The protection of creditors in company law

Abstract

Trade credit has always been one of the areas involving major commercial risks in businesses, ever since commerce took on a more determinate role in the evolution of modem society. Sole traders sought to improve their trade in the face or ever increasing competition by teaming up with others in their trade and by increasing their financial potential and strength through increases in capital and borrowing funds. Individuals who embarked on investing their personal belongings in a commercial activity ran the risk of losing all their property and more, while the other persons with whom they traded also ran similar risks. It is precisely with this risk in mind that the notion of limited liability was developed, a notion that has since caused commercial activity to be changed forever. With the advent of limited liability, the risk undertaken by individual entrepreneurs investing their funds and capital in business ventures was limited up to a pre determined amount. Companies were set up with a specific amount of share capital, i.e. the capital invested by the shareholders of the company, and therefore the personal liability of such investors was limited up to the amount declared in that share capital. With the development of limited liability came also the notion of separate and distinct juridical personality. This in essence meant that the company so formed was deemed a legal person separate and distinct from its owners, the shareholders, and together these two notions formed the basis of modern company law. This new concept thus led to a greater sense of confidence and security in commercial activity, and the limited liability company shortly became the most popular - and safe way of doing business. In a world that was abruptly taken by storm with the coming of capitalism and the industrial revolution, businesses quickly adopted the notion of limited liability and used it to their full advantage. The commercial company thus became the primary tool in and means of trading.