HISTORY OF COMPANY

DEVELOPMENT OF COMPANY LAW IN ENGLAND

The history of company in England can be studied by dividing it into two divisions-
1. History of company law to 1825.
2. History of company law since 1825.

1. History of company law to 1825

This earlier period can be sub-divided into further two parts-
a. Until 1720 when the Bubble Act was passed;
b. From 1720 until the Bubble Act was replaced in 1825.

Early forms of commercial associations:

Various forms of commercial associations were known to medieval law and as regards some of them
the concept of incorporation was early recognized. At first, however, incorporation seems to have
been used only in connection with ecclesiastical and public bodies, such as Chapters, Monasteries
and Boroughs, which had corporate personality conferred upon them by a charter from the crown.
In the commercial sphere the principal medieval associations were the guilds of merchants’
organizations which had few resemblances to modern companies. Many of these guilds in due course
obtained charters from the crown, mainly because this was the only effective method of obtaining for
their members a monopoly of any particular commodity or branch of trade.
Trading on joint account, as opposed to individual trading subject to the rules of the guild, was
carried in through partnerships, of which two types were known to the medieval law merchant. The
first of these, the Commenda, was in fact a cross between a partnership and a loan whereby financier
advanced money that he should share in the profits of the enterprise; his position was as a sleeping
partner but no liability beyond that of the capital advanced. The other type of partnership was the
Societas, a more permanent form of association which developed into the present- day partnership,
each partner being an agent of the others and liable to the full extent of his private fortune for the
partnership debts.

Merchant adventures:
The first type of English organization to which the name company was generally applied was that
adopted by merchant adventures for trading overseas. Royal Charter conferring privileges on such
companies are found as early as the 14th century, but it was not until the expansion of foreign trade
and settlement in the 16th century that they become common. The earliest types were virtually
expansions of the guild principle into the foreign land.
At late stage, however, the partnership principle of trading on joint account was adopted by the
regulated companies which become joint commercial enterprises and they started to operate on joint
account and with a joint stock. The best example of this process is the East India Company, which
received its first charter in 1600, granting it a monopoly of trade in the territory of the Cape of Good
Hope. At first, this joint stock and profits made from it were redivided among the subscribers after the
voyage. From 1614 onwards, however, the joint stock was subscribed for a period of years and this
practice was until 1692 when a permanent joint stock was introduced.

Companies and incorporation:

It was not until the second half of the 17th century that the differtiation between the two types of
company- Joint Stock Companies and Incorporated Companies. Many joint stock companies
were originally formed as partnerships by agreement under a seal, providing for the division of the
undertaking into shares which were transferable by the original partners under the partnership
agreement.
On the other hand, a corporation was dependent upon charter, was capable of existing in perpetuity, it
could sue and be sued and with transferability of shares. These companies were remained so until the
20th century. The limited liability of members was recognized in case of non- trading corporations as
early as the 15th century and at the end of this period in case of the trading companies too but many
charter had expressly conferred a power on the company to make levitations (calls) on the members.
This being so, the limited liability was illusory.

Growth of domestic companies:

After the Revolution of 1688 it to have been assumed that the crown’s prerogative was limited to the
right to grant a charter of incorporation, and that any monopolistic or other special powers should be
conferred by statute as their monopolies were an undue restraint on freedom of trade. This led the
growth of domestic companies.
Share dealings were common and stock-broking was a recognized profession, the abuses of which the
legislature sought to regulate as early as 1696. Both deeds of partnership and charters owed much to
the practices of the medieval guilds, particularly as regards the constitution of the governing body
which generally consisted of a governor and assistant governors. From the end of the 17 th century the
term directors began instead of the term assistant governors. Certain companies had already
experimented with different classes of shares. The invention of preference shares is generally
attributed to the railways companies a century later.
The South Sea Bubble:
The first and second decades of the 18th century were marked by an almost frenetic boom in company
flotation which led to the famous South Sea Bubble. To obtain the charter was not an easy business
and the promoters who were interested to do business with the benefit of incorporation without
obtaining a separate charter; they acquired charters from the existing companies almost dead in which
they could insert the other objectives as they wish. Therefore, an insurance company acquired the
charters of the Mines Royal and the Mineral and Battery Works. This method was used by the South
Sea Company to acquire virtually the whole of the National Debt.
When the flood of speculative enterprises was at its height, parliament decided to intervene to check
the gambling mania which the government had itself encouraged by sanctioning the South Sea
Company’s scheme. A resolution called House of Commons Resolution was passed to that effect on
April 27, 1720 and on the same year an Act, namely, the Bubble Act was passed with a view to
restrict and illegalize the unincorporated company. Section, 18 had provided that all such
undertakings as were herein described, tending to the common grievance, prejudice and
inconvenience of His Majesty’s subjects, should be illegal and void. By section 21, brokers dealing in
securities of illegal companies were to be liable to penalties. But the East India Company and South
Sea Company and other two insurance companies were authorized by the Act. Finally, section 25
inserting a proviso legalized all trade home or foreign in partnership which were done lawfully
according to the laws of this Realm now in-force. This statute was the first attempt at a companies
Act.

The Bubble bursts:

Early of 1720 proceedings were carried out against some of the companies operating under obsolete
charters with a view to these being forfeited. This led to a widespread panic from which the South
Sea Company itself never fully recovered. In June 1720 its stock had stood at over $1000 and
immediately before the issue of the writs it was still at $850. A month later it had fallen to $390 and
by the end of the year it was quoted at $125. The government was involved to rescue the company
but the subsequent investigation disclosed fraud and corruption which ruined the company’s
reputation. With its fell many of its contemporaries burst like the bubbles they were.

Effect on incorporation:
Joint stock companies did not disappear completely and many regularly chartered companies and few
unincorporated companies were in existence. After the growth of canal building, which necessarily
involved an application to parliament for special powers that the parliament became less strict in its
requirements and that direct statutory incorporation became common. It is this statutory incorporation
that we owe many of the features of modern companies; in particular the method of limiting liability
of the members to the nominal value of their shares. The companies relating to banking, fire and
marine insurance, making and maintaining canals, and bringing water to cities were incorporated and
refused to incorporate others.

Resurgence of unincorporated companies:

After the Bubble Act, the authorities placed almost insuperable difficulties in the way of
incorporation and left it to business men and their legal advisers to find an alternative device. This
they found in the unincorporated association – Partnerships; how far the partnerships could go was far
from clear. But from the middle of the century onwards it is clear that unincorporated joint stock
companies were operating to a gradually increasing extent and that complete freedom of transfer of
shares was assumed to be permissible.
Legal ingenuity enabled these unincorporated associations to operate by use of trusts. The company
would be formed under a deed of settlement under which the subscribers would agree to be associated
in a enterprise with a prescribed joint stock divided into a specified number of shares; the deed would
change by the majority of the proprietors; management would be delegated to a committee of
directors; and the company’s property would be vested in a separate bodies of trustees, some of
whom would often be directors also.

State intervention:
In November 1807 the Attorney General sought criminal information against two recently formed
unincorporated companies, both of which had freely transferable shares and advertised that the
liability of the members would be limited. Shortly afterwards two further associations were held
illegal as their shares were transferable.
Finally, the government felt compelled to do something to bring the law more into accord with the
facts. So, in 1825 the Bubble Act was repealed.

2. History of company law to 1825

The repeal of the Bubble Act was followed by a disastrous slump further emphasizing the need for
some constructive measures of control. The repealing Act was a provision under section 2 enabling
the crown to declare the extent of the members’ liability on the grant of charters. This provision
might have been expected to encourage greater freedom in the grant of charters but in fact, the
authorities remained as strict as ever. Hence, most promoters were thrown back on the unincorporated
form, legality of which was still in doubt. But the joint stock companies came to play an important
role in every part of the country’s economy. Clearly, some step had to be taken to remove the legal
confusions.
The first step was taken by the Trading Companies Act, 1834 with some features of corporate
advantages. It empowered the crown to confer by letters of patent any of the privileges of
incorporation without actually granting a charter.
In 1837 the Board of Trade instructed a chancery barrister to make a report on the law of partnership
which led the enactment of the Chartered Companies Act, 1837 with the valuable clarification that
personal liability of members might be limited by the letters patent to a specified amount per share.

Gladstone’s legislation of 1844 and 1845:

In 1843 Gladstone, who became president of the Board of Trade, prepared the two legislation and
passed by the parliament, namely, Joint Stock Companies Act, 1844 and Companies Clauses
Consolidation Act, 1845.
The Act of 1844 introduced three main principles which have constituted the basis of the modern
company law from that time-
i. It provided a clear distinction between private partnership and joint stock companies by
providing for the registration as companies of all new associations with more than 25
members or with shares transferable without consent of all the members.
ii. It provided for incorporation by mere registration as opposed to a special Act or Charters.
iii. It provided for full publicity which ever since has been regarded as the most potent
safeguard against fraud.
The Act has provided a permanent body known as the Registrar of Companies with whom
particulars of companies’ constitutions and changes therein and annual returns are filed.
Limited liability, however, was still excluded but their liability was to ceased three years after they
had transferred their shares by registered transfer and creditors had to proceed first against the assets
of the company. Existing companies were compelled to register. Winding up and banking companies
were dealt with a separate Act. The Act of 1845 set out the standard provisions normally included in
private statutes of incorporation.
Gladstone, therefore, succeeded for the first time in placing joint stock companies on a sound legal
footings; he may fairly be regarded as the father of modern company law. His legislation, however,
solved the legal not the commercial problems. It gave the company the legal status of a corporation
but denied its members’ limited liability.
The struggle for limited liability:
Several features of the Act of 1844 were open to criticism. In particular the complex procedure of
provisional and final registration was attacked which was remained unaltered until 1856. The main
cause of complaint, of course, was the absence of limited liability which led the next 10 years battle
joined to attain this feature. As a result of the Act there were three types of commercial associations-
1. Private partnerships of not more than 25 persons; and quasi-partnerships of unlimited size
formed before 1844. These were unincorporated and the liability of the members was
necessarily unlimited.
2. Chartered and Statutory companies, which were incorporated and the members were normally
free from liability or had their liability limited to a prescribed sum per share.
3. Companies formed or registered under the Act of 1844 which were incorporated but without
limited liability.
Still the confusion was to which companies the limited liability was to be extended. In 1854 the
government introduced two Bills, namely, the Partnership Amendment Bill and Limited Liability
Bill which provided for limited liability in the case of companies securing complete registration under
the Act of 1844 subject to certain safeguards. After some considerable period of time the House of
Lords having made various amendments, finally passed the Bill and the Bill was given the Royal
Assent in august 1855.
Attainment of limited liability:
The Act provided for the limited liability of the members of a company on complete registration if-
a. The company had at least 25 members holding $10 shares paid up to the extent of 20%;
b. Not less than ¾ of the nominal capital was subscribed;
c. Limited was added to the company’s name; and
d. The Board of Trade approved the auditors.
The directors were to be personally liable if they paid a dividend knowing the company to be
insolvent or made loans to the members, and the company had to wound up if ¾ of the capital was
lost.
Banks and insurance companies were excluded. The method of limitation was that already used for
chartered companies under the Act of 1837 and for statutory companies under the Companies Clauses
Act of 1845.
The Limited Liability Act remained in force for a few months and incorporated in the new Act, the
Joint Stock Companies Act, 1856. This Act was the first of the modern companies Act. It did away
the provisional registration and made the provision of Memorandum and Articles of Association with
the provisions for the winding up of a company.

Subsequent developments:
In 1857 the Act was slightly amended. Banks were brought in its scope. In 1862 the various
enactments were consolidated and amended in a new Act with short title- the Companies Act. With
numerous amendments it remained until 1908.

Twentieth century reforms:

By the end of the 19th century the Board of Trade had established the practice of appointing at
intervals of about 20 years a Departmental Committee to review the company law. This practice was
followed during the first half of the 20th century with new consolidation in 1908, 1929 and 1948.
After the European Communities Act, 1972 the legislative program was dominated by the need to
comply with EU obligations. In 1980 and 1981 two major Companies Acts were passed to fulfill the
objectives.