History of Passage of Comprehensive Companies Legislation in India

During the 11th to 13th Centuries, the associations of merchants called the Merchant Guilds
obtained charters from the Crown mainly to secure for its members a monopoly in respect
of a particular trade or commodity. Each member traded on his own account but subject to
the regulations of his Guild. Gradually there grew up trading on joint account subject to the
rules of the Guild. This joint account trading was either known as Commenda or Societas.
In Commenda, a trader lent money to another for trading, got a share of the profit and in
case of loss his liability was limited to the money lent. The financier was somewhat a
sleeping partner with limited liability. In Societas all the members took part in the
management of the trade and had unlimited liability. The Societas had now matured into
partnership. Commenda is still to be found in the Continental countries.

In the 14th Century, the word “Company” was adopted by certain merchants for trading
overseas. By Royal Charters these merchants were given certain privileges in trading. This
was more or less an extension of the Guild in foreign trade. By the 16th Century such
Charters became common granting monopoly of trade to members of the company and
Governmental power over the territory to the company. These companies were called
“regulated companies”.

By the end of the 16th century these individuals traded separately with their funds or stock,
as also jointly with other members of the company. Gradually the members gave up
separate trading and diverted their stock to the joint trading. Thus there became joint fund
or joint stock with which the members started trading on a joint account. The regulated
companies thus became joint commercial enterprises instead of trade protection
associations.

East India Company was established by a Charter in 1600. It had monopoly of trade in the
Indies; its members could carry on trade individually and had the option to subscribe to the
joint fund or stock of the Company. After each voyage the profits made, together with the
subscription amount, were re-divided among the members. In 1614, it was decided that the
subscription should be for a number of years. In 1653, a permanent subscribed fund was
introduced. Thus, there came into existence a permanent joint stock of the East India
Company.

In 1692, private trading by the members of the Company was prohibited. The term “Joint
Stock Company” was used at that time in relation to such a company to distinguish it from
a “regulated company” whose members had the freedom to trade separately and had options
to subscribe to the joint fund or stock of the company. The term “Joint Stock Company” is
now obsolete.

The principle of limited liability of members of non-trading corporations was accepted in

the 15th Century and subsequently in case of trading companies. This was important for
the company as for the separate debts of members the properties of the company could be
attached. Most of the Charters conferred power on the company to make calls on the
members and, as such, the limited liability of members was illusory. Moreover, the
creditors could proceed directly against the members if the company did not take action.
To avoid such unlimited liability the members used to enter into agreements with the
company that the company would have no power to make calls on them.

Monopolistic powers of company were not favoured and after the Revolutions of 1688 the
Crown, it was assumed, had the power to grant a Charter of incorporation but a
monopolistic or other special privilege could be conferred on a company only by a statute.
Gradually the foreign companies declined and the domestic companies grew up. The
domestic companies invited the public to subscribe to its capital but in other respects were
similar to public corporations enjoying monopoly. The Bank of England is an instance of
such a corporation. These companies were extensions of the Guilds and partnerships.

The first 20 years of the 18th Century witnessed the flood of speculative and often
fraudulent schemes of company flotations of which the notorious scheme of the South Sea
Company is the best-known example. The South Sea Company had a scheme to acquire
virtually the whole of the national debt by purchasing the holdings or exchanging the
holdings for the stocks of the company. The possession of interest-bearing loan owned by
the State was a basis upon which the company might raise vast sums of money for extension
of its trade. But the company had very little trade to expand. It had paid a huge sum of
money for obtaining the Charter in competition with the Bank of England. Ultimately, the
company failed. When such speculation and gambling were at its height and a large number
of companies came into existence the Parliament passed the Bubble Act, 1720. The Act
prohibited generally the use of corporations unless the corporation was authorised to act as
such by an Act of Parliament or Royal Charter, but exempted all undertakings established
before 24 June 1718. Proceedings were started against some of the companies operating
under obsolete Charters with a view to forfeiting the Charters. This led to a widespread
panic. The stock of the South Sea Company lost its value, and many of the companies
disappeared like the bursting of the bubbles.

To avoid the rigours of the Bubble Act, 1720, large partnerships were formed from the
beginning of 19th Century by a deed of settlement. The parties to the deed agreed to be
associated with a joint fund or stock divided into a number of transferable shares and agreed
to alterations of the provisions of the deed by a specified majority. They delegated the
management to the directors. The property was vested in a body of trustees. The trustees
were given power to sue or be sued on behalf of the company as the courts did not at that
time permit a suit to be filed in the firm’s name.

In 1825, the Bubble Act was repealed. It made a provision enabling the Crown to declare
the extent of the members’ liability on the grant of incorporation. To meet the needs of the
business community, the Trading Companies Act of 1834 was passed empowering the
Crown to confer by Letters Patent all or any of the privileges of incorporation, except
limited liability, without actually granting a Charter. This enabled companies to sue and be
sued in names of their officials. It was a first general Act requiring public registration of
members, but it expressly preserved their unlimited liability. The Chartered Companies
Act, 1837, re-enacted the 1834 Act but provided that personal liability of members might
be expressly limited by the Letters Patent to a specified amount per share.

In 1844, the Joint Stock Companies Act was passed. (1) It provided for the registration of
all new companies with more than 25 members or with shares transferable without the
consent of all the members. (2) It provided for incorporation by registration. Such
registration was provisional, authorising the company to function for a limited purpose.
Thereafter, on filing a deed of settlement containing the prescribed particulars and other
documents, the company was finally incorporated. (3) The Act created the office of the
“Registrar of Companies” and required particulars of the company’s constitution, changes
therein and annual returns to be filed with the Registrar of Companies so that there would
be full publicity. Limited liability was not granted, but it was provided that after transfer of
shares a member would have no liability on the expiry of three years and that creditors had
to proceed first against the assets of the company. A separate Act of 1844 made provisions
for winding up of companies and application of bankruptcy laws.

In the middle of the 19th Century the limited liability concept was mooted and there were
various criticisms. The proposed statute introducing the limited liability concept was
branded as “The Rogues’ Charter” and that the Parliament was devising means for the
encouragement of speculation, over-trading and swindling. If men were allowed to
subscribe for a limited amount in the capital of a company and be no further liable, a spirit
of gambling would develop to the detriment of the country and its tradition of sober
judgement. It would encourage excessive and reckless enterprises and open the door to
dishonesty and fraud.

In practical experience it has been found that during over century-and-half, to be precise,
in the last 160 years the critics of the limited liability concept were wrong and that the
limited liability concept has shown expansion and achievement on a scale that the critics
could hardly have dreamt of. Such expansion and achievement, in the considered view of
leading economists, could not have been attained without the limited liability. The
institution has survived and flourished in spite of isolated cases of dishonesty and fraud.
The legislature and judiciary have helped the business to grow and at the same time
protecting the interests of the public.

In 1855, the Limited Liability Act was passed providing for limited liability of the members
of a company on complete registration if (1) the company had at least 25 members holding
£ 10 shares paid up to the extent of 20%., (2) not less than three-fourths of the nominal
capital was subscribed, (3) “Limited” was added to the company’s name, and (4) the Board
of Trade’s approval obtained for appointment of auditors. The directors were made
personally liable if they paid dividend knowing the company to be insolvent or made loans
to the members and the company had to wind up and it was found that three-fourths of the
capital was lost.

The Act was repealed within a few months by the Joint Stock Companies Act, 1856. It
omitted the provisional registrations and the deed of settlement and introduced the
memorandum and articles of associations and made provisions for winding up. This Act
allowed incorporation with limited liability and any seven or more persons could register a
memorandum of association. It omitted some of the restrictive provisions of the 1855 Act.
The Joint Stock Companies Act, 1856, was amended in 1857. In 1862, the law was codified.
There were several amendments, and in 1908 the Companies Consolidation Act was
passed. Thereafter several amendments were made and in 1929 the Act was again
consolidated.

The English Companies Act, 1948, was passed consolidating the law and thereafter
amended and consolidated in 1967, 1976, 1980, 1981 and 1983.

The English Companies Act, 1985 has again consolidated the English Companies Act. The
English Companies Act, 1989 has further inserted and substituted several sections in the
English Companies Act, 1985. It is significant to note that the English Companies Act,
1985 as amended by the English Companies Act, 1989 is not a complete code in itself. The
provisions relating to companies in the UK are now contained in the Companies and other
related Acts [explained hereinafter]. All these Acts are to be considered to have a complete
picture of the provisions relating to Companies. The Companies Act in the UK has been
rapidly changing and will change to harmonise its provisions with the “Directives” of the
European Economic Community (EEC) to achieve the economic integration of its
members.

In India, in 1850, an Act for “Registration of Joint Stock Companies” was passed in line
with the Companies Act, 1844. Under the 1850 Act, the Supreme Courts of Calcutta,
Madras and Bombay were the registering authorities of companies. The Act permitted
registration of an unincorporated partnership formed under a deed and containing provision
for transfer of shares in its stock or business without the consent of all the partners, and of
non-trading companies, with or without limited liability. The privilege of limited liability
was not granted to banking and insurance companies until the Act of 1860. The Indian
Companies Act, 1866, was passed consolidating and amending “the laws relating to
incorporation, regulation and winding up of trading companies and other associations”. The
Act was amended and the law was consolidated from time to time keeping pace with the
English Acts.

The, Companies Act, 1956 (1 of 1956) was a consolidation of the existing laws, statutory
rules and certain principles laid down in decisions of the courts in India and in England.
The 1956 Act substantially incorporated provisions of the English Companies Act, 1948
which consolidated the principles of equity. Behind the English as well as Indian
Companies Acts, therefore, there is a general body of laws and equity principles and it is
there that most of the fundamental principles will be found and, as such, they are helpful in
understanding the present-day Company Law. So far as the laws have been consolidated
the old decisions will be binding in appropriate cases.

The Indian 1956 Act is mainly based on the English Companies Act, 1948 and the case
laws. There has since been substantial shift of principles and concepts from those contained
in and developed around the English Companies Act, 1948. There is now a wide gulf
between the Indian 1956 Act and the English Companies Act, 1985 with the associated
enactments.

In the last over a decade, an attempt has, however, been made to narrow this gulf by
amending the Companies Act, 1956 and associated corporate Acts, eg, the Securities and
Exchange Board of India Act, 1992, SEBI Rules, Regulations, etc., to somewhat keep pace
with the English Companies Acts and other associated corporate legislations in the
globalised economic scenario.