Part 2 History of Companies in the British isles
With the development of society in medieval England, the Crown began granting charters of incorporation in accordance with common law. The charters created “corporations” that were capable of perpetual succession and distinct, in law, from the natural persons who were its members at that time. As trade developed towards the end of the sixteenth century the Crown extended this common law right to commercial companies.
As a consequence of a growth in trade at the beginning of the seventeenth century, a number of commercial trading companies were granted charters, either by the Crown or by an Act of Parliament. Examples included the Levant Company, the East India Company, the Hudson Bay company and the South Sea Company.
The costs of obtaining a charter or creating a company by act of parliament was prohibitive for many and as a consequence a number of “companies” were formed by “contract”. The contract took the form of an elaborate deed of settlement regulating the relationship between members and providing for the transfer of shares. These companies remained partnerships and the liability of the members was unlimited.
In return for a £7 million loan to finance a war with France, the House of Lords granted a monopoly over trade with South America to the South Sea Company in 1720. The company underwrote the English national debt of £30 million with a promised return of 5% interest paid by the government. As a result the value of the South Sea Company increased tenfold. With the boom in the stock market a large number of non-chartered companies were formed, many with fraudulent or lunatic purposes. For example, companies were created to buy the Irish bogs and to manufacture a gun that fired square cannon balls. A company was promoted “For carrying-on an undertaking of great advantage but no-one to know what it is”. After receiving £2,000 from subscribers the promoter emigrated.
In 1720 under pressure from the South Sea Company the government passed The Bubble Act which made non-chartered companies illegal. From 1720 only companies incorporated by Royal charter or Act of Parliament were allowed to trade. The South Sea Company saw the price of its shares soar but shortly afterwards the bubble burst and the stock market crashed with a large loss of money and property. Edward Gibbon, the grandfather of the famous historian of the Roman Empire, saw his fortune disappear overnight.
Scottish common law allowed the formation of companies with transferable shares, managed by directors and having a legal personality separate from their members. Whilst The Bubble Act of 1720 applied to Scotland it had little practical effect as the companies formed under common law were still allowed to trade.
The Bubble Act held back the development of English trade and industry to such an extent that in 1825 it was repealed. The Crown was then obtained permission to grant limited liability when awarding future charters.
After the repeal of the Bubble Act the continued growth of British industry brought an increasing demand for joint stock companies. In order to meet this demand the Crown was given powers under the Chartered Companies Act 1837 to grant “letters patent” (an open letter granted by the Crown) to a body of persons associated together for a trading purpose. After registering a deed of partnership and dividing the capital into shares which allowed for transfers, the persons concerned were granted limited liability. The association to which the letters patent were granted did not become a body corporate.
The Joint Stock Companies Registration and Regulation Act was passed in 1844, which created a Registrar of Joint Stock Companies and allowed companies to be incorporated. However, they were treated like partnerships and the members did not enjoy limited liability for the company’s debts.
A member’s liability was finally restricted to the amount unpaid on their shares by the introduction of Limited Liability Act of 1855.
Parliament passed the Joint Stock Companies Act in 1856, which replaced the deed of settlement with the memorandum of association and the articles of association. Since this date Parliament has passed a number of Acts modifying the basic structure of a company without fundamentally altering it. These include: The Companies Act 1900, which introduced the compulsory audit of accounts, The Companies (Consolidation) Act 1908 which brought together the various Acts of Parliament passed since 1856 and The Companies Act 1948 which introduced far reaching changes to company accounts. A further major consolidation resulted in the Companies Act 1985 and the latest consolidated legislation is the Companies Act 2006. Some provisions of the Companies Act 1985 dealing with company investigations, the issue of prospectus’ and floating charges (and receivers in Scotland) remain in force.