Origin and Evolution of the Modern Company Law

Introduction

Gone are the days when sole proprietorship and partnership were the most preferable form of the business wherein the persons use to invest and earn profits out of the business for themselves. Though these form of businesses still exist but are not the most common form of business today as now the taste of the consumers has changed, technology has advanced manifold, etc., which require funds, huge funds and because of involvement of few persons in sole proprietorship or partnership this need of huge investment, production at large scale, etc, was not possible. So to fulfill these needs company form of business came into existence, as also with the time demand shifted from traditional goods to the capital goods and technological products, which require huge amount of labour and capital, supply of which was not the possible for a handful of persons.

Various forms of association were known to medieval law and as regards some of them the concept of incorporation was early recognised. 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 or were deemed by prescription to have received such a grant.

In the commercial sphere the principal medieval associations were the guilds of merchants, organizations which had few resemblances to modern companies but corresponded roughly to our trade protection associations, with the ceremonial and mutual fellowship of which we can see relics in the modern Freemasons and Livery 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. Incorporation as a convenient method of distinguishing the rights and liabilities of the association from those of its members was hardly needed since each member traded on his own account subject only to obedience to the regulations of the guild.

It was not until the second half of the seventeenth century that the differentiation between unincorporated partnerships and incorporated companies was firmly established. Many joint stock companies were originally formed as partnerships by agreement under seal, providing for the division of the undertaking into shares which were transferable by the original partners with greater or less freedom according to the terms of the partnership agreement. At this time there was no limit to the number of partners, but in fact they were generally small in number and additional capital was raised by leviations or calls on the existing members rather than by invitations to the public.

On the other hand, incorporation had certain clear advantages. A corporation was capable of existing in perpetuity, it could sue outsiders and its own members, and possession of a common seal facilitated the distinction between the acts of the company and those of its members.

Rather surprisingly, the most important advantage of all those conferred by incorporation-limited liability- seems only to have been realized as an afterthought. The fact that an individual member of a corporation was not liable for its debts had been accepted in the case of non-trading corporations as early as the fifteenth century, and not without some doubts, it was eventually recognised at the end of this period in the case of trading companies. But, although it was recognised, it appears at first to have been valued mainly because it avoided the risk of the company’s property being seized in payment of the members’ separate debts, rather than as a method of enabling the members to escape liability for the company’s, and this was the reason that mainly contributed towards such a fast growth and evolution of the companies.

Meaning of the term "Company"

The word ‘company’ is derived from the Latin word (Com = with or together; panis = bread), and originally referred to an association of persons who took their meals together. The company have the most striking features of being distinct legal personality, perpetual succession, the easy transferability of shares, the limited liability and its centralized and democratic governance but is not a citizen under the citizenship Act, 1955 or the constitution of India as also held by Hon’ble supreme Court in State Trading Corporation of India Ltd. v. C.T.O . As far as the companies Act is concerned it defines the company as A company formed and registered under this Act or an existing company. An ‘existing company’ means a company formed and registered under any of the former companies Acts.

This definition does not reveal the real distinctive characteristics of a company. Perhaps a clear definition of the company is given by Lord Justice Lindley : By a company is meant an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss as the case may be) arising there from. The common stock so contributed is denoted in money and is the capital of the company and the persons who contribute it, or to whom it belongs, are called as members. The proportion of capital to which each member is entitled is his share which is always transferable although the right to transfer them is more or less restricted. A company thus may be define as an incorporated association which is an artificial person, having a separate legal entity, with a perpetual succession, a common seal, a common capital comprised of transferable shares and carrying limited liability. It is called an artificial person because of its very nature that law alone can give birth to a company and law alone can put it to an end.

The main purpose why companies evolved is the operations and production at large scale which was not possible for handful persons either to manage it or to finance its operations. Huge investments, huge production and large scale operations gave a weapon in the form of company which is required to centralize the operations as someone must be made held responsible for the acts done.

Objectives of a company

As is in the case of, most of the business entities the main aim of the companies is to earn profit out of its operations. Company is formed with a contribution of many contributors who may be in the form of investors, lenders or depositors. Whosoever provides the money, expects the return on his investment and a company has no stand with excuses as far as the question of satisfying its capital contributors is concerned, otherwise the problem of scarcity of funds will become the most difficult question to be solved by the companies in the future. Every company is formed with a notion of generating more and more revenues so that it can discharge all of its liabilities and contribute towards the maximization of company’s wealth.

Corporations under Roman Law

The Romans did not develop a generalized concept of juristic personality in the sense of an entity that had rights and duties. They had no terms for a corporation or a legal person. But they did endow certain aggregations of persons with particular powers and capacities, and the underlying legal notion hovered between corporate powers, as understood in modern law, and powers enjoyed collectively by a group of individuals. The source of such collective powers, however, was always an act of state.

Four types of corporation were distinguished:

1. Municipia (the citizen body, originally composed of the conquered cities and later of other local communities) possessed a corporateness that was recognized in such matters as having the power to acquire things and to contract. In imperial times, they were accorded the power to manumit slaves, take legacies, and finally--though this became general only in postclassical law--to be instituted as an heir.

2. The populus Romanus, or the "people of Rome," collectively could acquire property, make contracts, and be appointed heir. Public property included the property of the treasury.

3. Collegia--numerous private associations with specialized functions, such as craft or trade guilds, burial societies, and societies dedicated to special religious worship--seem to have carried on their affairs and to have held property corporately in republican times. The emperors, viewing the collegia with some suspicion, enacted from the beginning that no collegium could be founded without state authority and that their rights of manumitting slaves and taking legacies be closely regulated.

4. Charitable funds became a concern of postclassical law. Property might be donated or willed--normally, but not necessarily, to a church--for some charitable use, and the church would then (or so it appears from the evidence) have the duty of supervising the fund. Imperial legislation controlled the disposition of such funds so that they could not be used illegally. In such cases ownership is thought to have been temporarily vested in the administrators.

Origin and Evolution of Companies in England

Background of English Company Law

At first, 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 or were deemed by prescription to have received such a grant. At the same time in the commercial sphere the principal medieval associations were the guilds of merchants, organizations that had few resemblances to modern companies but corresponded roughly to the trade protection associations . Incorporation as a convenient method of distinguishing the rights and liabilities of the association from those of its members was hardly needed since each member traded on his own account subject only to obedience to the regulations of the guild. Trading on joint account, as opposed to individual trading subject to the rules of the guild, was carried on through partnerships, of which two types were known to the medieval law merchant the commenda and the societas.

The first type of English organization to which the name company was applied was merchant adventures for trading overseas. Royal charters conferring privileges on such companies are found as early as the fourteenth century, but it was not until the expansion of foreign trade and settlement in the sixteenth century that they become common. The earliest types were the so called regulated companies which were virtually extensions of the guild principles into the foreign sphere and which retained much of the ceremonial and freemasonry of the domestic guilds. Each member traded with his own stock and on his own account, subject to obeying the rules of the company, and incorporation was not essential since the trading liability of each member would be entirely separate from that of the company and the other members.

At first, the concept was separate trading by each member with his own stock but later instead of it, they started to operate on joint account and with a joint stock. This process can be traced in the development of the famous East India Company, which received its first charter in 1600, granting it a monopoly of trade with the Indies. But even after that until the second half of the seventeenth century differentiation between the two types of company (unincorporated partnerships and incorporated companies) was not firmly established. At this time there was no limit to the number of partners, but in fact they were generally small in number and additional capital was raised by leviations or calls on the existing members rather than by invitations to the public.

The South Sea Bubble:

The concept of corporate form was brought in for the first time in United Kingdom wherein the body corporate could be brought into existence either by a Royal Charter or by a special Act of Parliament. Both these methods were very expensive and dilatory. Consequently, to meet the growing commercial needs of the nation, large unincorporated partnerships came into existence, trading, however, in corporate form.

The memberships of each such concern being very large, the management of business was left to a few trustees resulting into separation of ownership from management. Rules of law were not being developed by that time which gave a chance to fraudulent promoters to exploit the public money. As a result, many spurious companies were created which were formed only to disappear resulting in loss to the investing public.

The English parliament, therefore, passed an act known as the Bubbles Act of 1720, which, instead of prohibiting the formation of fraudulent companies, made the very business of companies illegal. This Act made no attempt to put joint stock companies on a proper basis so as to promote the interest of the industry and trade and also to protect the investors. An almost frenetic boom in company floatation’s, which led to the famous South Sea Bubble , marked the first and second decades of the eighteenth century. Most company promoters were not particularly fussy about whether they obtained charters (an expensive and dilatory process), and those who felt it desirable to give their projects this hallmark of respectability found it simpler and cheaper to acquire charters from moribund companies, which were able to do a brisk trade therein.

History of Modern Company Law:

The history of modern company law in England began in 1844 when the Joint Stock Companies Act was passed. The Act provided for the first time that a company could be incorporated by registration without obtaining a Royal Charter or sanction by a special Act of Parliament. The office of the Registrar of Joint Stock Companies was also created. But the Act denied to the members the facility of limited liability. The English Parliament in 1855 passed the Limited Liability Act providing for limited liability to the members of a registered company. The act of 1844 was superseded by a comprehensive Act of 1856, which marked the beginning of a new era in company law in England. This Act introduced the modern mode of creating companies by means of memorandum and articles of associations.

The first enactment to bear the title of Companies Act was the companies Act, 1862. By these acts some of the modern provisions of the company were clearly laid down. First of all, two documents, namely, (a) the memorandum of association, and (b) articles of association formed the integral part for the formation of a limited liability company. Secondly, a company could be formed with liability limited by guarantee. Thirdly, any alteration in the object clause of the memorandum of association was prohibited. Provisions for winding up was also introduced. Thus, the basic structure of the company as we know had taken shape. Sir Francis Palmer described this Act as the Magna Carta of co-operative enterprises. But the companies (Memorandum of Association) Act, 1890 made relaxation with regard to change in the object clause under the leave of the court obtained on the basis of special resolution passed by the members in general meeting. Then the liability of the directors of a company was introduced by the Directors’ liability Act, 1890 and the compulsory audit of the company’s accounts was enforced under the Companies Act, 1900.

The concept of private company was introduced for the first time in the companies Act, 1908 (the earlier ones were called public companies). Two subsequent acts were passed in 1908 and 1929 to consolidate the earlier Acts. The companies Act 1948, which was the Principal Act in force in England was based on the report of a committee under Lord Cohen. This Act introduced inter alia another new form of company known as exempt private company.

Another outstanding feature of 1948 Act was the emphasis on the public accountability of the company. Generally recognized principles of accountancy were given statutory force and had to be applied in the preparation of the balance sheet and profit and loss account. Further, the 1948 legislation extended the protection of the minority (Section 210) and the powers of the Board of Trade to order an investigation of the company’s affairs (section 164- 175); and for the first time the shareholders in general meeting were given power to remove a director before the expiration of his period of office. The independence of auditor’s vis-à-vis the directors were strengthened.

Charter Companies

These were a type of corporations that evolved in the early modern era in Europe. They enjoyed certain rights and privileges and were bound by certain obligations, under a special charter granted to them by the sovereign authority of the state, such charter defining and limiting those rights, privileges, and obligations and the localities in which they were to be exercised. The charter usually conferred a trading monopoly upon the company in a specific geographic area or for a specific type of trade item.

The earliest English chartered companies were the Merchant Adventurers and the Merchant Staplers. Such early companies were regulated companies, deriving the principles of their organization from the medieval merchant guilds. The regulated company was a corporation of merchants, each of whom traded on his own account but was subjected to a rigid set of common rules that regulated his operations within narrow limits.

A great increase in the number and activities of the chartered companies took place during the second half of the 16th century, when the English, French, and Dutch governments were ready to assist trade and encourage overseas exploration. Changes also occurred in the organization of chartered companies. The regulated company, which had been very convenient for trading with countries where conditions were stable, was not so suitable for ventures to remoter lands, where the risks, commercial and political, were greater. To meet the requirements of the new trading conditions, the joint-stock organization, in which the capital was provided by shareholders who then participated in the profits from the joint enterprise, was evolved. In some cases, the companies alternated between one form and the other. In all charters, provisions were inserted to secure the "good government" of the company.

In England two of the earliest and most important of overseas trading companies were the Muscovy Company (1555) and the Turkey Company (1583). They had important effects on international relations, for they maintained English influence and paid the expenses of ambassadors sent to those countries. Other English companies were established in this period for similar trading ventures: the Spanish Company (1577, regulated); the Eastland Company, for trade with the Baltic (1579, regulated); and the French Company (1611, regulated). The first company for African trade was founded in 1585, and others were granted charters in 1588, 1618, and 1631. But it was the chartered companies that were formed during this period for trade with the Indies and the New World which had the most wide-reaching influence. The East India Company was established in 1600 as a joint-stock company with a monopoly of the trade to and from the East Indies. Its political achievements form a large part of the history of the British Empire, and its economic power was enormous, contributing substantially to the national wealth and causing the company to be the centre of most of the economic controversies of the 17th century.

In North America the English chartered companies had a colonizing as well as a trading purpose. Although the Hudson's Bay Company was almost wholly devoted to trade, most companies--such as the London Company, the Plymouth Company, and the Massachusetts Bay Company--were directly involved in the settlement of colonists. Elsewhere, chartered English companies continued to be formed for the development of new trade--for instance, the short-lived Canary Company in 1665, the Royal African Company in 1672, and the South Sea Company in 1711. There was frantic speculation in the shares of the South Sea Company, resulting in a severe setback to joint-stock enterprise. The Bubble Act of 1720 was designed to make it much more difficult to obtain a charter.

In France and the Netherlands, chartered companies had also been used for similar purposes by the governments. In France, from 1599 to 1789, more than 70 such companies came into existence. Under J.B. Colbert the French East India Company was founded (1664), and the colonial and Indian trade was placed in the hands of chartered companies in which the king himself had large financial interests. The French companies, however, were largely destroyed by the "Mississippi scheme" of John Law, in which trading companies like the Senegal and French East India companies were incorporated in a plan to take over the public debt. The financial crash in 1720 destroyed public confidence, and although a new Company of the Indies existed until 1769, the chartered company was virtually dead. In the Netherlands the Dutch East India and West India companies were the basis of the commercial and maritime supremacy of the Dutch in the 17th century. The success of the East India companies caused the foundation of the Ostend Company, whereby the Holy Roman emperor Charles VI sought unsuccessfully to acquire the trade of England and the Netherlands.

The development of the modern limited-liability company or corporation under successive companies acts led to a decline in the importance of chartered companies. Some of the older ones still exist, however, including the Hudson's Bay Company.

Merchant Adventurers and the growth of Domestic Companies

The first type of English organization to which the name company was generally applied was that adopted by merchant adventurers for trading overseas. Royal Charters conferring privileges on such companies are found as early as the fourteenth century, but it was not until the expansion of foreign trade and settlement in the sixteenth century that they became common. The earliest types were the so-called regulated companies which were virtually extensions of the guild principle into the foreign sphere and which retained much of the ceremonial and freemasonry of the domestic guilds. Each member traded with his own stock and on his own account, subject to obeying the rules of the company, and incorporation was not essential since the trading liability of each member would be entirely separate from that of the company and the other members. Charters were nevertheless obtained largely because of the need to acquire a monopoly of trade for members of the company and governmental power over the territory for the company itself.

At a later stage, however, the partnership principle of trading on joint account was adopted by the regulated companies which became joint commercial enterprises instead of trade protection associations. At first, in addition to the separate trading by each member with his own stock, and later instead of it, they started to operate on joint account and with a joint stock.

This process can be traced in the development of the famous East India Company, which received its first charter in 1600, granting it a monopoly of trade with the Indies. Originally any member could carry on that trade privately, although there also existed a joint stock to which members could, if they wished, subscribe varying amounts. At first this joint stock and the profits made from it were re-divided among the subscribers after each voyage. From 1614 onwards, however, the joint stock was subscribed for a period of years, and this practice subsisted until 1653 when a permanent joint stock was introduced. It was not until 1692 that private trading was finally forbidden to members. Until this date, therefore, the constitution of the East India Co. represents a compromise between a regulated company, formed primarily for the government of a particular trade, and the more modern type of company, designed to trade for the profits of its members. This new type was called a joint stock company, a name which persists until the present day, although few of those who use it realize that it was adopted to distinguish the companies to which it relates from a once normal, but now obsolete, form.

Growth of Domestic Companies

By the middle of the seventeenth century powerful monopolistic companies were already coming to be regarded as anachronisms; it was realized that their governmental powers were properly the functions of the State itself and that their monopolies were an undue restraint on the freedom of trade. Most of them atrophied; but some survived for a time by converting, as did the Levant and Russia companies, from the joint stock to the regulated form (a strange reversal of the normal trend designed to allow greater freedom to their members) and others, like the Royal Africa Company, by completely relinquishing their monopolies. After the Revolution of 1688, it seems to have been tacitly 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.

The decline in the foreign-trading companies was, however, accompanied by an immense growth in those for domestic trade. Some of these were powerful corporations chartered under statutory powers (such as the Bank o England) the objects of which resembled those of the public corporations of the present day, but most were public companies in the sense that they invited the participation of the investing public. As regards these, the close relation between incorporation and monopoly was still maintained, for most companies were incorporated in order to work a patent of monopoly granted to an inventor.By the end of the seventeenth century some idea had been gleaned of one of the primary functions of the company concept- the possibility of enabling the capitalist to combine with the entrepreneur.

Share dealings were common and stock-broking was a recognised profession, the abuses of which the legislature sought to regulate as early as 1696. But it would be entirely misleading to suggest that there was in any sense a company law; at the most there was embryonic law of partnership which applied to those companies which had not become incorporated and, with modifications required by the terms of the charter and the nature of incorporation, to those which had. From the end of the seventeenth century the term directors began to supersede assistant governors. But the terminology varied and still varies.

Article by Mr. Rahul Kumar Singh - 5th Year - National Law Univerity, Jodhpur. Article appeared in the legalservicesindia.com