ART. VI. THE REFORM OF COMPANY LAW.

1. Report of the Departmental Committee appointed by the Board of Trade to inquire what Amendments are necessary in the Acts relating to Joint-stock Companies incorporated with Limited Liability under the Companies Acts, 1862 to 1890, with Appendix. Presented to both Houses of Parliament by command of Her Majesty. London: 1895 (C. 7779).

2. Report from the Select Committee of the House of Lords on the Companies Bill [H.L.]; together with the Proceedings of the Committee and Minutes of Evidence. 1896: 342.

3. Report from the Select Committee of the House of Lords on the Companies Bill [H.L.]; together with the Proceedings of the Committee, Minutes of Evidence, and Appendix. 1897: 384. 4. Report from the Select Committee of the House of Lords on the Companies Bill [H.L.]; together with the Proceedings of the Committee, Minutes of Evidence, and Appendix. 1898: 392. 5. A Bill intituled An Act to amend the Companies Acts. Prepared and brought in by Mr. Ritchie, Mr. Attorney-General, and Mr. Solicitor-General. Ordered by the House of Commons to be printed, 12th February, 1900.

MR.

R. LOWE once remarked in the House of Commons that it had been the misfortune of joint-stock companies always to be legislated for by persons in a state of excitement. The present Government appears to be fully alive to the danger of legislating for companies without due deliberation. For five successive years a Government Bill on the subject has been laid before Parliament. The Bill of this year may possibly be passed. There is a feeling abroad, stimulated perhaps by certain quasi-judicial pronouncements from the Bench, that 'something ought to be done.' But the opinions of those who are best qualified to estimate the probable results of litigation are not unanimous on the question how far this aspiration for reform can be satisfied without unduly trammelling commercial freedom.

The law of this country provides for several different types of company; but the public interest, so far as projects of reform go, is practically centred in one class of companies, namely, those incorporated under the Companies Act, 1862, and certain later amending Acts, as companies with limited liability. The Act of 1862 was based on the principle of affording the most complete freedom for the formation of joint-stock

* Hansard,' 3rd series, vol. cxl, col. 116.

companies with or without limited liability. The best evidence of the soundness of the principle on which the Act was based, and of the practical efficacy of the machinery which it provided, is to be found in the fact that a sum of at least 1,500,000,0007. of capital is invested in companies constituted under the Act. Further, very large sums are invested in Indian and colonial companies constituted under Acts or Ordinances copied in their main features from the Act of 1862. The operations of companies constituted under the Act of 1862 are not confined to the United Kingdom; they are to be found in full business operation, not only in other parts of the British Empire, but throughout the world. No accurate returns are available as to the capital of similar companies constituted in foreign countries; but it is believed that the capital of French joint-stock companies does not exceed 420,000,0007., and that the capital of German joint-stock companies does not excced 300,000,000l. It would therefore appear that the capital invested in companies incorporated under the Act of 1862 amounts to, and perhaps exceeds, twice the combined capital of the corresponding French and German companies. These figures show the magnitude of the interests which are concerned with the reform of company law, and amply justify the deliberation which the Government has shown in dealing with the question.

The law as to companies embodied in the Companies Act, 1862, still remains substantially unaltered. Various amending Acts have been passed. Some of these Acts effect mere alterations of detail suggested by practical experience of the working of the Act: others effect reforms of procedure, as in the case of the Winding-up Act of 1890, which vested the control of the liquidation of companies in the Board of Trade. None of the amending Acts touch the principle on which the Act of 1862 hinges, viz. that of allowing companies to be formed and managed with the utmost freedom. This freedom has sometimes been abused; and a feeling in favour of fettering it has from time to time been roused by its abuse-for instance, when the Liberator Society collapsed in 1892. This collapse caused wide-spread misery among the lower middle classes, and pointedly drew public attention to the ease with which fraudulent balance-sheets and delusive reports could be manufactured. The year 1893 was not propitious for pressing on projects of reform in such matters, but in 1894 an important step was taken. Mr. Bryce, as President of the Board of Trade, appointed a Departmental Committee, which was directed to enquire what amendments were necessary in the Acts relating to joint-stock companies incorporated with limited liability,

especially with a view to the better prevention of fraud in relation to the formation and management of companies; and to consider and report upon the clauses of a draft Bill which was laid before the Committee for the purpose. The Committee was exceptionally strong. The judicial Bench was represented by Lord Davey, the late Lord Justice (then Mr. Justice) Chitty, and Lord Justice (then Mr. Justice) Vaughan Williams. Lord Davey and Lord Justice Chitty had had, both at the Bar and on the Bench, very extensive experience of the working of the Act of 1862, while Lord Justice Vaughan Williams had for upwards of two years been in charge of the winding-up business of the High Court of Justice. The Bar was represented by Mr. Buckley, Q.C., who has recently been raised to the Bench, and Mr. F. B. Palmer, both of them authors of books on the Companies Acts used daily by all concerned in the administration of companies. The interests of the Board of Trade were protected by the appointment of Mr. John Smith, InspectorGeneral in Bankruptcy. As regards the practical working of Company Law, solicitors in large commercial practice have a wider experience than can be gained at the Bar. This was wisely recognised by the appointment to the Committee of Sir Albert Rollit, Mr. John Hollams, and Mr. Frank Crisp. Two accountants, Mr. Edwin Waterhouse and Mr. G. A. Jamieson, represented the views and the interests of the auditors. With these eleven gentlemen of professional experience only two representatives of commerce were associated, namely, Sir William Houldsworth and Mr. Alexander Wallace. The commercial interests of the country were, it must be confessed, meagrely, though ably, represented.

Lord Davey's Committee, as it has usually been called, began to sit in November 1894, and reported to the Board of Trade in July 1895. It embodied its recommendations for reform in a draft Bill which is appended to the Report. This Bill was introduced into the House of Lords in 1896 as a Government Bill, with a few amendments suggested by the Board of Trade, and was referred to a Select Committee, which proceeded to take evidence. The Committee was reappointed in 1897, and again in 1898, for the purpose of taking further evidence. In these three years it examined eighteen witnesses. In 1899 the Select Committee was once more reappointed, and without taking further evidence reported the Bill with amendments. The Bill as so amended has this session been introduced into the House of Commons as a Government measure.

The event has amply proved the wisdom of originally referring the question of reform to a strong Departmental

Committee. The labours of that Committee, and of the subsequent Committees of the House of Lords, have done much to clear the ground. It must be recognised that among the classes most interested in and concerned with limited companies there are wide divergences of opinion as to the expediency and practicability of particular reforms. But the discussions of the last five years have been of great assistance in showing what differences of principle lie at the root of these diverging opinions. There appear to be three fundamental questions round which discussion centres. The first question is how far it is expedient, generally speaking, to give unrestricted facility for trading with limited liability. The second question is how far a body trading with limited liability ought to be put upon special terms as to disclosing its affairs to persons who trade or intend to trade with it. The third question is how far persons who utilise the Company Laws for the purpose of inviting others to join with them in commercial enterprises ought to be placed under special liabilities towards, or for the protection of, the persons whom they so invite. The projected reforms which have been discussed during the last five years may conveniently be considered in three groups, which correspond with these three questions, namely, first, reforms aimed at fettering the free use of limited liability; secondly, reforms aimed at securing disclosure of the accounts and balance-sheets of limited companies, and registration of their mortgages and charges; and thirdly, reforms aimed at protecting persons who invest their money on the faith of public prospectuses.

The experience of the last forty years and the rapid growth of limited-liability companies might have been expected to furnish a conclusive answer to the question how far unrestricted facility for trading with limited liability is expedient. But it must be confessed that a section of the commercial world is still doubtful of the advantages of limited liability. Lord Davey's Committee was furnished with an interesting memorandum by Mr. Samuel Ogden, senior director of the Manchester Chamber of Commerce, and president of the Association of Trades Protection Societies of the United Kingdom, in which the views of those who distrust the limitedliability system are forcibly expressed. Mr. Ogden says that

'Unrestricted limited liability by registration is in some respects a serious danger to the whole trading community, from its tendency to alter the character and objects of mercantile transactions generally. The social and personal consequences of bankruptcy, which result from unlimited liability, impose prudence on private traders;

but, being non-existent in the case of limited companies, business involving large risks is more easily undertaken by such companies. This fact considerably handicaps ordinary traders with unlimited liability in their competition with companies with limited liability, and has a tendency either to drive them out entirely or to induce them to abandon their cautious rules of conduct in trading. The spirit of speculation and recklessness which is thus fostered by limited liability ceases to be confined to such companies, and inevitably spreads in the trading community which trades in competition with them. The resulting demoralisation of the trade affected and the discouragement of honest enterprise is, in some respects, of more serious importance than the actual loss to the shareholders and creditors of the companies themselves.'

These remarks represent with much force the views of what it may perhaps be pardonable to call the old-fashioned section of the commercial world. They carry the reader back to the discussions which preceded the passing of the Act of 1862. is now too late to discuss the question in the abstract. The gigantic operations of modern commerce depend to a very large extent on the facilities which limited liability gives to the operator for obtaining capital. The real answer to the opinions of which Mr. Ogden is the exponent is that the spirit of speculation and recklessness' cannot (at all events by legislators) be differentiated from the spirit of enterprise; and that, though the enormous development of enterprise during the last fifty years has brought evils in its train, the good has largely outweighed the evil. But the question is not a practical one. The principle of limited liability was at one time on its trial; since 1862 its acceptance is chose jugée.

Still, the old views as to the dangers of limited liability are not without their influence in the present day. Reforms are frequently advocated which are really inconsistent with the acceptance ex animo of the principle of limited liability. One proposal, advocated by Lord Justice Vaughan Williams in his addendum to the report of Lord Davey's Committee, is to attach compulsorily to all shares in limited companies (except possibly shares paid up in full on the formation of the company) a 'reserve' liability-that is to say, a liability to pay up further capital in the event of the company being wound up. This proposal was rightly rejected by Lord Davey's Committee, on the ground that it would render the shares of companies less eligible as an investment, and would make it almost impossible for trustees to hold the shares of any company as part of their trust estate. Another proposal was unfortunately adopted by Lord Davey's Committee, but was afterwards rejected by