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History of Banking in Scotland
Chapter XXVI - Limitation of Liability

THE effect on the public mind of the revelations of sufferings entailed on the shareholders of the City of Glasgow Bank, by the necessity of providing for the enormous deficit discovered in the accounts of the bank, was very strong. There was an almost wild desire to take the burden from their shoulders, or at least to ease the strain to as great an extent as possible. It was in this spirit that an association was formed with the object of promoting a great lottery to raise money, which, after payment of prizes and expenses, should be applied in meeting the bank's debts. The proposal met with a good deal of public approval; and there can be little doubt that, so far as the adhesion of supporters was concerned, it might have been carried out with considerable success. Led away by the hope of achieving a grand result in the mitigation of misery, many persons forgot that even charity must be founded on high principle. Even the Government authorities hesitated to suppress a movement which had so much good for its object, although it could with difficulty be regarded as legitimate. A little consideration, however, convinced people that to cure the City Bank troubles by imitating the action which had caused them, and to pay gambling debts by further gambling, even although the sufferers were innocent parties, would be a violation of the national honour, and an establishment of a precedent prejudicial to commercial morality. The Crown authorities then intimated that the scheme seemed to violate the law; and, after some reasonable negotiation, the proposal was withdrawn (January 1879).

It then became evident that the shareholders must face their difficulties unaided. They had a duty to do, and it must be said that they did it nobly. They could not escape their responsibilities, but the spirit in which they met them was admirable. But, while the public saw that there could be no interposition between the debtors and their creditors, they were not the less resolved to stand close by and help those who fell. A relief fund subscription was opened for the benefit of those who were deprived of their means of support by the calamity. This at once met with great success. People of all classes felt relief in the opportunity of affording material assistance to, and substantially testifying their sympathy with, the hundreds of innocent sufferers whose case had engrossed their attention for months previously. The various committees throughout the country obtained subscriptions for about 400,000 within a few months. Of that very large sum only a small fraction was not eventually paid up by the subscribers, and all but about 20,000 was raised in Scotland. This result was one of which Scotland may well be proud; the more so as it was accomplished at a time when, irrespective of the direct consequences of the disaster which had occasioned it, the nation was sadly straitened by dull trade, bad harvests, and lessened incomes.

The great question which was evolved, as the main economic principle, from the experience of the crisis, was the advisableness of continuing the system of unlimited liability of shareholders in banks. While other business establishments had, as a rule, availed themselves of the provisions of the Companies Acts permitting limitation of liability, the Scottish banks, like most of the larger English banks, had not thought it expedient to do so. Those which had not been specially incorporated were registered under the Acts as unlimited companies. The fact of any of the banks being in the enjoyment of a limitation of liability was questioned by many writers; but, after a fierce discussion, this argument came to nothing. It was evident to candid minds that the doctrine of limitation of liability by virtue of incorporation under special Acts of Parliament or Royal Charters was as old as the law of the land. In point of fact, the raising of the question was the result of the conflict of interests between the unlimited banks and the three old chartered banks, and not the discovery of any legal principle which had been overlooked by lawyers and statesmen for hundreds of years.

An exception should be made, however, in the case of one writer among those who doubted the sufficiency of the charters to cover liability of the stockholders of the banks in question. Mr. William Mitchell, [Our Scotch:Banks, Edinburgh, 1879, p. 84, et seq.] waiving the untenable position of those who doubted that Acts of Parliament and Crown Charters conferred limitation unless the contrary was stated, founded his argument on special provisions in the constitutions of the banks themselves, whereby powers were conferred on the banks to make calls on their proprietors to a limited extent. It was shown, however, by the other side, that these provisions were of a purely optional character, had been inserted for a specific purpose, and afterwards dropped. But, even admitting that these powers are still available, the fact of their insertion is an argument in favour of the doctrine of limitation by incorporation. The proportions callable are, moreover, distinctly specified, and small in amount.

There was a general cry for legislation, but great difference of opinion existed as to what form it should take. Early in January 1879, Mr. John M`Laren, M.P. (now Lord M'Laren), introduced a bill providing for the auditing of the books and accounts of the banks in Scotland, but it was talked out. Later in the session, the Government took up the question on a broader basis, and introduced a bill, which, after great modifications, became the "Companies Act, 1879." It was not a measure of which its framers had much reason to be proud, but it had the effect of removing all legal difficulties which seemed to stand in the way of the adoption by some of the banks of the principle of limited liability. It also established a new system of reserve liability. The leading London banks at once adopted its provisions, and their example was largely followed by other English banks.

The Scottish banks, however, refrained from recognising it as suitable for their needs. The three old banks held that it had no applicability to them, and the unlimited banks were fearful of appending the depreciatory word "limited" to their names. Again and again they were attacked in the public press for their hesitation. In letters to newspapers the old banks were abused for harbouring every species of evil spirit which words could define or imagination depict, as applicable to business establishments, and the other banks were taunted with weakness and cowardice. The criticism of responsible editors was, of course, more dignified, but generally not less adverse. But the banks would take no hurried action.

At last, however, the three old banks made a movement which was a surprise to every one. In November 1880 they individually gave notice of application to Parliament for power to increase their capitals, alter their existing capitals, and provide a large margin of responsibility of stockholders as additional security to creditors. This resolution met with little or no opposition from the proprietors of the banks, and the directors' proposals were formally confirmed by them in each case. In the public press, however, the new movement was not so favourably received, and in several cases it was denounced with more severity than accuracy of criticism ; indeed, a large amount of ignorance was manifested regarding the matter. The bills were duly introduced, but met with considerable opposition in Parliament. The Government expressed objection to proceeding in such matters by private legislation, but intimated their willingness to introduce a public measure, giving the powers asked, provided the banks would agree to certain conditions, including the adoption of the term "limited" as part of their titles.

In a few very able letters addressed to the Treasury, the banks showed the impossibility of their agreeing to the views of the Government; and in April 18 81 they finally closed the negotiations, and intimated that they would not proceed with their bills. This conclusion to the movement was a very happy one for the three old banks. The alterations proposed would have spoilt their constitutions, and, as experience has since shown, were not necessary for maintaining public confidence. The action of the banks, however, had a good effect in showing that they were sincerely anxious to study public sentiment in the matter of providing enlarged security for their liabilities. There can be little doubt that, in their correspondence with the Treasury, they greatly strengthened their position in the public view, and swept away the ignorant criticism to which they had been subjected in the public press.

Shortly after the abandonment of the scheme of the old banks, the unlimited banks took into favourable consideration the propriety of adopting the provisions of the Act of 1879. The result was a mutual resolution to become limited, on the basis of having subscribed capitals five times as large as their existing paid-up capitals. In the case of the National Bank, no alteration of capital was necessary, as it stood at the required proportion; but each of the other banks had to enlarge its subscribed capital. As there was no issue of new stock, as had generally been made by the English banks adopting the Act, there was no opportunity of immediate pecuniary benefit to the shareholders. But general satisfaction was felt that limitation of liability had been accomplished, and it does not appear that this action was followed by any prejudicial effect to their business.

Another question evolved, or rather brought prominently forward, by the disaster was the propriety of the appointment of neutral auditors to report on the statements of accounts issued by the banks. Hitherto most of the banks had considered the practice as unsuited to the nature of banking business. Even when vehemently (sometimes not over politely) urged to adopt the system, there was a good deal of hesitation. But, as one after another gave in to the public demand, within three years after the City Bank's failure, all had permanently adopted the principle of appointing two independent professional accountants to examine the accounts and cash balances, and certify as to the accuracy of the published annual balance-sheets and profit and loss statements. This result was certainly in the general interest, even if the security thus attained was less absolute than the confidence sometimes reposed in professional audits.

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