Limited liability simply refers to the principle or condition whereby the liability of the owners of a business is limited to the amount of equity capital invested, or agreed to be invested, by them in the business. Where limited liability applies, it means that if the business incurs debts, the owners are not liable or responsible for those debts simply because that are owners of the business. If the business becomes insolvent or is otherwise wound up, the owners may not be able to get their investment capital back and may lose that amount. But, as long as the owners have paid the amount of capital that they agreed to contribute to the business, they have no further liability. In this sense, their liability is limited to the amount of their investment capital – hence the term “limited liability”.
Limited liability investment structures were developed in Europe as far back as the 18th Century as a means of encouraging investment by allowing investors to limit their exposure to losses. Limited liability most commonly applies in relation to companies, where it is usually confirmed in the company’s constitution. Most shareholders of companies enjoy limited liability that is limited to the amount of the subscription price for their shares, or any other equity investment they have agreed to make in the company. Limited liability in relation to companies in Myanmar is reflected in section 6 of the Myanmar Companies Law 2017. However, recognition of the concept in Myanmar dates back at least to 1914, when limited liability was referenced in section 5 of the previous Myanmar Companies Act 1914. Despite this being a fundamental and long-standing concept, we nevertheless sometimes come across shareholders and professional advisers in Myanmar who do not fully appreciate the scope and application of limited liability.
Exceptions to limited liability are possible. In Myanmar, section 24 of the Income Tax Law 1974 states that every person who holds a share in a business at the time the business is discontinued is jointly and severally liable for payment of any income tax assessed against the business. While we are not aware of any instance in which the Internal Revenue Department has relied on section 24 to impose tax liability on shareholders, this section nevertheless creates a potentially significant category of liability for shareholders.
Shareholders can also potentially make themselves liable for the debts of the company by separately agreeing to be liable, for example, where a shareholder agrees to guarantee debts of the company. Limited liability in relation to share capital does not provide any protection to a shareholder where it has separate agreed to take on liability. But in the vast majority of cases, shareholders in Myanmar companies can rest assured that they have no liability in respect of the company other than the capital they have agreed to invest in the company.