Chapter 1
Historical Development of Company Law
Chapter Summary
1
THE CONCEPT OF THE CORPORATION
A corporation is a body created by law, with its own legal status, and continues to exist despite changes to
the individuals it represents. It can sue and be sued in its own name.
1
HISTORY OF COMPANY LAW IN ENGLAND
The Companies Act 1862 formed the basis of company law in Australia prior to federation in 1901.
The concept of the corporation in English law has existed since the first half of the fourteenth century,
with the English monarch conferring corporate personality upon monasteries and municipal councils.
1.1
Guilds
The next type of corporation developed in the field of commerce, where Royal charter created
corporations under which guilds or associations of particular types of merchants operated. Members
obtained a monopoly over the trade covered by the guild, but the guild itself did not obtain any rights or
liabilities following incorporation. It merely provided rules within which members had to operate, and
each member traded individually (and hence had no limited liability).
1.2
Joint Trading
Joint trading was possible through the use of two types of partnership: the commenda and the societas. In
a commenda, a financier provided the trader with a loan and in return received an agreed share of the
trading profits. The societas operated on a similar basis to the modern form of partnership. Each partner
was an agent of the other partners and each partner was personally liable for the partnership debts.
1.3
The first ‘companies’
Associations of English merchants trading overseas first used the word ‘company’ during the fourteenth
century. Through royal charter, these associations received certain trade monopolies over foreign
territories. However, the use of ‘company’ did not mean limited liability, but just “association”.
These associations became known as ‘regulated’ companies by the sixteenth century. However, these
regulated companies still operated on a similar basis to the earlier guilds. Although membership enabled
participation in a particular trading venture, members of the company traded individually as sole traders.
1.4
The joint stock company
Partnerships using joint accounts and joint stock started trading by the beginning of the seventeenth
century. This type of company became known as a ‘joint stock company’. Well-known examples include
the East India Company and the Hudson Bay Company. In addition to trading monopolies, royal charter
conferred on these joint stock companies official powers of administration in foreign territories. After the
completion of each overseas trading venture, the members of the company divided the joint stock and the
profits between themselves. This was the beginning of the concept of the share.
Permanent joint stock financed these companies rather than finance through joint stock raised specifically
for a particular trading venture.
1.5
Important seventeenth century developments
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Joint stock companies became less frequent as the state took greater control over administration of foreign
territories, and monopolies over trade were perceived as an unacceptable restraint of trade.
Companies had acquired perpetual succession and a common seal, enabling them to have legal identity in
contracts and the courts which was separate from their members.
Significant growth in domestic companies at the end of the 17th century and beginning of the 18th century
were fuelled by public speculation in capital raisings. The most famous was the South Sea Company,
which was so successful that Parliament (facing a financial crisis in 1719) allowed the Company to take
over the national debt, passing the South Sea Act which allowed the Company to use shares to pay out
government creditors. Share price rose dramatically … until the ‘South Sea Bubble’ burst in 1720 when
investors attempted to sell their overvalued shares. At the time of the collapse, widespread company fraud
also existed.
1.6
Bubble Act 1720 to 1844
Parliament’s response was the Bubble Act 1720, aimed at controlling share speculation by preventing
companies from raising capital without Parliament or royal authorization (but it didn’t work). The
difficulty of raising capital in this manner led to the development of the deed of settlement company,
which was based on the trust concept. Subscriptions were vested in a body of trustees who had a duty to
act in the best interests of the subscribers. These subscribers had a position similar to that of beneficiaries
under a trust. The deed of settlement set out the obligations of the trustees. Through careful legal drafting,
the deed of settlement company resembled an incorporated body. The sale of shares transferred joint stock
between investors. Trustees acted like company directors. The deed was also similar to the memorandum
and articles of association of a modern company. (And since partnership law governed deed of settlement
companies, the Bubble Act did not affect their operation). Registration of these companies became
possible under the Joint Stock Companies Registration and Regulation Act 1844.
1.7
Joint Stock Companies Registration and Regulation Act 1844
The Joint Stock Companies Registration and Regulation Act 1844 represents one of the most significant
developments of modern company law. The Act introduced the concept of incorporation through
registration, no longer requiring Royal charter or a special Act of Parliament.
New deed of settlement companies with more than 25 members had to register, and upon registration an
incorporated body was formed. To increase public accountability and reduce fraud, the Act also required
annual balance sheets and audit reports. To protect the public, the companies were unlimited companies,
and members remained liable for company debts. Creditors had to commence separate legal action
against individual shareholders to recover “company” debts; and the only way to limit the liability of
shareholders was through individual contracts between each shareholder and creditor.
1.8
Limited Liability Act 1855
The Limited Liability Act 1855 limited the liability of the shareholders of companies registered under the
1844 Act to any unpaid amount of their shares. Shareholders with fully paid shares were not liable for any
company debts to creditors. Individual contracts were no longer necessary.
1.9
Joint Stock Companies Act 1856
The Joint Stock Companies Act 1856 then connected the concepts of incorporation through registration
and limited shareholder liability. The Act also:
 reduced the minimum number of shareholders in a registered company to seven;
 introduced a constitution through the memorandum of association and the articles of association;
 allowed the formation of unlimited companies and companies limited by guarantee;
 required that partnerships of more than 20 persons register as companies.
1.10 English Companies Act 1862
The English Companies Act 1862 consolidated the various statutes governing companies that had been
passed since 1856. This Act of 1862 formed the basis of early company legislation in Australia.
2
TYPES OF CORPORATION
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2.1
Corporations sole and corporations aggregate
Two types of corporation developed in medieval England: the corporation sole and the corporation
aggregate. The corporation sole enabled property held on behalf of the church by a church official such
as a bishop to be passed on to a successor to that position. Ownership of the property was vested in the
corporation sole and not in the individual official. A corporation sole is therefore an artificial legal person
representing successors to a particular position.
The corporation aggregate developed as an artificial legal person representing a group of individuals
existing at the same time. The individuals could change without affecting the existence of the corporation.
2.2
Formation at common law
The English monarch is an example of a corporation sole formed at common law. The English Crown also
creates corporations aggregate through royal charter. In Australia, the Governor-General exercises this
power on behalf of the Crown. An example is the Institute of Chartered Accountants in Australia.
2.3
Formation under statute
Specific statutes create corporations sole and corporations aggregate (now known as a body corporate).
Examples are the Official Trustee in Bankruptcy; the Australian Securities and Investments Commission.
Corporations sole are not formed by registration under a statute. A company is a corporation aggregate
formed upon registration under the Corporations Act 2001. Non-bank financial institutions such as
building societies and credit unions become incorporated bodies upon registration under the various State
Financial Institutions Acts. Unincorporated voluntary non-profit associations become incorporated bodies
upon registration under the various State Associations Incorporation Acts.
3
DEVELOPMENT OF COMPANY LAW IN AUSTRALIA
3.1
The colonies to the 1950s
Each Australian colony introduced its own system of company formation by registration under colonial
statute based on the English Companies Act 1862. Differences continued between the States following in
Huddart, Parker & Co Ltd v Moorehead where the High Court held that company formation was a State
rather than a Commonwealth responsibility.
By the 1950s, parliaments and courts recognised that this approach of giving wide discretion to company
directors was not in the best interests of shareholders, but effective regulation of companies required a
coordinated approach.
3.2
The Uniform Companies Acts
In the early 1960s, the Commonwealth and the States introduced similar Uniform Companies Acts.
However, companies trading or raising finance in more than one State had to incorporate in each State and
comply with each State’s administrative requirements. Over time, some States also changed the original
legislation, resulting in differences arising again across Australia.
3.3
The co-operative scheme
Regulation of the securities industry became an issue in the early 1970s following allegations of illegal
practices. The Rae Committee investigated the allegations, and in 1974 recommended that a national body
be set up to regulate the securities industry (which was at that time regulated by the States).
In 1978, the Commonwealth and the States reached agreement on a coordinated approach, with each State
adopting the Commonwealth’s companies and securities legislation. The National Companies and
Securities Commission (NCSC) to regulate the co-operative scheme which commenced in 1982. The
NCSC was accountable to a ministerial council comprising Commonwealth and State attorneys general,
who assumed overall supervision of the scheme. However, the NCSC delegated administrative
responsibilities such as company registration to existing State Corporate Affairs Commissions.
Problems still included:
 amendments required ministerial council approval;
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law reform through a ministerial council representing Commonwealth and States interests;
NCSC could not properly coordinate the activities of the various State Corporate Affairs
Commissions, which operated autonomously.
4
THE CORPORATIONS LAW SCHEME
4.1
The constitutional position
Highlights of the 1980s period include: deregulation of the Australian financial system; relatively easy
access to finance; many corporate collapses; and the stock market crash of 1987. In 1987, the
Commonwealth’s federal parliamentary committee (set up to investigate the existing system of corporate
regulation) recommended replacement of the co-operative scheme by one under Commonwealth control.
The Commonwealth accepted the recommendation and attempted to introduce a national scheme, but the
States argued that the planned scheme was unconstitutional.
Section 51(xx) of the Commonwealth Constitution provides that the Commonwealth parliament shall have
power to make laws with respect to ‘foreign corporations, and trading or financial corporations formed
within the limits of the Commonwealth’.
In New South Wales v The Commonwealth, the High Court held that the scheme was unconstitutional
since only the States could legislate for the formation of companies; the Commonwealth did not have the
power to do this, it could only pass legislation affecting existing companies.
4.2
The national scheme
The Commonwealth and the States agreed to implement a new national scheme of company administration
and regulation under Commonwealth control. Under the amendments, the Corporations Act 1989 (Cth)
and the Australian Securities Commission Act 1989 (Cth) only applied in the Australian Capital Territory.
The States and the Northern Territory then passed identical legislation to adopt the law of the Australian
Capital Territory. The new scheme did not include the Close Corporations Act (Cth).
After passing a Corporations ([State]) Act 1990, each State and Territory had identical Corporations Law.
Although the Corporations Law scheme commenced operation on 1 January 1991, the formal agreement
ratifying the meeting at Alice Springs (the Corporations Agreement) was only entered into by the
Commonwealth, the States and the Territories on 23 September 1997.
However, the practical operation of the new ‘national law’ depended upon two critical elements:
 a national approach to enforcement by the Australian Securities and Investments Commission
and the Commonwealth Director of Public Prosecutions; and
 the ability of the Federal Court to deal with matters arising under the various State and Territory
Corporations Acts. To do this, the Corporations Law cross-vesting scheme was introduced.
4.3
The cross-vesting schemes
In 1987 the Commonwealth parliament and each State parliament established a general system of crossvesting of jurisdiction between federal, State and Territory courts. The Jurisdiction of Courts (Crossvesting) Act 1987 (Cth) provided that the Federal Court, the Family Court or the Supreme Court of a
Territory may exercise original or appellate jurisdiction conferred by a State law. Each State Cross-vesting
Act provided that the Federal Court, the Family Court and the Supreme Court of another State or of a
Territory might exercise original or appellate jurisdiction with respect to State matters.
The Corporations Law, the Corporations Acts of the Commonwealth, each State and the Northern
Territory specifically provided for cross-vesting of jurisdiction between federal, State and Territory
courts, to enable the Federal Court to hear matters arising under the various Corporations Acts.
On 17 June 1999 the High Court held by a six to one majority in Re Wakim (1999) 163 ALR 270 that the
attempt to confer State jurisdiction on federal courts was constitutionally invalid in both the general and
Corporations Law cross-vesting schemes. The High Court held that:
 the federal court could properly hear state matters connected to and arising out of the same facts
as a bankruptcy matter, in which it had original jurisdiction;
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the Federal Court had no jurisdiction to order the winding up of a company registered under
NSW Corporations Law of New South Wales because the Commonwealth Corporations Law
cross-vesting legislation was invalid;
since the Corporations Law of the Australian Capital Territory was federal law, the Federal
Court had jurisdiction under the cross-vesting scheme in respect of matters arising under the
ACT’s Corporations Law.
Some important consequences of the Wakim decision:.
 All orders made by the Federal Court under the Corporations Law cross-vesting scheme in State
Corporations Law cases since 1 January 1991 became invalid.
 Actions commenced but not finalised in the Federal Court concerning State Corporations Law
matters became ineffective. Parties in this situation had to commence another action in the
relevant State Supreme Court.
 Judges in the Federal Court had developed considerable expertise in Corporations Law matters
but would no longer be involved in the bulk of Corporations Law cases. Thus the future
caseload of State Supreme Courts would increase; and also State courts could give inconsistent
interpretations to similar provisions.
4.4
Remedial legislation
The States adopted remedial legislation to validate these Federal Court and Family Court orders. The
purpose of the various Federal Courts (State Jurisdiction) Acts was to:
 provide that ineffective orders of the Federal Court and the Family Court made in relation to
State matters have the same effect as if they were judgments of the relevant Supreme Court; and
 allow the transfer of proceedings currently before a federal court to the relevant State Supreme
Court.
4.5
Possible long-term solutions to Wakim
The following three solutions were considered in the light of Re Wakim:
 to amend the Commonwealth Constitution to allow the referral of State and Territory judicial
power to federal courts (but time-consuming & difficult to hold a referendum to change
constitution);
 Using s 51(xxxvii) of the Constitution (the referral power), the States could refer matters relating
to the formation, regulation and winding up of a company to the Commonwealth;
 Govern company formation (and possibly winding up) by State legislation while the regulation
and running of a company could be governed by Commonwealth legislation.
4.6
The Corporations Act 2001
The second solution was adopted in the Corporations Act 2001. It was also agreed between the
Commonwealth and States that any referral of power should be subject to a ‘sunset’ clause whereby the
referral would be reviewed in five years’ time and, if necessary, terminated.
The states (starting with NSW in March 2001), passed referral legislation such as the Corporations
(Commonwealth Powers) 2001 (NSW) was passed by the New South Wales parliament. Other States and
the Northern Territory passed similar legislation. The Commonwealth then passed the Corporations Act
2001 and the Australian Securities and Investments Commission Act 2001. Both commenced operation
on 15 July 2001.
4.7
REFORM
In 1993, the Commonwealth government set up the Corporations Law Simplification Program to simplify
the existing law. A taskforce identified priorities and formulated an implementation plan. The aim of the
program was to make the Corporations Law easier to understand and hopefully reduce compliance costs.
The taskforce decided to implement any changes to the Corporations Law in stages.
The First Corporate Law Simplification Act 1995 simplified the law relating to proprietary companies,
company registers and share buy-backs.
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The Second Corporate Law Simplification Bill 1996 formed the basis of the Company Law Review Act
1998, which introduced major changes relating to: setting up and running a company; members’ rights and
remedies; meetings; share capital; financial reports and audit; annual returns; and deregistration of
companies.
In March 1997, the government announced the replacement of the Corporations Law Simplification
Program with the Corporate Law Economic Reform Program. The Corporate Law Economic Reform
Program Act (which was passed in November 1999 and commenced operation in March 2000) introduced
major reforms including the areas of directors, takeovers and fundraising.
The Financial Services Reform Act 2001 (which commenced on 11 March 2002) introduced major
reforms to the law relating to financial services and markets, including advice provided by sharebrokers
and the operation of share market.
The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (the
‘CLERP 9 Act’) commenced operation on 1 July 2004. This Act introduced various changes to the
existing law, particularly in relation to audit regulation.
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