Historical development of the concept of Corporate Law

By | November 6, 2019
concept of Corporate Law

The history of modern Corporate Law in England began in 1844 when the Joint Stock Companies Act was passed. Read this article to understand the Historical development of the concept of Corporate Law.

Introduction

There was a time when people used to opt for the sole proprietorship or partnership as this form of business-suited the most and people were more reluctant to invest their money and earn profit for themselves out of it with the help of these forms of business. These kinds of business do exist in today’s world as well but they are not preferable forms that one would like to opt for doing business. This is because the technology had advanced to the next level, change in consumers can be seen and so on.

All these reasons have the nature of demanding a huge fund and since only a few people form the part of a partnership or sole proprietorship pursuant to which, it becomes difficult for them to manage the funds. Hence, in order to fulfil all those needs of the business which was not possible with the help of the above-mentioned forms, there came a concept of another form of business known as the company.

Not only this but along with the passage of time, the shift from the traditional goods was also seen to the technological products as well as the capital goods. This form required a lot of labour as well as the capital and it was next to impossible for these handfuls of people to supply all the required things.

There were a lot of associations which were prevalent in the market as per the medieval law, which help us to trace the evolution of the theme of incorporation from that medieval period. In the very starting, it was thought that the incorporation can be related only with the concepts of public bodies as well as ecclesiastical in the forms of chapters, boroughs along with the monasteries. These forms were having the personality of the juristic person, which was provided to them by the charter passed by the crown.

CORPORATION AS PER THE LAW IN ROME

The Romans were not having a very wide concept of legal personality when it comes to the context of the entity while the entity has its own duties and rights. There is no particular set of terms and conditions for any legal person or corporation. However, they did provide some particular capacities as well as powers to the certain aggregation of persons.

In addition to it, they also endowed the legal notion that was underlying and was also hovered between all the corporate powers as per the concepts of modern law. The modern law also gave an insight into the use of powers by the corporate persons. But, all these collective powers can be traced from the acts of the state.

ENGLISH COMPANY LAW

In the very starting, it was thought that the incorporation can be related only with the concepts of public bodies as well as ecclesiastical in the forms of chapters, boroughs along with the monasteries. These forms were having the personality of the juristic person, which was provided to them by the charter passed by the crown. However, at the very same time in the sphere of the commercial world, the main associations of the medieval time formed the part of the guilds of merchants as well as for those organisations that were possessing some features of the modern-day companies but also corresponded to the associations for the protection of trade roughly.

The title of the company was associated with the adventures of merchants for the purpose of overseas trading. They formed the very first type of organizations to which the name of the company was applied. It was in fourteenth century when the royal charter was passed in order to confer privileges on such companies. But these privileges were extended to these companies only till the time when the foreign trade got extended along with their settlement during the sixteenth century when these companies or organizations became part of commons.

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 a 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 calls on the existing members rather than by invitations to the public.

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 the association formed an 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 the 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 a 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 the company known as an exempt private company.

Another outstanding feature of the 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 the 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 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 trading, 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 a 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 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.


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Akriti Gupta
Author: Akriti Gupta

Akriti Gupta is a fourth-year learner of BBA LLB programme in Symbiosis Law School, NOIDA. She has done moots and has various publications in her name. Mooting and research papers have helped her a lot to enhance her researching and drafting abilities.

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