Are limited Liability Companies a clever trick ?

I had a very interesting discussion with Vivek Joshi which made me thinking. He has  convinced me that companies with limited liability are a clever trick to make the rich even more richer and us left with worthless paper. I think the argument has some merit.

For instance, lets say I want to start a business. My destiny is then tied to the business. If the business does well I do well. If I borrow money then I have to repay it. If the business makes a loss, I will have to sell my assets to pay the loan. Fairly simple and easy to understand. I take only those risks that I can understand else the chickens come home to roost.

But on the other hand I can create a company with limited liability.Now I can  take risks, loans, do wilful default, take a salary, dividend and everything else and still my skin in the game is only to the extent of the money that I have put in the company. In the end the company has to pay. I only have a limited liability.

Don’t believe this then listen to this story. Once a man named Vijay Mallya started a airline. And don’t ask me why. Some people want to create airlines and do calendar photo shoot. So he  creates a limited liability company . He puts some of his own money and borrows the rest from others. Then he borrows more from banks like SBI and ICICI Bank where you and me put our hard earned money. If Kingfisher does well then he has unlimited right to the profits. But if it doesn’t his loss is only to the extent of the money he has put in the business. His personal wealth is protected irrespective of the scale of loss the company has suffered.  And I guess you know the rest of the story.  The company goes bankrupt. Company has debts to pay to the tunes of thousands of crores.Employees are waiting for their salary. But Mallya says he has no money to pay. And more importantly he doesn’t have to pay. It is  the company that has to pay. As if to add insult to injury he clarifies to a group of reporters that  people  don’t understand the concept of Limited Liability.

Off course we don’t thats why we are in this mess.

Vijay’s Mallya net worth according to Forbes is $750 Million and the total debts that Kingfisher Airlines has till today excluding the salary of the staff that he is yet to pay is Rs 12000 Cr ( $200 Million). So he can pay up but he won’t and doesn’t have to. That is the beauty of the whole  limited liability ingenuity.

So who pays eventually. Its you and me buddy . Because SBI and ICICI and others have funded the airline. These are the same banks where your father has a PPF account and your salary gets credited. Plus countless other minority shareholders who are holding to the stock of the company and waiting for a miracle.

So that is the beauty of limited liability company. Hats off to the person who designed the concept .I suspect  its the English and guess what it is the English .

A trick right in front of our eyes and we can do nothing about it. Its brilliant. You can speculate for profits and not be liable for the losses. And it happens in real world.

 

Screen Shot 2014-05-29 at 4.45.29 pm

 

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