I posted this video on YouTube this morning:
The link is here.
The transcript is as follows:
Limited liability companies are a threat to your well-being. Now most people don't think like that, but I do.
We all think we're familiar with what a limited liability company is. It's just an organisation, set up by one or more people, and it has Ltd after its name, which stands for Limited Company. That means that the shareholders do not have to pay the debts of the company if that company goes bust owing you money, the shareholders, being the people who set the company up and bought shares in it and who have the right to manage it by appointing its directors.
Larger limited companies are called PLCs, or public limited companies, and we're very familiar with them. Most of the things you buy on the High Street will be sold to you by a PLC. Most certainly, your shopping, in the sense of your food and everything else, will be, and your banks are PLCs as well.
So why are those companies a threat to your well-being? Well, they create the risk of something called moral hazard. Moral hazard is the behaviour of a person who undertakes an activity knowing that they won't have to bear all the consequences of their actions.
Sometimes moral hazard is created by things like insurance. In other words, we'll be a bit reckless because we think, well, we've insured against the loss of this particular thing happening. Bashing the car, maybe. Or losing something, so we're risky with regard to where we leave it.
But moral hazard can also be created by limited companies because if the shareholders of a company realise that they do not have to pay its creditors if the company goes bust, they may take more risks than is appropriate.
They'll be reckless because they are not responsible for the money that they are managing, which fundamentally is other people's money.
Let me give you an example. In 2007, the Northern Rock Building Society, by then actually a bank, went bust because its directors had been irresponsible. There's no way around that observation. They had lent people who had applied for mortgages 125 per cent of the value of the properties against which they were lending for the purposes of security. In other words, if you wanted to buy a house which was going to cost £200,000, the Northern Rock Building Society offered you £250,000 in mortgage. It was reckless because they were using other people's money. And that building society ran out of road. It could not pay its creditors. The government had to bail it out.
That was an example of moral hazard. It created the first run on a bank in the UK in a 160 years. But it happens day in day out amongst smaller and sometimes even larger companies. Carillion was a very large trading company, a builder, which went bust because it basically was reckless with regard to its creditor's money.
Smaller companies do this. We know that there are fly-by-night companies who are set up, never have any intention of really paying people, trade for a little while, the owners take the cash and then run, and the money which is owing to the suppliers disappears. This is moral hazard and that's why we need to regulate companies well in this country.
We don't regulate companies well. We let people have companies by paying just £12 online to form one. We don't require proof of identities. We don't require that they file their accounts if they disappear fairly quickly. We don't know anything about them. And all of that is an environment that creates risk.
I don't know why we put up with that. Limited companies should be much better regulated than they are because otherwise they impose a cost on you, me and everyone else in the country, because some people, let's be blunt, can't be trusted and give them the opportunity to exploit somebody else and they accept the moral hazard that they are being faced with.
They take the risks, they leave somebody else to bear the consequences, and that is unacceptable.
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Wouldn’t you agree there is no real accountability within the government regulators either though?
I agree
That is why in the Taxing Wealth Report I call for radical overhaul of Companies House
Spot on.
Two questions.
First, what do other countries do? Is there a model we should adopt?
Second, current law makes directors responsible to all stakeholders…. not just shareholders – and this seems to have been forgotten. Do we need to ban or jail a few directors?
A) Access to limited liability is heavily regulated, with appropriate fees for checks undertaken imposed.
B) We have no company law regulator in the UK, and no one interested in creating one so we gave a deeply criminogenic environment.
Every cowboy builder in the UK would totally disagree with you.
Crooked builder ?
Owe a fair bit to suppliers and customers ?
Then take excess drawings from your business account, cease trading, and start afresh next week.
It really is that easy.
You do realise that is what I am saying?
I am outlining a particularly easy scam, and one of the worst and most frequent abuses of limited liability.
I totally support abolition of limited liability, where almost all business risks can be easily outsourced, having been a victim.
Our particular cowboy had five deliberately manipulated “insolvencies” in under ten years, but is still trading.
The business model of this Ponzi approach is to underprice jobs to get the work, then go bust when new customers dry up.
I suspect Companies House data considerably understates the problem, as sole traders also use the limited liability vehicle, however, the official figures are that there were an estimated 4350 construction companies that went bust in 2023 alone (17% of all insolvencies).
That is 12 a day …
It would be very interesting for someone to properly investigate how many of these claimed insolvencies were followed up with an immediate new start up, and attempts to immediately strike out the original company, as that can be achieved in a mere four weeks, wiping out debts.
That was the recommended course of action of Bob the Builder’s accountant.
I would add that the Insolvency Service only ban about 40% of official recommendations for directorial bans from insolvency practitioners, have two full years to do this, and that any business going bust with insufficient funds for insolvency is not investigated at all,
So there is always a get out of directorial jail free card..
Even if banned there is always the builder’s wife as the sole director of the limited company.
The scope for licensed and sanctioned corruption with limited liability structures is absolutely phenomenal.
I agree
But that’s the sort of research no academic seems to want to do, or at least get funding for. Now, why is that?
If companies house did the kind of governance you suggest then (I think) it would cause a great impediment to one of the main money laundering capitals – London.
A lot of offshore money is “cleaned” and put into London banks through opaque companies giving the city good profits and I assume the UK Gov makes healthy taxes from this.
The moral hazard is (I guess) an “occupational hazard” of a financial services sector that needs a loosely governed companies structure to operate. The occupational hazard being the problems it creates elsewhere in the economy and across the global South.
A tighter governance in terms of less externalisation of costs or misoperation is a second step. The UK companies system doesn’t check or verify details or accounts. That would be a good first step.
But as I say it’s a conflict of interest in establishing a financial system that thrives on loose governance.
Happy to be corrected if I am misinformed. (I got most of my information from Prof Kojo Koram’s book Uncommonwealth) .
You are right
Thanks for confirming my line of thought.
Any idea what would be the cost of enacting the type of governance you propose in terms of loss of profits to the city of London and hence on the tax revenue?
Even a rough idea would be good to know.
If it’s sizeable our rulers (and dare I say it a sizeable chunk of the population) won’t have problems HM government pocketing “ill gotten” gains. Hence, I suspect, companies governance might be a non starter.
I think that £6 billion of extra tax could be raised
I am indiffeent to the cost to the City of London
We tried to take Companies House to the ombudsman on the grounds the Finance Act 2006 gave them a legal duty of care, for certain oversight roles in that Act, but they insisted they were only a registry and got away with that argument, negligence not being anything possibly to do with them, guv.
Or anyone else, come to that. So as I note, often, there is no enofrcement of company law in the UK. We might as well not have it.
I might add, and I know the video’s in particular need to be kept simple that we need to look at the whole issue of ‘business regulation’ in the UK
Trading Standards – where they exist are under resourced as a start.
In Australia & the USA Builders have to be licensed – something that was considered but rejected in the UK, and certainly in New Zealand the Motor Trade is regulated as well.
By comparison it was interesting to see how the UK Scrap Metal industry was facilitating crime until a few years ago and even then the regulation that was brought in has been deemed inadequate. Then of course there are all the issues about ‘waste crime’ which I wont even start on.
I think you’ve ventured into a general lack of governance across the board. And you are right. Then there’s “corrupt” governance, for example OFWAT allowing sewage in rivers etc.
Prof Danny Dorling describes UK as a “failing state” for reasons slightly different to this but I think this phrase encapsulates our predicament quite well.
interesting, thank you. I also briefly watched a part of the video, and for me it was quicker to read it. But i am glad you are now widening the audience for your sane and sensible ideas. A while back someone commented that you should be wearing some flashy or zany outfit – personally the casual cotton jacket and checked shirt, with the books in the background looked just the job to me.
Your indifference to the broader impacts of most of your proposals is the reason why none of them will ever see the light of day.
Those with much less desire to score political points also have to review the potential impact of any proposals to ensure that the overall impact is positive.
If the adverse cost to the City of London is much more than £6bn then it’s a bad proposal.
So criminality is not with ending for its own sake? Thank you for summarising the logic of neoliberalism so succinctly.
It is so refreshing to hear you say this (criminality and neoliberalism). Even my “progressive” friends can’t accept ending the criminal economic structures. (Too costly). I think Gramsci called it hegemony. Neoliberalism enters all our thinking. If we let it.
Really enjoyed this post and all the comments. Thank you.
My take is that funds will be needed by the next chancellor, whichever party they represent. Further, some of the Taxing Wealth proposals are so obviously right, fair and doable that the even the Tories might enact a couple before the General Election.
And LLP’s? Part of the same problem? The Scottish LP’s (nothing to do with Holyrood) were notorious scams until recently.
They too need regulation.
But LLPs are not the same as Scottish LPs
This post identifies one way in which our country’s democracy could be improved. In a discussion of Israel’s claims of democracy:
Kant, one of our great moral philosophers, insisted that a law is not a valid law unless you try to make it apply to everybody, and make it universal. A country with two of sets of laws for two different groups of people is not a country with twice as much law but a country with no laws at all. Lawlessness begins when people can choose what set of laws they wish to follow. Lawlessness happens when people think there are no negative consequences for not following rules or laws, or when a nation tries to maintain its own sense of security by enforcing the insecurity of others. That will end, perhaps, in the needed post-war reckoning.
https://www.progressiveisrael.org/book-review-timber-of-democracy/
Kant was right
Masterly analysis and conclusion as always. Recognise that this issue is spread across many service sectors. The BUT, as pointed out above, is making any realistic progress in the direction of the desired state.
I thought to spend 10 minutes in the rabbit hole and quickly check a simple sector – builders, an industry in which I am NOT an expert. “Cowboy builders” is instantly recognised, most voters would surely approve of some kind of licensing, several strong Trade Federations are in place asking for this, so why has nothing happened? Immediately, I found A BEIS study (2013?), seems to perfectly match the scope, Pye Tait Consulting examined “schemes for occupation licensing of building trades working in the home in the domestic repair, maintenance and improvement (RMI) market”. Reviewed 12 licensing regimes in total – in Aus, USA and EU states – including their level of impact on construction trades in those nations/states.
The study was published but seems no longer available on DBT(/BEIS) or the consultants site – maybe people are hoping the subject is now forgotten? So if this “simple” example can seemingly not progress in 10 years, with a well-accepted business case, what hope for the other sectors? I have no answer here, but some kind of carrot will be required. For the building sector, perhaps a new chancellor might look to introduce “licensed-only” as a pre-requisite to participate in govt. programs for home insulation, ASHP, solar…backed up by a public awareness program of risks of unlicensed traders?
Thanks