Edited by Jan Toporowski and Jo Michell
Chapter 27: Limited liability
Limited liability is a legal concept that governs restrictions on the extent to which owners of economic resources can be held financially liable for damage caused to third parties through the use of these resources. Limited liability can arise from private contracts, statutory law, bankruptcy or the use of limited liability forms of firms. Modern corporate limited liability is based on the legal doctrine of ‘separate corporate personality’, according to which a company constitutes a separate legal entity from its ownershareholders. If the company fails and/or causes harm, the liability of its owner-shareholders is limited to the nominal value of their shares.With the rise of corporate groups since the inter-war period, the legal principle of ‘separate personality’ has been extended to the relationship between parent and subsidiary companies, and the protection of limited liability granted to parent companies in regard to claims against their subsidiaries, independently of the degree to which parent companies own and/or control subsidiary companies.
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