A history of company law in colonial Australia: economic development and legal evolution.

• Jurisdiction: Australia
• Date: 01 December 2007
• Author: Lipton, Phillip

[The history of Australian company law has attracted remarkably little attention in academic literature, perhaps because it has mainly been seen as a copy of English law with few, if any, noteworthy features. This article points out several interesting and significant aspects of the evolution of Australian company law and considers this evolution in the context of the economic development of colonial Australia. Australian company law is an example of the transplantation of English law, raising the question of whether this transplant was successful. The central contention of this article is that although a substantial part of Australia's company law was transplanted from England, its evolution was innovative and responsive to the economic needs of Australian society at the time. In particular, Australia's company law was instrumental in financing the development of the mining industry, which played an important role in the economic success of colonial Australia.]

CONTENTS I Introduction II Pre-Legislative Development of Companies III Early Experiments in Limited Liability IV The Transplanting of the Companies Act 1862, 25 & 26 Vict, c 89 V The No Liability Legislation for Mining Companies VI The Reforms of the 1890s VII The 'Transplant Effect'. VIII Legal Autonomy Versus Functionalism IX Conclusion I INTRODUCTION

The interaction between economic development and the evolution of company law in colonial Australia presents an interesting case study of a company law transplant because this interaction can be examined in the development of a capitalist society over a relatively short period of time.

Little has been written about the history of Australian company law, (1) possibly because it has been regarded as a mere copy of the English legislation with few, if any, distinguishing features apart from some local innovations in the 1870s and 1890s. This article looks at the history and evolution of company law in colonial Australia and finds several noteworthy features that defy claims that the Australian developments were largely a wholesale imitation of the law in England. In fact, there were innovative features in the development of company law which were specific to the Australian experience and which cast light on the interrelationship between economic development and legal evolution.

First, by the 1820s and 1830s there was already demand for pooled equity investment and share trading, and for the utilisation of unincorporated joint stock companies with transferable shares. This early use of joint stock companies set in train an evolutionary trajectory well before the introduction of 'companies' legislation and the establishment of formal stock exchanges. This suggests that companies would have continued to evolve as a matter of commercial practice, irrespective of legislative developments.

Secondly, limited liability partnerships that had some of the characteristics of companies were introduced in New South Wales and Victoria in the early 1850s for mining enterprises. (2) This legal form was short-lived, but it indicates the willingness of colonial governments to seek innovative responses to the needs of their business communities despite the absence of equivalent English legislation. Indeed, the introduction of limited liability was still being vigorously debated in England at the time. (3)

Thirdly, the introduction of companies legislation in Victoria in 1864 (and in the other colonies also around this time) broadly coincided with the beginning of a gold mining boom, which was a major driver of economic growth. This legislation facilitated company formations in the gold mining industry, and this in turn was a significant factor in the development of this key industry and the enormous wealth it generated. Moreover, the introduction of the no liability company in 1871 was an innovative response to the requirements of the gold mining industry, and occurred at a time of significant expansion in gold output. (4)

Fourthly, the investor protection reforms of the 1890s in Victoria were also highly progressive and, while largely based on English law reform proposals, occurred more than a decade before similar reforms were introduced in England. These legislative amendments were a response to the widespread losses suffered by investors in the aftermath of the boom, bust and severe depression of the 1890s.

Thus far, the only significant interpretation of the history of Australian company law is a series of articles by Rob McQueen in the early and mid-1990s, which questioned whether the adoption of English company law by the Australian colonies was appropriate for the local conditions. (5) He described this adoption as 'company law as imperialism', (6) serving English economic interests rather than assisting Australian economic development. He also viewed the introduction of the no liability company as being largely brought about by the inadequate administration of the companies legislation. (7)

This article reassesses the transplantation of English company law in Australia in terms of whether it was successful and appropriate, and whether it encouraged economic development. The establishment of sound institutions is conducive to strong economic growth, and the successful transplantation of company law can be seen as a significant factor in the remarkable economic success of the Australian colonies in the latter half of the 19th century and also explains why the Australian colonies were able to avoid the 'resource curse'. (8)

This article also adopts the classification formulated by Ron Harris, who analysed the relationship between legal and economic developments in England from 1720 to 1844. (9) Harris suggests that this relationship between legal and economic development has been characterised in three ways: the first sees the law as developing autonomously or in isolation from economic developments. The second interpretation regards legal and economic developments as occurring in rough synchronisation so that the legal framework is responsive to economic needs. The third perspective sees the law in the books as divorced from and initially unresponsive to economic needs, although the resourceful practice of businesspeople enables the law to be adapted so that it can be functional in its operation.

This article argues that the foundations of the institutions of company law had already been laid before the enactment of limited liability companies legislation. This early period prior to 1850 can be seen as fitting the third interpretation because the economic need for a form of business organisation suitable for pooled investment and share trading effectively evolved without specific legal encouragement. However, the period after the introduction of limited liability legislation in the 1850s--culminating in the transplant of English companies legislation--can be seen as a period in which legal evolution responded to economic development and a number of legislative changes were made that furthered economic growth and the interests of important business constituencies. Hence, the legal evolution of company law can overall be seen as responsive to the economic circumstances that existed in the Australian colonies in the 19th century.

The main focus of this article is the evolution of company law during the colonial period. The evolution of Australian company law is considered in the context of the broad economic history developments of the time. However, a detailed examination of the various debates engaged in by economic historians and the operation of corporations in other settings is outside the scope of this article.

II PRE-LEGISLATIVE DEVELOPMENT OF COMPANIES

In the early years following settlement, the development of the NSW economy was a concern secondary to that of maintaining a penal colony. Hence, for several decades the economy was quite primitive. Any private financial resources which were accumulated were utilised in small-scale trading or agricultural activities. Most infrastructure was developed by the government as part of its main function as administrator of a prison colony.

The first company formed in NSW was the Bank of New South Wales in 1817. (10) At a time when the colony was moving away from its convict origins and a free economy was starting to develop, Governor Lachlan Macquarie wished to develop a source of finance and local currency so as to reduce dependence on the Treasury in London and facilitate the development of an even freer society. (11) Macquarie sought to encourage local investment in the bank and conferred upon it a charter granting limited liability to its shareholders, under which the bank operated for some time. (12) However, the charter required approval from the government in London and ultimately this was refused, perhaps because it was seen to be undesirable for banks to be formed with limited liability, as this placed depositors at greater risk. This reluctance to extend limited liability to banks resulted in their exclusion from the Limited Liability Act 1855, 18 & 19 Vict, c 133. The result of this refusal was that the Bank of New South Wales operated as an unincorporated joint stock company governed by the law of partnership and its deed of settlement, which provided for transferability of its shares and management by a board of directors. Nevertheless, the unlimited liability of shareholders did not greatly discourage investors from taking up the bank's shares as the bank traded profitably from the beginning, perhaps partly due to the very fact that unlimited liability instilled confidence in depositors. (13)

Unincorporated joint stock companies operating under deeds of settlement had been formed in England for a long time, but had increased in numbers during the railway boom of the 1830s and 1840s. (14) A similar development took place in NSW, with the formation of several banks and other companies such as the Australian Agricultural Company in 1824, the...