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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.
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Origin and Evolution of the Modern Company Law
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The
author can be reached at:
rks_nlu@legalserviceindia.com /
