HISTORY OF ENGLISH COMPANIES FROM 1720 UNTIL THE REPEAL OF THE BUBBLE ACT IN 1825

1. INTRODUCTION
2. OBJECTIVES
3. MAIN CONTENT
4. CONCLUSION
5. SUMMARY
6. TUTOR MARKED ASSIGNMENT
7. REFERENCE/FURTHER READING

INTRODUCTION

Upon the enactment of the Bubble Act 1720 an Act which expressly prohibits the formation of Joint Stock Companies, the assumption is that this will mark the end of companies. But this was not to be, though the growth and development of Joint Stock Companies was seriously retarded, yet with the help of lawyers, the Joint Stock Companies system, continue to develop gradually and inevitably. In this list we shall continue to trace the historical development of companies from the Bubble Act of 1720 until 1825 during which significant charges was recorded.

OBJECTIVES

In this unit, the student will learn about the origins of memorandum and Articles of Associations, the Directors, shares, and influence of equity in company law.

MAIN CONTENT

EFFECT OF BUBBLE ACT ON COMPANIES

One of the main reasons for passing the Bubble Act was to protect the South Sea Company from total collapse. However, because of the revelations that later came on the fraudulent activities involved in the management of the company and deep corruption associated with the government itself, the company eventually collapsed, and with it a lot of companies and numerous investors lost their investments in these companies. Gower writes that,

“if the legislators had intended the Bubble Act to suppress companies they had succeeded beyond their reasonable expectations; if, as seems more probable, they had intended to protect investors from ruin and to safeguard the South Sea Company, they had failed miserably”. (op. cit).

Joint Stock Companies did not totally disappear. Many of the properly chartered companies survived and are allowed to continue to flourish, while others still applied for charters and were granted; though charters became very difficult and more expensive to obtain.

The official view at this time was aptly represented by Adam Smith (Wealth of Nations, V. Chap 1, Pt 111 art 1) writing in 1776 that Joint Stock Companies are only appropriate for trades such as banking, insurance and making and maintaining canals and that others will be contrary to public purpose. However this renewed the position of government until the introduction of gas-lighting into the larger cities and towns early in the 18^th century, an later the laying of railways, created a wide-spread necessity for united capital. 

UNINCORPORATED ASSOCIATIONS

The Government strict stand on the nature of Joint Stock Companies, and the very difficult procedure for obtaining a charter led gradually to legal minds coming together to explore ways of circumventing the Bubble Act. The lawyers discovered that the Act did not prohibit partnerships, but expressly permitted people to continue to operate partnerships as before. The idea was that since partnership permitted several individuals to pool their money together for profit. With the aid of equity and by the use of trust, lawyers recognizing the fact that the Bubble Act did not prohibit a group of people calling themselves a company so long as the company did not presume to be a corporate body dealing with shares, it was not against the law; and because these associations were not corporations they could not own their own property. The lawyers, therefore in order to circumvent that, vested the property of the association in the Trustees appointed by the association by the use of Trust Deed and the Trust Deed was known as Deed of Settlement. The trust deed could specify the purpose for which property was vested and the trading venture to which the property was to be applied.

The trust deed is what is now known as the memorandum and articles of associations. The Deed of settlement is structured in such a way that the associating members or subscribers would agree to be associated in an enterprise with a prescribed joint stock divided into a specified number of shares, management of the enterprise is normally delegated to a committee of persons now known as Directors, while the property is vested in separate set of people – the trustees; in some cases the trustees are also directors of the company.

The trustees being the legal owner of the property of the company owns for the benefit of the subscribers who are the beneficiaries under the deed of settlement. The trustees can be sued or sue on behalf of the company. In some of the deed of settlements the provision is specifically made, but since this is the position under the law, normally the courts of equity permits this in any case.

The members do not own property that is the beneficial owners got their benefits through the ownership of a share thorough which profits of the company were shared. There was therefore no difference between this company and the type prohibited by the Bubble Act and indeed after the panic brought by the Bubble Act many companies adopted the deed of settlement system. The Royal Exchange was evolved in 1790 by Royal Charter. Globe Insurance petitioned the House of Lords for a charter which was refused and used the trust deed system to form a company (see House of Common Journal (300) LXI 1590J). This system gave rise to many institutions known today like the trustees Savings Bank, Building and Friendly Societies. The system brought joint stock system under the influence of equity in company law till today.

REPEAL OF THE BUBBLE ACT 1720

The Bubble Act 1720 continue to be a dead letter law, as many companies sprang up using the deed of settlement system, and continue to do that very act which the Act prohibited. Many subscribers freely transfer their shares without hindrance. The profits are shared as dividends and the companies continue to draw a lot of public participation. The government could not do much about this. However, in November 1807 the Attorney General tried to prosecute some unincorporated companies that freely made provisions for easy transfer of its shares. The court as per Lord Elhersborough(R v Dodd 1808) 9 East 516) dismissed the applications because the Act had not been invoked for 87 years previously. Subsequently, when the court held two similar companies illegal (R v Stratton (1809) 1 Camp. 549, Buck v Buck (1808) 1 Camp. 547). Many continue to oppose the where concept of Joint Stock Companies while the vast majority had come to embrace it the to the many advantages that cannot be over looked. There was much debate on the merits and demerits of the system.

Finally, the government stopped into the matter and upon review of all the issues involved, the government sponsored a Bill before the House for the repeal of the Bubble Act of 1720. The Act was repealed in 1825 and this marks the beging of the active role of the Bovened of Trade in the development of company law.

  CONCLUSION

From the foregoing account it is clear that the Bubble Act 1720 was a great ingredient to development of company law and for over 100years it held sharing effectively blocking an intelligent development of the law. Gradually however, lawyers with the aid of equity were able to systematically avoid the provisions of the law, and lay a solid foundation for the development of the law which is still opponent till today.

SUMMARY

The Bubble Act 1720 though prohibited joint stock companies yet with ingenuity of lawyers and with the help of trust, they devised the deed of settlement companies that was specifically structured use the companies prohibited under the Act, and was able to achieve the same commercial purpose. This deed of settlement companies actually brought about the concepts in company law today. It also caused equity to intervene in companies and since then the influence of equity cannot be divorced from company law.

TUTOR MARKED ASSIGNMENT

Since the Bubble Act 1720 there Joint Stock Company into the arms of equity, it has not been able to extricate itself discuss.