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 HISTORICAL DEVELOPMENT OF COMPA1Y LAW.

I.
(Cohen
THE Report of the Committee on Company Law Amendment
Committee) and the pending company law reform have enlivened
interest in company law and it may be assumed that this interest will last
for some time to come. In these circumstances it seems fitting to review
the historical development of the limited liability company in the light of
the company law reform.
II.
The principle of limited liability was first introduced into English law
of commercial associations in the sixteenth century when bodies which
had started as large partnerships found it expedient to obtain corporate
form and to carry on business as an incorporated joint stock company.
Thus, the Society of Mines Royal, which was founded in 1561, was incor-
porated in 1568; the Society of Mineral and Battery Works, founded in
1565, was incorporated in 1568. Other companies, trading in foreign
countries, also obtained corporate form, for example, the Russia Com-
pany in 1558, the Levant Company in 1581, the East India Company in
1600.1
It would appear that these companies incorporated by royal charter
were, in essence, the first companies which afforded limited liability to
their members. The limitation of the shareholders' liability was a con-
sequence of the legal concept of a corporation as a legal entity quite
distinct and separate from its members. Limited liability, however, was
not the main purpose for which those companies sought incorporation.
They wanted special powers and privileges which could be obtained by a
royal grant only.
Such a royal grant of incorporation does not appear to have been
available for ordinary trading associations. They were not considered
deserving of encouragement on grounds of public policy. 2 These
ordinary trading companies had to do without incorporation, and had to
make the best use they could of the facilities offered by the common law.

I.
In the second part of the seventeenth century common lawyers
developed from the ordinary partnership a special type of large partner-
ship, the unincorporated joint stock company. The special features of
these joint stock companies were that they were generally designated by
a name descriptive of the business, while ordinary partnerships commonly
used the names of one or more partners, that their business was conducted
by managers or directors who were not necessarily partners, and, above
I For the history of earl7 company law see: Dr. W. R. Scott, The Constitution and
Finance of English, Scottish and Irish Joint Stock Companies to 1720; Carr, Select
Qharters of Trading Companies 1580-1707, Selden Society, vol. 28, XX; Sir Win.
Holdsworth, A History of English Law, vol. VIII, p. 208-09.
, Apendix
XVTi, -p. 102. A to Second Report of the Mercantile Law Commission, P. P. 185-65,
 The Law Quarterly Rteview. [VoL. 62

all, that their capital was divided into shares which were freely trans-
ferable. 2 Practically they differed from an incorporated joint stock
company in no particular except in the absence of a charter and,
therefore, of limited liability. 3 For without incorporation there was no
possibility of limiting the shareholders' liability in general. In law, these
companies were considered nothing but partnerships, every member being
fully liable for all the debts and liabilities of the company.
The historical development of these joint stock companies was stated
by Mr. Robert Lowe, when he introduced the Companies Bill, 1856, in
the House of Commons, as follows:-
'Now the state of the law relating to Joint Stock Companies is
somewhat peculiar. It seems to have been the misfortune of these
bodies to be always legislated for by persons in a state of excitement.
The first Act relating to them, called "the Bubble Act ", was passed
during the first paroxysm produced by the bursting of the memor-
able South Sea Bubble, in the reign of George I. Banquo says:
"The earth has bubbles as the water has,
And these are of them! "
And so our legislature set to work to explode them; and for 100
years the law of this country rendered the formation of Joint Stock
Companies illegal, and an indictable offence .... This prohibition
remained in force till the year 1825, when it was repealed. The
Government at that date still continued to look very jealously on
these companies, and, although it was then seen that they partook
very largely of the nature of corporations, yet it was only by very
slow degrees that it could be induced to regard them in that light;
for in the first year of the reign of Her present Majesty it was
enacted,' not that Joint Stock Companies should be allowed to sue
under a corporate name, . . . but that they should be allowed to sue
and to be sued in the name of their public officer-a most incon-
venient and circuitous form of proceeding, and one which showed
the absurd and ridiculous distrust with which these associations were
regarded. Then we come to the law of 1844-the present Joint
Stock Companies Act. That measure was the result of the Report
of a Select Committee, which appears to have conducted its delibera-
tions in a state of mental perturbation scarcely less violent than that
which prevailed in the days of George I. For, when I look at their
Report, I find the headings of the different sections of what one
would generally expect to be a very demure and quiet document
running thus-" Amount and Distribution of the Plunder ", "Cir-
cumstances of the Victims ", "Impunity of the Offenders ", and the
like; so that a hurried glance at the contents might make a man
fancy he was reading a novel instead of a blue-book.' 5
This comment appears to be more witty than fair. It is evident from
the facts given in the report of the Select Committee on Joint Stock
3 Sir Wm. Holdsworth, op. cit. p. 215.
4 This is a slip. The Act referred to is the Act of 1834, 4 & 5 Will. IV. o. 94.
5 Hansard CIL (1856) 116, 117. For a fuller account of the history of company law
in the nineteenth century see B. C. Hunt, The Development of the Business Corporation
in England, 1800-1867, Harvard Economic Studies, vol. LII (Cambridge, Mass., 1936);
T. B. Napier, The History of Joint Stock and Limited Liability Companies in 'A
Century of Law Reform' (London, 1901); B. R. Formoy, The Historical Foundation of
Modern Company Law (London, 19M3).
OCT., 1946] Hitorical Development of Company Law. 7
Companies, 1848, that very grave abuses occurred in those days with
regard to joint stock companies. These abuses had mainly disappeared
in 1856, when Mr. Lowe made his statement, their disappearance being
due to the provisions of the Joint Stock Companies Act, 1844, which was
based on that report.
This Joint Stock Companies Act of 1844 (7 & 8 Vict. c. 110) made
the incorporation of a joint stock company independent of any govern-
mental approval by providing for compulsory registration of joint stock
companies which were defined as follows: -
(a) Partnerships where the capital was divided into shares which were
transferable without the express consent of all the co-partners,
(b) all assurance companies,
(c) all partnerships with more than twenty-five members.
There were two different registrations prescribed by the Act, a pro-
visional one before the public was approached for subscriptions, and a
complete registration after subscriptions for shares had been received
and a ' Deed of Settlement' had been filed for registration. This deed of
settlement had to contain, apart from the internal regulations of the
company, all the essentials which have now to be stated in the memoran-
dum of association, except, of course, the limitation of the shareholders'
liability which was not then permitted by law. In particular, the deed
of settlement had to state the business or purpose of the company, and
also the amount of the capital and its division into equal shares. No
minimum amount was prescribed either for the share capital or for the
value of each share; but the deed of settlement had to be signed
'by at least one Fourth in Number of the Persons who at the date of
the Deed have become Subscribers, and who shall hold at least one
Fourth of the maximum Number of Shares in the Capital of the
Company'-
This means that complete registration could not be obtained unless at
least one-fourth of the nominal capital of the company had actually been
subscribed.
On provisional registration the promoters were empowered to do all
acts necessary for the constitution of the company, but no more
(section 28).
On complete registration, however,
' such Company and the then Shareholders therein, and all the
succeeding Shareholders, whilst Shareholders, shall be and are hereby
incorporated . . . for the Purpose of carrying on the Trade or
Business for which the Company was formed, but only according to
the Provisions of this Act, and of such Deed as aforesaid, and for the
Purpose of suing and being sued, and of taking and enjoying the
Property and Effects of the said Company' (section 25).
This was a great step forward, the joint stock company became a
corporation, though 'only according to the Provisions of this Act, and of
such Deed as aforesaid '. The corporate character was obtained by mere
registration, without royal charter or special Act of Parliament. Thus
the formation and incorporation of a joint stock company ceased to be a
matter of privilege and became a matter of right.
But in spite of this corporate character the registered joint stock
6 Parl. Papers 1844, vol. VII.
 The Law Quarterly Review. [VoL. 62

company remained a partnership. The Act of 1844 calls it a partnership,

for example, in section 25, where it is said that after complete registration
it shall be lawful for such companies
'to perform all other Acts necessary for carrying into Effect the
Purposes of such Company, and in all respects as other Partnerships
are entitled to do '.
With regard to the shareholders' liability the Act provided
'that every such Shareholder shall ... be and continue liable as he
would have been if the said Company had not been incorporated'
(section 25).
One of the basic principles of partnership law, the unlimited liability of
any partner for all debts and liabilities of the partnership, was thus
maintained. It was maintained in essence, but subject to a modification
which may be considered as the first step on the road to limited liability.
Whereas a partnership creditor who has obtained judgment against the
partnership-firm can immediately levy execution against any partner,
the creditor of a joint stock company, incorporated under the Act of
1844, could levy execution against a shareholder only if due diligence
had been used to obtain satisfaction of such judgment, decree or order
by execution against the property and effects of the company (section 66).
That is to say, the liability of the shareholders of a joint stock company
for. the debts of the company, though still a liability towards the com-
pany's creditors, and though still unlimited, became a subsidiary liability,
subject to unsuccessful execution against the property of the company.

IV.
After the most urgent problems of registration and incorporation of
joint stock companies had been solved by the Act of 1844 the general
interest now concentrated on the problem of limited liability.
As early as 1825 the introduction of limited liability for joint stock
companies had been suggested in the House of Commons.8 From time to
time the problem of limited liability was discussed in Parliament,' but
the majority opinion was still strongly opposed to the new idea.
In 1887, by request of the Lords of the Committee of Privy Council for
Trade, Mr. Bellenden Ker, of Lincoln's Inn, made an elaborate report
' on the law of Partnership generally and on the system of partnership
with limited responsibility as practised in France and elsewhere ,.10 It
seems significant that the instructions given to Mr. Bellenden Ker related
to partnerships and not to incorporated companies. Accordingly, when
dealing with French law, Mr. Bellenden Ker referred to the socifti en
commandite only, the French limited partnership, and not to the socifti
anonyrne, the French company limited by shares. The latter type of
commercial association does not appear to have aroused any interest in
this country, for incorporated companies were already well known, having
obtained incorporation either by royal charter or by Act of Parliament.
Mr. Bellenden Ker, referring not only to French, but also to American
7 The concepts of partnership and of legal personality are not necessarily contradictory.
In Scottish law, for example, partnerships are legal personas.
&Hansard XII (1825) 1284.
9 For example, in 1836, Hansard XXXII (1836) 1187, 1192.
10 Published as Appendix No. 1 to the First Report of the Select Committee on Joint
Stock Companies, 1843, Par]. Papers 1844, vol. VII.
OcT., 1946] Historical Development of Company Law. 879
and Irish limited partnerships, recommended the introduction of a limited
partnership, but nothing ensued.
The suggestion of limited liability was again made before the Select
Committee on Joint Stock Companies, 1848, but was not acted upon."
In 1852, a Mercantile Law Commission was appointed to inquire and
ascertain ' whether any and what alterations and amendments should be
made in the Law of Partnerships as regards the question of limited or
unlimited responsibility of the partners '."2 This Commission, after
having heard a great deal of contradictory evidence on conditions pre-
vailing and on past experience in this country and abroad, especially in
France and in the States of New York and of Massachusetts, made a
report in 1854 in which it arrived at the conclusion that the proposed
alteration of the law would not operate beneficially on the general trading
interests of the country.
Notwithstanding this very reluctant attitude on the part of the
Commissioners, the House of Commons, in the same year, passed
unanimously a resolution
' that the Law of Partnership which renders every Person, who,
though not an ostensible Partner, shares the Profits of a Trading
Concern, liable to the whole of the Debts, is unsatisfactory, and
should be so far modified as to permit Persons to contribute to the
Capital of such Concerns on Terms of sharing their Profits, without
incurring Liability beyond a limited amount '."
On account of this resolution the Board of Trade stopped the grant
of charters pending legislation. To meet this situation the Government
put before Parliament a temporary measure, the Limited Liability Bill,
1855.
Considering the wording of the quoted resolution of the House of
Commons one might have expected that the Government would have
followed the French example of the socilti en commandite by suggesting
a sort of limited partnership. But the Government did not see fit to
recommend any kind of limited liability for ordinary partnerships.
' Strictly speaking, a Joint Stock Company was but a partnership;
but still there was a substantial distinction between the two. At any
rate, the legislature had treated them as distinct, because private
partnerships still rested entirely at Common Law while Joint Stock
Companies had been the subject of regulations by Statute.' 1
The Limited Liability Bill, 1855, was but an amendment of the Joint
Stock Companies Act, 1844. By this amendment joint stock companies
were to be enabled to limit the liability of all their members by complying
with certain conditions intended to prevent ' mere gambling bubbles'.
The Bill required a minimum capital of £20,000 and a minimum value
of £25 for each share. At least three-fourths of the nominal capital had
to be subscribed, and at least one-fifth to be paid up on each share prior
to complete registration of the company.
In the debate in the House of Commons there was still opposition

11 Parl. Papers 1844, vol. VII, reply to question 1521.

12 First Report of the Mercantile Law Commission, Parl. Papers 1854, XXVII.
S Hansard QXXXIV (1854) 764, 800.
1, Mr. Bouverie, then Vice-President of the Board of Trade, moving the second reading
of the Limited Liability Bill in the House of Commons, Hansard CXXXVII (1865) 810.
 The Law Quarterly Review. [VOL-. 02
against the principle of limited liability. Mr. Strutt, for example, said
that he entirely agreed with the Hon. Member for Birmingham
'that it was perfectly absurd to suppose that ordinary trades could
be carried on by companies as well and as prosperously as by
individuals'. 15
Opinion was also divided about the value of the suggested restrictions
as to a minimum share capital and a minimum amount of each share.
On account of strong opposition in the House of Commons the Govern-
ment first reduced the amount of the required minimum capital from
£20,000 to £10,000, and the minimum value of shares from £25 to £20
each. Finally, being afraid of a division of the House, the Government
dropped the requirement of a minimum capital altogether and reduced
the minimum value of shares to £10 each. The provisions that three-
fourths of the nominal capital had to be subscribed and that one-fifth of
the subscribed capital had to be paid up were retained. The House of
Lords added the following further restrictions:-'
(a) The Deed of Settlement to be executed by at least twenty-five share-
holders (thus a minimum capital of £250 was secured);
(b) the directors to be ' jointly and severally liable for all the debts
of the company if they declare and pay any dividend when the
company is known by them to be insolvent or any dividend the
payment of which would to their knowledge render the company
insolvent' (following the law of Massachusetts);
(c) if one auditor only appointed, that single auditor, if two or more
auditors appointed, then one of such auditors to be approved by
the Board of Trade;
(d) no loan to be made to a shareholder, and any officer of a company
making one or assenting to it to be liable to the full extent of such
loan (following the law of Massachusetts);
(e) 'In the case of any company which has obtained a certificate of
limited liability whenever on taking the yearly accounts of such
company, or by any report of the auditors thereof, it appears that
three-fourths of the subscribed capital stock of the company has
been lost, or has become unavailable in the course of trade, the
trading and business of such company shall forthwith cease, or
shall be carried on for the sole purpose of winding up its affairs;
and the directors of such company shall forthwith take proper
steps for the dissolution of such company, and for the winding up
of its affairs' (section 18).
To anyone who has not an intimate knowledge of the history of British
company law these provisions of the Limited Liability Bill and the Limited
Liability Act, 1855, must come as a surprise. One of the main differences
between British and Continental company law is the fact that the British
limited company does not afford the safeguards which are considered
essential by Continental Companies Acts, viz., a minimum share capital
and a minimum value of shares, a minimum subscription of a consider-
able proportion of this share capital and a minimum payment of a
considerable part of the subscribed share capital before registration of
the company. All these safeguards are to be found in the Limited
Liability Bill or in the Limited Liability Act, 1855, respectively.
15 Hansard CXXXIX (1855) 1387.
OCT., 1946] Historical Development of Company Law. 881
It will be remembered that a minimum paid-up share capital of £5,000
or of £2,000 was suggested before the Cohen Committee.16 The Limited
Liability Bill, 1855, shows that a statutory minimum share capital is not
a novel institution in British company law. Some of the amendments
recommended by the Cohen Committee are also to be found in the
Limited Liability Act, 1855. For example, the Cohen Committee recom-
mends a prohibition of loans to directors. 17 The Limited Liability Act,
1855,. went even further by prohibiting loans to all shareholders. Again,
the Cohen Committee recommends that only ' public auditors ' recognized
as such by the Board of Trade, should be admitted as auditors of com-
panies registered under the Companies Acts." The Limited Liability
Act, 1855, provided that at least one auditor of the company had to be
approved by the Board of Trade. It would appear, therefore, that some
of the principles now recommended are but a return to the earliest roots
of modern British company law.

V.
The Limited Liability Act, 1855, had a very short life. Even in that
year, the Government announced that they intended to introduce a Bill
revising the whole law of joint stock companies in the next session.
When this was done in February, 1856, the wind had changed completely.
Mr. Lowe, whose criticism of the Government Bill of 1855 was mainly
responsible for the elimination of a statutory minimum capital, had
succeeded Mr. Bouverie as Vice-President of the Board of Trade. He
introduced the Joint Stock Companies Bill, 1856, in the House of
Commons with a remarkable speech (part of which has been quoted
above) in which he pronounced the principles upon which future
legislation should be based."'
'We entirely repudiate', he said, 'as the basis of legislation the
principle upon which the present Joint Stock Companies Act is
founded-that it is in the power of the Government to prevent the
institution of fraudulent companies. We do not believe that it is in
the power of the Government to supersede the vigilance of individuals
who are actuated by the strongest personal interests to detect these
frauds.'
' We propose to take now our stand upon the only firm foundation
on which the law can be placed-the right of individuals to use their
own property, and make such contracts as they please, to associate
in whatever form they think best, and to deal with their neighbours
upon such terms as may be satisfactory to both parties.'
'In my judgment the principle we should adopt is this-not to
throw the slightest obstacle in the way of limited companies being
formed-because the effect of that would be to arrest ninety-nine
good schemes in order that the bad hundredth might be prevented.'
The governing principle of the Bill was expressed perhaps even more
clearly by Lord Stanley of Alderley, then President of the Board of Trade,
16 Report of the Committee, Cmd. 6659, par. 57.
17 Qmd. 6659, par. 94.
15 Cmd. 6659, par. 110.
19 Hansard CXL (1856) 124, 130, 131.
 The Law Quarterly Review. [VOL. 62
representing the Government at the second reading of the Bill in the
House of Lords, when he said 20:
'The principle of the Bill was to allow every man to employ his
capital as he pleased, but at the same time to require that the public
should be fully informed as to the nature of the partnerships into
which he entered, and the terms upon which they conducted their
business.'
The new Government policy of 'comprehensive liberality', as Mr. Lowe
had called it, met with some strong opposition in both Houses of
Parliament. In the House of Lords Lord Monteagle said 21 :
'The noble Lord (Stanley of Alderley) had referred to examples of
foreign States. . . . But he (Lord Monteagle) denied that on the
present occasion we were adhering to foreign experience .... Had
such a legislative monster as the Bill now before their Lordships ever
been produced in America, in France, or in any other part of the
world? Wherever in foreign countries limited liability had been
established, the principle had been coupled with safeguards and
limitations, all of which were wanting in this Bill. They had been
told that they ought not to attempt to regulate private interests by
Act of Parliament, but should leave people to take care of them-
selves; but that was no reason why they should encourage a host of
adventurers with shilling shares and five pounds capital to start such
useless and mischievous companies, to the injury of their neighbours.'
Lord Overstone and Lord Monteagle then lodged a protest in writing
against the second reading of the Bill in which they laid down their
reasons for doing so as follows: -

(2). .
(8) In every other country the privilege of limited liability is
surrounded by restrictions which are intended to guard against
the danger-first, of excessive and reckless enterprize, naturally
generated by the sense of strict limitation of risk; and
second, of fraudulent abstraction, under the form of interests
or profits, of that specific and fixed amount of capital which
is alone appropriated as the security of the honest creditor.
(4) 'Profits in trade consist of interest upon capital, remuneration
for labour and skill, and premium of insurance on risk. In
proportion as the risk in any business is great profits are
usually high; but of these high profits a large share is by
every honest trader set aside as the premium reserved against
high risks. An unfortunate tradesman coming before the
Bankruptcy Court would not be very leniently dealt with
should it appear that, carrying on a very riskful business, he
had year by year spent all the great apparent profits, making
no reserve out of them to meet the high risks he was incurring.
Now, this is the very practice which this Bill directly
sanctions, and therefore encourages '.
This sounds almost as if the noble Lords had foreseen that the Act
by its silence might give rise to the dividend doctrine, subsequently

20 Hansard CXLII (1856) 1482.

21 Hansard CXLII (1856) 1484, 1485.
OcT., 1946] Historical Development of Company Law. 888

developed by the Court of Appeal, that dividends may be paid out of

current profits 'although every shilling of the capital may be lost '.2
In 1856, their Lordships protest was brushed aside, and the Govern-
ment succeeded with its policy of laissez faire. The result was that most
of the restrictions placed upon limited companies in the Act of 1855 were
eliminated in the Act of 1856. No minimum amount of shares was
required any longer, no minimum subscription of a proportion of the
nominal capital, no paying up of subscribed capital and, consequently,
not two registrations but one only, no Government approved auditors.
The minimum number of subscribers was reduced from twenty-five to
seven, the provision that a company must be wound up when three-
fourths of the subscribed capital is lost was diminished to the provision
that a company may be wound up in that case; no restriction was placed
upon loans to shareholders.
On the other hand, the provisions securing information to the public
were amplified. The Register of Members which was previously open to
shareholders only was made accessible to everybody on payment of a fee
of is.; the Annual Return which formerly had to contain the name and
the business of the company only was to supply henceforth all essential
information about the capital of the company and the shareholders. The
registered office was made compulsory, also the publication of the name
of the company outside such an office and on all letters, bills, etc.
There were, however, severe cuts also in the information to be supplied
to shareholders and to the public. The Minute Book and the Account
Books which were formerly open to the inspection of shareholders were no
longer made accessible to shareholders unless the articles so provided.
Above all, the appointment of auditors and the registration of the balance
sheet with the auditors' report thereon, both compulsory since 1844, were
no longer compulsory. The relevant provisions of the Act of 1844 had
not proved effective. The Report of the Select Committee on Assurance
Associations had commented in 1858 ":
' One of the chief securities contemplated by the Act of 1844 for
the safety of the public is the duty imposed upon them to return
annual balance sheets representing the state of their afairs... they
are open to public inspection. But from the fact that the Act
prescribed no form, and furnished the Registrar with no power to
enforce a compliance with the spirit, or even with the letter of the
law, it appears that this provision has been very imperfectly complied
with in many cases, and in others altogether neglected; so that it
cannot be said that it has afforded, in the majority of cases, either
the information or the security which was intended '.
It was not until 1900 that a compulsory audit was re-introduced, and
not until 1907 that the filing of a ' statement in form of a balance sheet'
was made compulsory again.
With regard to the liability of the shareholders the Act of 1856
brought two changes. First, it contained the provision that if the com-
pany carried on business with less than seven shareholders for more than
six months, every such shareholder was to be fully liable for all the
debts of the company contracted during that time. Secondly, the Act

53 Lindley L.3. in Lee v. Neuchatel Auphalte Company (1889) 41 Ch. D. 1, at p. 28.

23 Parl. Papers 1852-5 . XXI, iii.
 The Law Quarterly Review. [VOL.. 62
of 1856 altered the nature of the shareholder's liability. According to
section 8 of the Limited Liability Act, 1855, creditors of the company
could still levy execution against the shareholders if they were not able
to satisfy their claims by execution against the company, although
only to the extent of the portions of the shares not paid up. 2" This
section was replaced by section 61 of the Joint Stock Companies Act,
1856, which ran as follows :-
'In the event of any company being wound up by the Court or
voluntarily, the existing shareholders shall be liable to contribute to
the assets of the company to an amount sufficient to pay the debts of
the company . . . with this qualification that if the company is
limited no contributions shall be required from any shareholder
exceeding the amount, if any, unpaid on the shares held by him'.
Thus the direct, although subsidiary, liability of the shareholders
towards the company's creditors came to an end and was replaced by a
liability towards the company only. This means that the corporate
character of the limited company won the upper hand over the partner-
ship element in it. " Accordingly, joint stock companies with limited
liability were no longer termed ' partnerships' in the Act of 1856 as
they had been in the Act of 1844, and thereby indirectly in the Act of
1855.
This change in the legal nature of limited companies was not always
realized. For example, Lord Lindley in his book on ' Company-Law con-
sidered as a branch of the Law of Partnership' stressed the partnership
element instead of the corporate element.

VI.
The next major Act was the Companies Act, 1862, which is commonly
regarded as the foundation of British company law. Actually, it was
mainly a consolidating Act, consolidating the Joint Stock Companies Act,
1856, and various Acts re joint stock banking and insurance companies.
Materially, the main changes brought about by this Act were the
inclusion of banking and insurance companies within the scope of the Act,
the introduction of the company limited by guarantee, and the absolute
prohibition of any alteration of the object clause in the memorandum
of association whereby all companies registered under the Act became
subject to the doctrine of ultra vires.' This affected the legal character
of registered companies.
' Thus the modem company is not the ancient corporation. It
does not possess the ordinary attributes of legal personality. It is
bound down, cabined, and confined within the limits of its
memorandum of association .2T
If the ultra vires doctrine as applicable to registered companies is
abolished by the forthcoming Companies Act," this will be the final
24 Cf. sect. XXXVI of the Companies Clauses Consolidation Act, 1845, which is still
in force and *hich provides the same kind of direct liability of the shareholders towards
the company's creditors for companies incorporated by special Act of Parliament.
25 See T. B. Napier, op. cit., p. 892. 'The effect (of the Act of 1856) was to create
a body corporate '.
20 See 62 L. Q. B. 66, 68.
27 T. B. Napier, op. cit., p. 396.
28 See recommendation of the Cohen Committee, Cmd. 6659, par. 12.
OCT., 1946] Historical Development of Company Law. 885
step in the long process of gradual transformation of the joint stock
company from a mere partnership to a genuine corporation.
There were several further Acts between the Companies Act, 1862, and
the Companies Act, 1907, all of them confined to the regulation of special
problems. Thus the Companies Acts, 1867 and 1877, provided for the
reduction of share capital, an Act of 1890 for the alteration of the
memorandum of association. The Companies Act, 1900, re-introduced
a compulsory audit, amplified the provisions relating to prospectuses,
and provided for the registration of all charges on the company's assets.
Apart from these amendments tending towards fuller publicity some steps
were taken towards securing a ninimum working capital. Though no
statutory minimum capital was required before registration, companies
were forbidden to allot shares and to commence business unless the
minimum amount named in the prospectus had been subscribed and
the
sum payable on application for the amount so fixed and named had been
paid (section 6). This may be regarded as the first step in reversing the
policy of 'comprehensive liberality ', as enunciated by Mr. Lowe in 1856.
The Companies Act, 1907, which followed and which was consolidated
with the previous Acts in the Companies (Consolidation) Act, 1908, is
remarkable from a more general point of view. It extended the principle
of limited liability to so-called private companies with a minimum number
of only two shareholders.
When limited liability was first introduced, in 1855, it was expressly
restricted to joint stock companies and was withheld from ordinary
partnerships. The same principle prevailed in 1856, although the
minimum number of shareholders was then reduced from twenty-five to
seven. Practice, however, literally adhering to the Companies Act, 1862,
developed a new type of limited company, commonly called private com-
pany, which, in tact, was nothing but an ordinary partnership with
corporate status and limited liability. The essential features of these
private companies were the small number of shareholders and the
absence of any application to the public for subscription of shares or
debentures. In the leading case of Salomon v. Solomon A Co.2' the
House of Lords decided that even the minimum number of seven share-
holders did not mean that every shareholder had to have a substantial
or a beneficial interest in the company, but that the Act was complied
with if one member held the bulk of the shares and the other six members
held one share each. Thus private companies were sanctioned by the
highest legal authority in this country, and it was only natural that the
Companies Act, 1907, regulated them expressly.
These regulations were rather scanty. In essence they allowed private
companies 3 ' to commence business immediately after registration no
matter how much of the share capital had then been subscribed and paid
up, and they exempted private companies from certain provisions as to
publicity, mainly from the obligation to publish their balance sheets.
For the rest, private companies did not differ from public companies. If,
on the recommendation of the Cohen Committee,"' private companies,
29 [1897] A. C. 22.
8o Companies which may not have les than two and not more than fifty members,
excluding present or former employees; which restrict the right to transfer its shares,
and which 'prohibit any invitation to the public for subscription of its shares or
debentures.
31 Cmd. 6659, p. 28.
 . The Law Quarterly Review. [ VoL.. 62

except so-called ' exempt companies ', are no longer to be exempted from
publishing their accounts, they will become even more akin to public
companies than hitherto. This is noteworthy, for there are substantial
differences between public and private companies in various Continental
company laws, not only as to publicity but also as to the liability of the
shareholders and in other respects.
The Companies Act, 1928, made a further vigorous stride towards fuller
information of the public. The provisions about prospectuses were
amplified and the provisions of the Companies Act, 1900, re-introducing
a compulsory audit, were supplemented and reinforced by new provisions
which made the keeping of proper books of accounts compulsory. Form
and contents of the balance sheet were regulated, and for the first time
it was provided that an annual profit and loss account had to be laid
before the shareholders. The making of loans to directors was not
prohibited, but the amount of such loans was to be stated in the
accounts. These provisions spelt progress not only for this country but
influenced other company laws as well. For example, they served as a
model for the German Companies Act of 1981 by which a compulsory
audit was first introduced into German law.
Apart from these provisions securing greater publicity some further
inroads were made on the absolute freedom of forming and managing
companies without any restrictions. All public companies had to have
at least two directors, the financing of purchases of shares in the company
by third parties out of the assets of the company was prohibited, the
liability of directors and auditors was no longer allowed to be restricted
by the articles of association.

VII.
This brief survey shows that the foundations of modern British company
law were laid in 1856 when liberalism was at its peak. The guiding
principle then fixed was fullest freedom for shareholders in the formation
and management of companies on the condition that fullest information
was given to the public. In the course of time this latter element became
more and more preponderant. On the other hand, with waning liberalism
the principle of absolute freedom for shareholders was bound to lose
ground.
The Cohen Report keeps in line with this development. Its recom-
mendations relate mainly to increased publicity in prospectuses, in
accounts, in the disclosure of nominee holdings and in the disclosure of
financial relations between companies and directors and between holding
and subsidiary companies. There are also some restrictions on the
freedom of shareholders to be found in the recommendations of the Cohen
Committee, for example, the prohibition of loans to directors and the
fixing of a retiring age for directors of public companies. It may well
be that the policy of 'comprehensive liberality ', enunciated as the
guiding principle of British company law by Mr. Lowe in 1856, will be
further reversed in future as the tendency grows to restrict individual
liberties in the public interest.
WALT= Hoimwrrz.