The history and development of Modern Company Law in India is closely linked with that of England and for that reason it becomes essential to have a brief account of the history of English Company law for proper appreciation of our law. Brief History of Company Law in England The British came to India in 1600 as traders in the form of The East India Company. Attracted by the stories of the fabulous wealth of India and forfeited by the adventurous maritime activity of the Elizabethan era, Englishmen were eager to establish commercial contacts with the East. To facilitate such a venture, some of the enterprising merchants of London formed themselves into a company. They secured for it a Charter from Queen Elizabeth in December, 1600, which settled its constituents, the powers and privileges. 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 and started trading in corporate form. The memberships of each such concern being very large, the management of business was left to a few trustees resulting in 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 floatations, 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). 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.
The history of modern company law in England begins in 1825 when the Bubble Act was repealed by the Bubble Companies Act. After this the commercial need for general admission of joint stock enterprise became pressing, and it became clear that if the legislature did not act, the future development of companies would be an evolution of the unincorporated company, with its cumbrous/cumbersome constitution, its confused legal status and the great disadvantage of merely contractual limitation of liability of members. In 1844, as a result of Gladstone’s initiative as President of Board of Trade, Parliament passed the Joint Stock Companies Act. 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 1855, 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. Lastly provisions for winding up was also introduced. Thus, the basic structure of the company as we know had taken shape. 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 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. The outstanding feature of the 1948 Act was the emphasis on the public accountability of the company. Generally recognised 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 (Sections 164—175); and for the first time the shareholders in general meeting were given power to remove a director before the expiry of his period of office. The independence of auditors vis-a-vis the directors was strengthened. The 1948 Act was amended by the Companies (Amendment) Act, 1967. The Amending Act was based upon the report and recommendations of the Jenkins Committee presented in 1962. The 1967 Act adopted and considerably extended in some respects, the recommendations of the Committee as to disclosure. The Act abolished the exempt private company, and required all limited companies to file accounts. More stringent provisions were imposed in relation to director’s interests in the company and disclosure thereof. The Companies Act, 1976 attempted to remedy a variety of defects which had become evident in the application of the Acts of 1948 and 1967. The 1976 Act further strengthened the requirements of public accountability and those relating to the disclosure of interests in the shares of the company.
The Companies Act, 1980 was a major measure of company law reform in England as insider dealing was made a criminal offence. The shareholders were given a right of pre-emption in the case of new issues of shares in specified circumstances. Dealings between the directors and their companies became greatly restricted and maximum financial limits were introduced for such dealings. The protection to the minority shareholders was extended by enabling them to file petition for relief, if their position was unfairly prejudiced. The Companies Act, 1981 introduced other important changes. For the purposes of accounting and disclosure, companies were divided into small, medium-sized and other companies and their disclosure requirements were differentiated accordingly. The law relating to the names of companies was simplified by the abolition, in principle, of the approval of the name by the Department of Trade. The company was authorised, subject to certain conditions, to issue redeemable equity shares and to purchase its own shares. The 1981 Act further abolished the register of business names which had to be kept under the Registration of Business Names Act, 1916. Effective steps were taken to prepare consolidating measures relating to the Companies Acts 1948 to 1981. In November, 1981, the Department of Trade published a consultative document entitled “Consolidation of Companies Acts”. In this document the various methods of consolidation and their relative advantages for the practice were discussed. The whole of the existing statute relating exclusively to companies was consolidated in the Companies Act, 1985, and the Companies Acts 1948 and 1983 replaced by introduction of the Companies Consolidation (Consequential Provisions) Act, 1985. At the same time two minor consolidating enactments, the Business Names Act, 1985 and the Company Securities (Insider Dealing) Act, 1985, were passed to consolidate certain provisions of the Companies Acts 1980 and 1981, which affected sole traders, partnerships and persons other than companies as well as companies regulated by the Companies Act, 1985. The whole of the present statute, therefore, was contained in the Companies Act, 1985 and the two minor consolidating enactments together with the temporary and transitional provisions of the Companies Consolidation (Consequential Provisions) Act, 1985, all of which have come into force from 1st July, 1985. The U.K. company law has further been amended and has been substituted by U.K. Companies Act, 2006 (which received Royal Assent on November 8, 2006). The Act has been brought into force in stages and circumscribes enhanced duties of directors, simpler regime for private companies, increased use of ecommunication, enhanced auditor liabilities etc.
Development of Indian Company Law Company Law in India, as indicated earlier, is the cherished child of the English parents. Our various Companies Acts have been modelled on the English Acts. Following the enactment of the Joint Stock Companies Act, 1844 in England, the first Companies Act was passed in India in 1850. It provided for the registration of the companies and transferability of shares. The Amending Act of 1857 conferred the right of registration with or without limited liability. Subsequently this right was granted to banking and insurance companies by an Act of 1860 following the similar principle in Britain. The Companies Act of 1856 repealed all the previous Acts. That Act provided inter alia for incorporation, regulation and winding up of companies and other associations. This Act was recast in 1882, embodying the amendments which were made in the Company Law in England upto that time. In 1913 a consolidating Act was passed, and major amendments were made to the consolidated Act in 1936. In the meantime England passed a comprehensive Companies Act in 1948. In 1951, the Indian Government promulgated the Indian Companies (Amendment) Ordinance under which the Central Government and the Court assumed extensive powers to intervene directly in the affairs of the company and to take necessary action in the interest of the company. The ordinance was replaced by an Amending Act of 1951. 14 EP-CL The Companies Act, 1956 – Based on Bhaba Committee Recommendations The Companies Act, 1956 was enacted with a view to consolidate and amend the earlier laws relating to companies and certain other associations. The Act came into force on 1st April, 1956. This Companies Act was based largely on the recommendations of the Company Law Committee (Bhabha Committee) which submitted its report in March, 1952. This Act was the longest piece of legislation ever passed by our Parliament. Amendments have been made in this Act periodically. The Companies Act, 1956 consisted of 658 Sections and 15 Schedules. Full and fair disclosure of various matters in prospectus; detailed information of the financial affairs of company to be disclosed in its account; provision for intervention and investigation by the Government into the affairs of a company; restrictions on the powers of managerial personnel; enforcement of proper performance of their duties by company management; and protection of minority shareholders were some of the main features of the Companies Act, 1956. The Companies Act, 1956 had undergone changes by amendments in 1960, 1962, 1963, 1964, 1965, 1966, 1967, 1969, 1971, 1977, 1985, 1988, 1996, 1999, 2000, 2002 (Amendment), 2002 (Second Amendment), and 2006. The Companies Act, 1956 was also amended pursuant to the enactment of the Depositories Act, 1996. Based on the recommendations of Shastri Committee, the Companies (Amendment) Act, 1960 introduced several new provisions relating to various aspects of company management which were overlooked in the 1956 Act. The Companies (Amendment) Act, 1963 provided for the appointment of a Companies Tribunal and constitution of the Board of Company Law Administration. It also empowered the Central Government to remove managerial personnel involved in cases of fraud, etc. Based on the recommendations of the Vivian Bose Commission, the Companies (Amendment) Act, 1965 introduced some major changes, such as clear definition of the main and subsidiary objects of a company in its Memorandum of Association; Strengthening the provisions relating to investigation into the affairs of the company, etc. The Companies Act was further amended twice in 1966. Two important changes were introduced by the Companies (Amendment) Act, 1969. The institutions of managing agents and secretaries and treasurers were abolished with effect from April 3, 1970. Secondly, contributions by companies to any political party or for any political purpose were prohibited. The Companies (Amendment) Act, 1974 which came into force from February 1, 1975 had introduced some important and major changes in the Companies Act, 1956. The object of the Amendment Act was to inject an element of public interest in the working of the corporate sector. The Companies (Amendment) Act of 1977 brought about certain changes in Sections 58A, 220, 293, 620 and 634A of 1956 Act. The Companies (Amendment) Act, 1985: The amending Act substituted Section 293A of Companies Act, 1956 with a new section permitting Non-Government companies to make political contributions, directly or indirectly. With a view that legitimate dues of workers rank pari passu with secured creditors in the event of closure of the company and rank above even the dues to Government, Sections 529 and 530 of the Companies Act, 1956, were amended and a new Section 529A was introduced. Lesson 1 Introduction 15 The Companies (Amendment) Act, 1988: Based on the recommendations made by the Expert Committee (Sachar Committee), the Companies (Amendment) Act, 1988 substantially amended the Companies Act, 1956 in order to streamline some of the existing provisions of the Companies Act, 1956 and to ensure better working and administration of the Act. The important changes introduced by the Amendment Act of 1988 were: Definition of Secretary brought in line with the definition of ‘Company Secretary’ in the Company Secretaries Act, 1980 and includes an individual possessing the prescribed qualifications. The concept of company secretary in practice was introduced for the first time in the Companies Act. The Amended Act, among other things, also set up an independent Company Law Board to exercise such judicial and quasi-judicial functions, earlier being exercised either by the Court or the Central Government. The Depositories Act, 1996 made the following major amendments to the Companies Act, 1956:- (1) Every person holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company. (2) Stamping of transfer instruments is not required where both the transferor and transferee are entered as beneficial owners in the records of a depository. (3) The securities of a company other than a private company have been made freely transferable. The transfer has to be effected immediately by the company/depository. (4) The register of members shall indicate the shares held by a member in demat mode but such shares need not be distinguished by a distinctive number. (5) Company to give in the offer document option to the investor to ask for issue of securities in demat mode. The Companies (Amendment) Act, 1999 made the following major changes to the Companies Act, 1956:- — Companies allowed to issue Sweat Equity shares and to buy-back their own securities. — Facility for nomination provided for the benefit of share/debenture/deposit holders. — An Investor Education and Protection Fund to be established. — National Advisory Committee on Accounting Standards for companies to be established. — Prior approval of Central Government not required for inter-corporate investment/lending proposals subject to certain conditions. Further the Companies (Amendment) Act, 2000 made the following major amendments: (1) Private Companies and Public Companies to have a minimum paid-up capital of Rupees one lakh and five lakh respectively. (2) Change of place of registered office from the jurisdiction of one Registrar of Companies to another Registrar of Companies within the same state requires confirmation from the Regional Director. (3) Provisions relating to deemed public companies became inoperative and a new provision relating to conversion of a public company to a private company inserted in the Companies Act, 1956. (4) SEBI given powers regarding issue and transfer of securities and non-payment of dividend by listed public companies. (5) Certain measures included for protecting the interest of small deposit holders in a company. 16 EP-CL (6) Preferential offer/Private placement of securities to 50 (fifty) persons or more treated as public issue. This shall not apply to a preferential offer made by public financial institutions and NBFCs. (7) Provisions relating to shelf-prospectus and information memorandum, issue of equity share capital with differential rights as to dividend, voting or otherwise included. (8) Every listed company making initial public offer of any security for a sum of Rupees ten crores or more will have to issue the same only in a dematerialised form. The Companies (Amendment) Act, 2002 and Companies (Second Amendment) Act, 2002 made the following changes to the Companies Act, 1956:- 1. New Part IXA consisting of Section 581A to 581ZT relating to Producer Companies inserted . 2. The existing Company Law Board is proposed to be dissolved and in its place a National Company Law Tribunal (Tribunal) is to be constituted. 3. Appeals against the orders of the Tribunal can be filed with the Appellate Tribunal. Further appeal against the orders of the Appellate Tribunal would lie to the Supreme Court. 4. The Board for Industrial and Financial Reconstruction is to be abolished and SICA will be repealed. 5. Transfer of all the powers from the BIFR to the Tribunal. 6. Transfer of certain powers of the High Court to the Tribunal. 7. Greater role for professionals in the administration of Company Law. 8. Transfer of powers relating to winding up, mergers and amalgamations from Court to the Tribunal. The Companies (Amendment) Act, 2006 inserted new Sections 610B, 610C, 610D and 610E and and also certain sections pertaining to Director Identification Number (DIN). Salient features of the provisions of Companies (Amendment) Act, 2006 are as follows: — DIN to be obtained by all existing directors and every other person, intending to become a director. — The applications, balance sheet, prospectus, return, declaration, memorandum and articles of association, particulars of charges or any other particulars or document required to be filed or delivered, are to be filed in electronic form . — The document, notice, any communication or intimation, required to be served or delivered under the Act to the Registrar of Companies, should be served or delivered through electronic form . — Applications, balance sheet, prospectus, return, register, MOA and AOA, particulars of charges or any other document and return filed shall be maintained by Registrar in electronic form . — Central Government may provide such value added services through the electronic form . — All the provisions of Information Technology Act, 2000 relating to the electronic records, in so far as they are not inconsistent with the Companies Act, shall apply to the records in electronic form.
