whereas, at the present moment, with the law as it stands, he is completely destroyed, and his invention is useless to him; he struggles month after month; he applies again and again to the capitalist without avail. I know it practically in two or three cases of patented inventions; especially one where parties with capital were desirous of entering into an undertaking of É. moment in Liverpool, but five or six ifferent gentlemen were deterred from doing so, all feeling the strongest objection to what each one called the cursed partnership law.” Report, p. 155. Mr. Fane says, “In the course of my professional life, as a Commissioner of the Court of Bankruptcy, I have learned that the most unfortunate man in the world is an inventor. The difficulty which an inventor finds in getting at capital, involves him in all sorts of embarrassments, and he ultimately is for the most part a ruined man, and Somebody o,” possession of his invention.”.-Ib.
nomical point of view, of the imperative necessity which M. Coquelin ascribes to it. Yet the inconveniences are not small, which arise indirectly from those provisions of the law by which every one who shares in the profits of a coilcern is subject to the full liabilities of an unlimited partnership. It is impossible to say how many or what useful modes of combination are rendered impracticable by this state of the law. It is sufficient for its condemnation that, unless in some way relaxed, it is inconsistent with the payment of wages in part by a percentage on profits; in other words, the association of the operatives as virtual partners with the capitalist.* It is, above all, with reference to the improvement and elevation of the working classes, that complete freedom in the conditions of partnership is indispensable. Combinations such as the associations of workpeople, described in a former chapter, are the most powerful means of effecting the social emancipation of the labourers through their own moral qualities. Nor is the liberty of association important solely for its examples of success, but fully as much so for the sake of attempts which would not succeed; but by their failure would give instruction more impressive than can be afforded by anything short of actual experience. Every theory of social improvement, the worth of which is capable of being brought to an experimental test, should be permitted, and even encouraged, to submit itself to that test. From such experiments the active portion of the working classes would derive lessons which they would be slow to learn from the teaching of persons supposed to have interests and prejudices adverse to their good; would obtain the means of correcting, at no cost to society, what. ever is now erroneous in their notions of the means of establishing their in dependence; and of discovering the conditions, moral, intellectual, and indus