THE idea of the limited liability company was brilliant. It has generated unbelievable wealth, created untold jobs and facilitated the commercial flowering of the past 150 years. But it was an idea of the 19th century; an idea that has diminishing relevance as we approach the 21st. In the early 1800s, to separate management from ownership would have been foolhardy. Not to hold businessmen responsible for the debts they incurred would have been considered immoral. Yet by the end of the 1800s both ideas were completely accepted. The reason was the invention of the joint stock, limited liability company around 1850. We have not looked back since then. Claims on the shareholders of an incorporated company are limited to the size of their equity stake: no more. Trading through a limited company gives the owners the privilege of walking away from the debts of the company should it become insolvent. But in the 19th century none dreamed of today's complex corporate groups. Public holding companies now typically trade through a hierarchy of wholly owned and associated companies. Other companies operate in complex networks and through chains of strategic alliances. When one company owns another, should it be able to claim immunity from indebtedness if its subsidiary becomes insolvent? The answer is yes: it is perfectly legal, provided there has been no skulduggery - at least in US and the Commonwealth jurisdictions, including Hong Kong. Dominant holding companies in such groups are not liable for debts of their subsidiaries. Some will argue that a reputable company would never walk away from the debts of a subsidiary. The adverse publicity would damage the group's image. Yet in the recent case of the Pentos company, should the main board of the group company be able to walk away from the debts incurred by one of its subsidiaries? Even though those losses had been incurred under strategies they proposed? In the words of lawyers, companies are surrounded by a corporate veil. Creditors cannot cut through it to claim their debts, even if the owners are another company in the group. This is not the case in Germany. Creditors of a company within a group can pursue their debt up the ownership chain. If it can be shown that the holding company exercised control over the subsidiary, creditors can pursue their debt to the next company in the ownership chain, right up to the holding company of the group. The original draft directive of the European Community's company law harmonisation programme (draft directive number 9) took the same line. They did not see why a group of companies should be able to walk away from the debts of a company in their group, when that company's strategies had been dictated by group executives. After all, they argued, when subsidiary executives take instructions from their line bosses in the group, why should the group not be responsible for the results? Moreover, if the salaries, the performance measurement, and possibly the promotion prospects of subsidiary company executives were determined by the group, it should be responsible for the results. The draft directive of the EC has not been enacted. In Hong Kong, the corporate veil remains. In the absence of wrongdoing, companies can walk away from the debts of their subsidiaries. I have to say that I find it hard to justify that in equity. Bob Tricker is a professor at the University of Hong Kong Business School.