this transplanted imperial companies legislation in the colonies. This neglect is, at .... In support of their case they ...... Africa, vol. 4, and Durban: Butterworths.
Griffith Law School Socio-Legal Research Centre Research Paper Series 09-14
THE FLOWERS OF PROGRESS: CORPORATIONS LAW IN THE COLONIES Rob McQueen Griffith University; The Institute of Postcolonial Studies
The Flowers of Progress: Corporations Law in the Colonies by Rob Mc Queen Griffith Law School Introduction During the long period of imperial expansion from the fifteenth century through to the end of the nineteenth century one of the often repeated claims of the colonizers was that they were bringing along with them progress and modernity. One of the areas in which this process of modernization was inevitably considered to be imperative was in regard to commercial practices and organization in the colonized states. Whole systems of commercial practice that had endured for centuries in these ‘backward’ states were rapidly swept away, often with scarcely a trace. Organizational structures designed to accommodate the particular needs of small scale or co-operative undertakings in Africa1 were cast aside, as were pre-existing structures for corporate enterprises in India2. These older forms for structuring commercial collectivities were dismissed as either too `primitive’ or unsuitable for the needs of modern capital. Even in settler economies an analogous process was to occur. Local business practices which had grown up in the period between settlement and the period of commercial exploitation (as was the case in the Australian colonies) were swept away by British models as part of the process of ‘modernization’ of the colonial legal and economic system when these colonies were considered to have reached an appropriate level of ‘maturity’. In this process practices and ideas introduced from the metropolis were invariably preferred over nascent local practices, which were thereby not permitted to take root and develop3. It was not always the case that the introduction of commercial laws imposed by colonizers was greeted with universal acclaim. Indigenous leaders were quite often divided over the new laws and their possible effect on local practices and traditions. Even in states which had managed to resist colonization, but not the pressure from Europe or North America to modernize their companies and other commercial laws, their was significant debate as to the possible effects of these new provisions on the local population and on the independence of the local polity after their introduction. Hawai’i was a classic case in point. King Kamehameha III attempted in the mid nineteenth century to stave off colonization by demonstrating the preparedness of Hawai’i to modernize and to adopt foreign laws such as the commercial laws of Britain and North America. At the time this was a plausible and defensible strategy to
1
See for instance the account of the history of women’s cooperative structures Kenya in Robertson, C. (1996) pp. 615-642. See also: Anderson, D., (2005) pp.9-41 as to the manner in which co-operative ventures were virtually eradicated in Kenya as a consequence of corporate competition. African businesses could not compete with incorporated undertakings, nor did they have the protection of `limited liability’ which `European’ corporate competitors enjoyed. 2 Recent research by Indian scholars has explored the history and nature of pre-colonial Indian corporate forms. In particular note: Khanna, Vikramaditya S. (2005), See also on the history of ownership forms and corporate governance in India: Gollakota, K & Gupta, V (2006) pp.185-198 3 Kercher, B (1995)
Electronic copy available at: http://ssrn.com/abstract=1135964
2 prevent colonization by one or other of the economically powerful states, which were then expressing both political and economic interest in Hawai’i4. This defensive strategy of accommodation taken by the King of Hawai’i was opposed by a number of other chiefs, who saw it is leading to the marginalization of Hawaiian’s in their own country with the economy, the legal system, and the processes of governance becoming more and more dependent on technical advisers and experts from European and North America powers. One chief, Kamakau, expressed these concerns in the following manner: A learned man had arrived with knowledge of the law, and the foreigners who were holding office in the government hastened to put him forward by saying how clever and learned he was and what good laws he would make for the Hawaiian people. The truth was they were laws to change the old laws of the natives of the land and cause them to lick ti leaves like dogs and gnaw bones thrown at the feet of strangers, while the strangers became their lords and voices of strangers were raised over those of the native race5. Whilst we may in hindsight note the abject effects of colonization the choices open to the colonized (or those imminently on the cusp of colonization as in Hawai’i) were generally quite circumscribed. The circumstances in which new laws were being imposed or advanced by colonizing powers was not built on notions of equality between colonizer and the colonized. The forces advancing the imperative nature of becoming `modern’ were difficult, if not impossible, to resist. On the part of the colonized there was often little scope for choice or even debate as to the nature of legislation being introduced by the colonizers. This was particularly so in respect to key economic laws such as companies’ legislation. The Flowers of Progress and the Politics of Place Even political strategies of accommodation to outsiders did not avail those states that adopted this as a strategy. As we have seen the Hawaiian monarchy attempted such accommodation only to find to their dismay that this was not sufficient to save them from imperial domination and ultimately annexation by the United States6. The French theorist, Bruno Latour, has argued that there are only various local understandings of the world, and the universal is only ‘created’ when one local dominates another local.7 However such domination seems to currently be in the ascendant. Theorists such as Michael Hardt and Antonio Negri in their influential text, Empire8, have argued that the local is being rapidly subsumed in the current conjuncture as a consequence of the ongoing process of globalization, which is rapidly absorbing local cultural and legal differences. If this is so then the prognosis for the future is grim. The peculiarities of `the local’ will simply cease to exist. However better comprehending the processes by which local understandings were 4
There is a detailed account of these developments in the opening chapter of Sally Engle Merry’s (2000) superb analysis of the complex processes of colonization and local resistance in Hawai’i. 5 Kamakau (1961), p.399 cited in Merry, Sally Engle (2000) at p.6 6 Merry, Sally Engle (2000) pp.7-8 7 Latour , B. (1993) at p. 122. See also Tobin, B.F.(1996 at p.212; Durlik, A., (1999), at pp.39-57. 8 Hardt, M & Negri, A, (2000)
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3 subsumed in the past and the long-term effects of that subsumption it is suggested crucial to a fuller understanding of the ongoing process of globalization today. Destabilizing legitimating narratives today can only occur with a greater understanding of the manner by which the ‘universalization’ of certain laws occurred during the colonial period, and how the success of such laws were not generally as a result of their superior knowledge claims, but rather were tied to unequal relations of power as between colonizer and colonized. The intertwining of a company law based on the ‘English model’ and economic and political ‘modernity’ was well recognized by a range of English social commentators in the nineteenth century such as Charles Dickens,9 Anthony Trollope10 and George Gissing.11 These social consciences of mid and late Victorian England however generally maintained their focus on the effects of modern institutions such as the limited liability company at home, rather than in the colonies. Others, such as Conrad12, however, examined the bleaker side of such manifestations of ‘modernity’ in colonial settings. It was nevertheless left up to a failed barrister writing a satire of English company law to point out the perceived inter-relationship of company law with ‘modernity’ and how, in settings other than metropolis, such ‘modern’ concepts might have unexpected (and undesirable) effects.13 Gilbert wrote the opera after reading accounts of the then ongoing transformation of Hawai’i and the sojourn of the Royal Hawaiian Princess in London on a mission to learn more of English customs and laws by studying these practices at `close hand’ in England. In 1893 W.S Gilbert wrote one of his strangest operettas, which was a satire on company law, and in particular the limited liability principle.14 In Utopia Limited; or The Flowers of Progress, the fruits of knowledge from the ‘developed world’, including the English Companies Act of 1862, are brought to the ‘backward’, but developing state, of Utopia. The Utopians are, by the nineteenth century, hopelessly out of touch with the economic doctrines of the day. Their economy is relatively simple and concepts such as limited liability are completely alien to it. However, the King wishes the country to ‘modernise’ and thus has sent a delegation to England to learn the essence of modernity. The group responsible for so bringing wisdom and ‘economic development’ from the West are called the ‘Flowers of Progress’. They include the King’s daughter, Princess Zara. They are charged with bringing ‘knowledge’ and ‘progress’ back to Utopia. The most important of these fruits of knowledge to be introduced into the developing state with the return of the ‘Flowers’ is the concept of the limited liability company. The Flowers of Progress have brought an English company promoter, Mr.Goldbury, along with them to help explain the concept and the benefits it will confer on the populace. The libretto recounts the travails of this idea in the unprepared terrain of Utopia. Mr. Goldbury sings his song in praise of the corporate form to the King and 9
e.g. Little Dorritt e.g. The Way We Live Now 11 e.g. The Whirlpool 12 e.g. Nostromo and Heart of Darkness 13 Borowitz Albert I (1973 at 1276. 14 Gilbert W S (1984) at p.292. 10
4 suggests that instead of remaining a monarchy the state should register as a corporation. Goldbury concludes his song by praising the regenerative powers of the corporate form. At first the King considers such a concept as dishonest, but is brought around by the Flowers, who convince him he is just being ‘old fashioned’. The King’s instincts are; of course, by and large, correct. Ultimately the introduction of this new species of commercial organization almost brings ruin on the ‘developing’ state of Utopia. The reason for this near ruin being the enthusiastic adoption by the citizens of Utopia of the limited liability corporate form for all facets of human activity. Every citizen of this far-flung state ‘even down to the youngest babe’ transforms themselves into a limited liability corporation. The benefits they have understood from the Flowers of Progress’ in their midst are that limitation of liability will let them get on with their affairs without responsibility for any debts which they might contract. In the context of the history of corporations law in a range of locales we can observe how understandings of corporate law became ‘universalized’ during the period of colonial domination and the various accommodations attempted by local rulers in colonized states to adapt to these new laws and practices.15 We have also seen that unlike the case in the fictional Utopia this process did not occur without resistance or protest on the part of local elites. In a number of locales opposition to British companies’ laws was at times articulated by elements within local elites as to the possible effects the introduction of such ‘foreign’ legislation could have in regard to future autonomy and control over the local economy and its possible broader societal effects. What is perhaps surprising, however, is that despite their crucial importance to the economic transformation of many colonized states there has been little detailed historical analysis of the processes of introduction and the subsequent operation of this transplanted imperial companies legislation in the colonies. This neglect is, at least to some degree, ironically a result of the perceived uniformity or ‘universalism’ of the legislation across the Empire. With few local variants to the legislation it has generally been assumed that the history of companies law in the colonies was simply a subset of its history in the ‘home country’. However, what is surprising on closer examination is the routine manner in which a number of the supposed `universal values’ embodied in British companies laws were both questioned by the colonized and often departed from in the colonies, despite the claims of the colonists that they were introducing legal provisions that did not distinguish between subjects on the basis of status or class. In the case of British colonization during the latter half of the nineteenth century one of the major indicia of whether a colonized economy was ‘modernized’ was the presence of company laws modeled on the English Companies Act (or in other colonial settings equivalent forms of ‘modern’ company law). In almost every colonized state within the British Empire there was an Act or Ordinance that replicated the English Companies Act in one of its iterations post 1855. Sometimes the adoption of the latest version of British companies legislation was extremely rapid, such as was the case in India, where the British Companies Act of 1856, which 15
see e.g. Moraru , C. (1997) at p.171.
5 introduced limited liability, was adopted by the Indian legislature only a year later than its adoption in Britain. In contrast, in colonies of lesser economic significance older forms of companies’ legislation were permitted to linger on for extended periods of time without revision16. The adoption in colonial economies of companies legislation modeled on British legislation facilitated an Empire-wide system of company law with a common terminology and set of practices. This, of course, aided British entrepreneurs by providing a common investment framework across a wide area of the globe. By using a common template for the company laws of the British colonies there was a high degree of homogeneity in commercial structures across the Empire, which both simplified the process of overseas investment and created a degree of certainty for investors. Such a degree of homogeneity also provided investors in the metropolis with assurance as to the structures within which their investments would be managed, and additionally ensured that they could obtain the protection of limited liability, so that their risks might be significantly lessened, even in far flung regions of the globe, whilst at the same time often affording much higher returns on their investments than similar investments at home. As noted above, given the importance of companies’ legislation to the colonial process, it is surprising that there has been little serious historical examination of the debates surrounding its introduction into the colonies, nor of its subsequent reception by colonized populations. Through a series of case studies the ambivalent and even hostile nature of the reception of company law into the British colonies will be examined in the following. The relevance of this troubled history of colonial corporate law in respect to current trends towards homogenization of corporations laws as part of the ongoing processes of globalization will be explored in the conclusions to the paper. The Adoption of ‘Modern’ Company Law as an Indicia of Progress: the case of Basutoland In 1958 in the then Basutoland (now Lesotho) a Special Session of the Basutoland Council was convened to discuss the adoption of a new Company Law for the fledgling nation. Basutoland’s existing company legislation in 1958 consisted of nineteenth century legislation from the Old Cape Colony, which legislation had itself had been reproduced from earlier British statutes. The proposed new legislation was introduced by the Legal Secretary to the Basutoland Council and was supported by the Basuto Traders Association and the Basutoland Chamber of Commerce as well as by the European Traders Association. Councillor Maqoaelane Hlenkane of the Basutoland Traders Association supported the adoption of the legislation on the
16
In some colonies older versions of the nineteenth century Companies Act were maintained on the statute book without amendment well into the twentieth century despite their archaic nature – The Companies Act of West Australia is a case in point. This statute replicated the English Act of 1856 and remained largely unaltered as the prevailing corporations statute well into the 1970s. This is perhaps even more surprising given the significant mineral and other resources of W.A. It is less surprising that High Commission States such as Basutoland continued to have archaic forms of company law well into the 1950s, given their marginal economic status.
6 grounds that it brought Basutoland law into step with that of other countries, and also that it would be indicia of the ‘progressive’ nature of the ‘new’ Basuto nation: We thought for a new country like ours, where the law will be introduced for the first time, we thought the Legal Secretary could be asked what important points we must remember I have said company laws are identical in all countries. I have said that it is difficult for the Council to say that this law should be promulgated before they see it, but none-the–less I have said it would be better to promulgate the law and then thereafter amend it where you see any faults in it...I wish to add that, according to my experience, this work of companies is very important and most prosperous (sic) than when a person does business alone by himself, and it is better than a partnership, the law which we have recently passed because it is a company law it is progressive, and Basutoland is now a progressive country, and it cannot go forward unless we have companies established in this Country17 (my emphasis). The various representatives of the Trader’s Associations around the table all spoke in favor of the introduction of this new company law on the grounds that it would increase trade in Basutoland, and demonstrate the nations commitment to progress. However, a number of other Councilors sitting in the great hut where the meeting was being held expressed different views. They saw outside investment in the form of companies as being potentially destructive of the Basotho way of life. In support of their case they pointed to then recent developments in adjacent States such as Swaziland and Bechuanaland (now Botswana). Councillor Ntsu Mokhehle18 critically addressed various aspects of the proposed new companies legislation: It is very essential that we should have company law in the Country; nobody can deny that; but it is equally important that the old wish of the Basuto should be followed in the promulgation of the company law. It will mean, Your Honour, that we do not take matters of this nation very seriously if it could be advanced before us that the reasons why this draft legislation cannot be placed before us are that it will cost a lot of money, it will take a long time because of its thickness or that traders are in a hurry to have it…I say it is our duty to scrutinize this law and try and see what powers are being given to these companies so far as the land is concerned, whether we are educated or not educated...If we all know the trouble in the Suez Canal and if we know the trouble which is at represent taking place in the Middle East and if we know how Rhodesia was passed into the hands of the English...and if we know what caused trouble in South America last year, we shall know that it is not a playing matter to have a company law in a country because these companies bring money from their
17
Report of the Proceedings of 2nd Special Session (1958) of the Basutoland Council 30/7/19581/8/1958, Basutoland Company Law (Central and South African Department) PRO, Kew Gardens London,), originally BBS 120/17/1 now DO 35/7269. 18 Ntsu Mokhele formed the Basutoland Congress Party in 1952 (subsequently renamed Basotho Congress Party after independence in 1966) and from 1960 was the official head of the Party. He subsequently was exiled from Lesotho after the Basutoland National Party, led by Chief Leabua Jonathan, refused to accept the results of an election the 1970s in which the BCP won the majority of votes. From exile in Botswana Ntsu Mokhehle became leader of the Lethoso Liberation Army. After many years of exile he returned to Lesotho and was elected as Prime Minister of the country in 1993. Other than for a short period in 1994 he remained Prime Minister of Lesotho until 29 May 1998. His name, Ntsu, means ''eagle,'' and voters signaled that they supported him by flapping their arms like wings. He died in January 1999.
7 own countries, and those countries have got the right to protect the rights acquired with their money in those other countries…19 This discussion of company law by the Paramount Chief of Basutoland, the Legal Secretary to the Basutoland Council and other Chiefs and Councilors illustrates the division of opinion amongst leaders of colonized states to such legislation. Some regarded such legislation with extreme suspicion. Other leaders saw the adoption of corporations laws modeled on those of Britain or some other colonizing state as a potential signal to the outside world’ of their preparedness to modernize. As Councillor Hlenake noted ‘Basutoland is now a progressive country, and it cannot go forward unless we have companies established in this Country’. These new laws were, at least by some, seen as opening up new prospects for their states and holding out the prospect of re-making those societies by engagement with these new laws. As Sally Engle Merry reminds us, law was not always imposed on unwilling colonial subjects. In many places, there were ‘some who desired the forms and texts of European law in order to construct a society they were told was more civilized’20. Others, as was the case in Basutoland, were more cautious in their acceptance of ‘foreign laws’, and some simply opposed outright any accommodation to foreign laws. The difficult political choices being made by such leaders we to have long-term consequences, which many in the subject societies quite clearly recognized at the tie. However, the reality, particularly in regard to key economic laws such as those relating to corporations, was that there was little room to maneuver. This was the case whether the state in question was formally independent (as was the case with states such as Hawai’i) or a colony. Merry’s account of the debates in Hawai’i in the late nineteenth century on these issues sounds not unlike those in Basutoland half a century later. Corporate interests and a loss of autonomy over the local economy has seen over the past half century the unraveling of many aspects of the Basuto way of life combined with an ever growing dependence on overseas corporate interests to sustain the economy. The acquisition of water rights, rather than land, by overseas corporate interests, followed by the subsequent forced relocation of thousands of traditional landholders has undermined the economic independence of contemporary Basutoland/Lesotho and destroyed the livelihoods of a significant proportion of the population. Lesotho most significant industry is now in providing large quantities of water to adjacent ‘waterhungry’ South Africa. More and more of its water resources are being harnessed by international corporations through the re-diversion of major rivers and the construction of massive dams in Lesotho. These water resources are also important in generating large amounts of hydroelectric power for South Africa. However the cost of harnessing these resources has been significant to the population of Lesotho, particularly those located in the Mohale valley. As a recent report on the effects of these large dam schemes in Lesotho has noted: Of the total land area of Lesotho, less than 10% is suitable for arable farming. The Mohale valley, which would be flooded when the Mohale dam is completed, contains 19
Report of the Proceedings of 2nd Special Session (1958) of the Basutoland Council 30/7/19581/8/1958, Basutoland Company Law (Central and South African Department) PRO, Kew Gardens London,), originally BBS 120/17/1 now DO 35/7269. 20 Merry, Sally Engle, (2003at p. 577
8 Lesotho's most fertile land and is the only region in the country to produce a surplus. Phases 1A and 1B of the project will together result in the loss of 4,635 hectares of grazing land and 1,500 hectares of arable land, according to the World Bank. Measures taken to help the 24,000 people who lost their farms, homes or access to communal grazing land as a result of Phase 1 of the LHWP have been heavily criticized as ineffective. Because Lesotho has so little arable land, those evicted to make way for the reservoirs have not been given replacement farmland but are forced to find new livelihoods. The Mohale will affect another 7,400 people. Initially, the project emphasized training for resettlers in skills that were useless in Lesotho. One of the project consultants, who had long experience with forced resettlement for dams, was reported to have said privately that the chance of the project creating alternative livelihoods for affected people was "virtually nil"21. What are we to make of this account of the introduction of company law into Basutoland and the subsequent unraveling of both the direct and indirect effects of the opening up of the country to foreign capital? How should we understand with hindsight the views of those advocating the introduction of modern companies legislation? And how should we now view those opposing the introduction of the legislation? In the case of a small nation such as Basutoland/Lesotho the opposition to the introduction of ‘modern’ company laws in the 1950s by leading political figures, just as with the opposition by a number of chiefs to the legal and economic changes in Hawai’i in the late nineteenth, demonstrates the astuteness of such figures in respect to the long-term effects of these transformations to their legal and economic landscape of their nations and the difficult decisions which exist for such states. However, they also illustrate the limed scope in many cases of finding means to resist such transformations in the face of extant relations of power and the inequities within which those relations operate in such contexts. In the case of Basutoland the immense problems faced by small nations in a globalizing world are dramatically reflected in he fact that the very leader who was the most vehement force opposing the introduction of the new company laws in the 1950s was, some 40 years later Prime Minster of the nation when the arrangements were set in place to construct the giant Highland Dam, which has had such a malign and continuing effects on the possibility for the Basuto way of life to continue in any meaningful sense. ‘Universalism’ with Exceptions: The Company Laws of Colonial India and South Africa i) India As was the case elsewhere in the British Empire, Companies Acts based on British legislation were introduced to India during the colonial period. The 1856 Companies Act, which had introduced a general scheme of limited liability to Britain, was almost immediately also adopted in India, the legislation being legislated for the colony in 1857. In commenting on the suitability of this legislation to Indian needs and local conditions Rungta noted that: 21
The Record of Twelve European Dam Building Companies (2000) p.120
9 The Acts provide examples of a complete disregard and an utter failure on the part of the legislators to take into account the peculiarities of conditions in India. If there is any underlying theme running through the company legislation of a full half-century in India...it is a steadfast adherence to the policy that what was good for Britain must also be good for India22. Rungta is particularly scathing in respect to the inability of Indian companies legislation in the nineteenth century to make proper provision for the needs of the multitude of small businesses, to deal with the very real differences in the structure of the capital market in Indians compared to Britain, or to adapt the administrative structure of the companies law to the practicalities of India. One particular focus of criticism of Rungta and other critics is in respect to the `managing agency system’, which was already entrenched in Indian commercial life before the introduction of companies’ laws based on British legislation in the middle of the nineteenth century. The managing agent system differed from a corporate structure built around a board of directors. Boards of Indian companies during the colonial period performed few, if any, real decision-making functions. They were often no more than rubber stamps. Indian companies instead had a managing agency house appointed to manage the dayto-day business of the enterprise. These managing agents had control of the promotional, financial and managerial functions of the company and their relationship to the shareholders in the company and their responsibilities were set out in a written agreement which formed part of either the Articles or Memorandum of Association of the relevant company. This structure built on the colonial practice of British capital in using managing agency firms as intermediaries in the establishment and operation of ‘indigo plantations, coal mines, iron and steel works and…tea gardens and other kinds of industry’.23 Goel comments in regard to the factors that led to this peculiar set of arrangements: Obviously, the companies constituted by the British, whether registered in England or in India, stood in great need of able executives for the management of their concerns in India. These managing agency firms met this difficulty of finding in India directors, especially managing directors, who could remain in the country long enough to guarantee the continuous supervision for the successful conduct of such concerns. Consequently, when new companies were formed (in London or India by the British) the practice grew, almost invariably, of entrusting the actual management of new concerns to such old and well established agency firms as could command the British investors on terms and conditions as to their tenure and remuneration etc incorporated in written agreements which often formed part of the Articles of Association of the managed companies24.
22
Rungta, R (1970) at p.214. Goel (1961) at p. 420. 24 ibid at p. 421. 23
10 The role of these managing agencies was to become one of the most controversial features of Indian company law during the colonial period. Both government officials and Indian shareholders became increasingly critical of this ‘managing agency system’, which, they argued, held back Indian industrial development by cheating shareholders and ruining the companies that they managed. The managing agents themselves, however, argued that the system was beneficial for the companies they managed and for the Indian economy as a whole. In their defense the managing agent’s and their defenders suggested that the managing agency houses, by uniting under one firm financial, industrial, and commercial interest, were able to reap the benefits of integration and economies in management and administration; so, for instance, the managing agencies banks could mobilize capital for their industrial concerns, while they could use their transport networks to move raw materials and finished goods. This structure, it has been argued by some, was similar in ways to Japanese zaibatsu or the modern multidivisional firm25. One of the more detailed analyses of the managing agent system suggests that ‘this unique institution of company management emerged and grew in response to the acute shortages of entrepreneurial ability, managerial personnel and venture capital in India’.26 This version of the ‘historical necessity’ of the managing agent system in colonial India has, however, been subject to significant contestation in recent years. Some accounts suggest that it was not so much the lack of managerial ability amongst Indians which gave rise to the managing agent system; rather it was the distrust of Indians by the British which lay behind the adoption and continued use of managing agents up to independence and beyond27. Nevertheless, as a consequence of significant disquiet relating to perceived abuses by managing agencies beginning in 1913 Indian Parliaments28 made several attempts to reshape the Companies Act in ways that were more suited to local needs.29 The main focus of these efforts was the abolition of the managing agent system itself, which was seen by many as an innovation introduced into Indian corporations law in the nineteenth century to accommodate the interests of investors from the colonising power, which by the early twentieth century had outlived its usefulness and produced few benefits to the local economy30. This system was perceived by many as a significant brake on the development of an indigenous entrepreneurial system in India, and as productive of much fraud and malpractice. Managing agents were generally perceived to extract extortionate amounts from the companies they managed, thus reducing the return on investment to shareholders. They were also accused of a range of other sharp practices, which were not regulated by the then extant companies legislation. The managing agent system thus was perceived to have been productive of a range of dishonest and unproductive practices, which did little to advance the vitality of the corporate sector, and which required State intervention to 25
Misra, M. (1999) Goel R K (1961) at p. 389. See also: Goel R K (1969), pp. 152-177. 27 see Rungta, R (1970) 28 The Indian Companies Act 1913 was, however, after much discussion as to the need to accommodate local needs in the end largely based on the English Companies Consolidation Act of 1908 29 For examples see. Basu S.K (1958), and Maheshwari R P and Maheshwari S N (1972, at p. 402 30 For an account of the origins of the managing agent system in India see Kling, Blair B (1966) at pp. 37-47 26
11 bring under control. 31 In 1913 the then Secretary of the Commerce and Industry Department, R.E. Enthoven impressed on the Government that: To pass a Bill regulating the constitution and management of companies in India and to fail to deal with the notorious irregularities of the managing agent system would surely be to lay the Government open to serious criticism. It has to be recognised that English Company Law when imported into this country requires special modifications if it is to deal with conditions which do not exist in England…32 He then went on to specifically address the issue of abuses of the managing agent system: …it is possible, and not uncommon, the managing agents, as firm, should buy a very large quantity of jute, cotton, coal or other commodity without indicating at the time the transaction is completed, whether they purchased for their firm or for one or more of the companies for which the firm acts as managing agents. Hence it may occur that, after making a large purchase of this description, if the market becomes unfavourable, the managing agents are tempted to represent the transaction as effected on behalf of one of the managed companies while, similarly, if the market improves there is nothing to prevent them treating the transaction as the property of the firm, and thus become entitled to the profit.33 Despite the considerable evidence of abuses of the managing agent system, and very strong representations from the colonial government that the managing agent system either be abolished, or considerably modified to prevent further abuse there was considerable opposition to such changes in Great Britain (and, of course, amongst those in India who would be adversely affected by the abolition of the managing agent system). The managing agents were of great use to the British as a comprador class, and thus protection of their interests was considered vital by those who benefited most from their continued role in the management of Indian businesses. The comments of Sir J.D Rees on the proposed changes to Indian Company Law indicate that this was the case. In 1914 Rees stated that the Company Law Bill then before Indian Parliament was one ‘which closely concerns the interest of business firms partly or wholly domiciled in England…certain of its provisions are’, he said, ‘in the opinion of business men, likely to have injurious effects both in India and in this country, particularly those relating to directors’. Rees suggested that efforts should be made to ensure that the Bill was not passed in its then current form.34 As a result of these representations and other such comments emanating from the ‘home country’ the legislation was not passed in the form originally proposed, despite the fact that in its final form it simply had proposed tighter regulation of the activities of managing agents and provided for the majority of a companies directors to be elected independently of the managing agents. Even such modest reforms appear to 31
On this point generally see Misra, A. M. (2000) cited in Goel (1961) at p.425 33 ibid, at p. 426 34 cited in ibid p.426 32
12 have been seen as potentially disruptive of vested interests and thus to be opposed at all costs.35 In the end the 1914 Indian Companies Act contained little which had any practical effect. As we have seen, under considerable pressure from vested interests any clauses, which specifically dealt with managing agents, were deleted from the proposed legislation before it before it became law. Therefore the rights and obligations of managing agents continued to be determined in accordance with common law and statutory provisions relating to the law of contract and agency, rather than under the terms of the Companies Act itself. The Companies Act of 1914, however, did make an elected board of directors mandatory for the first time in India. However, the drafting of these provisions was so weak that they did not prevent managing agents swamping such a board with their nominees and controlling the subsequent election process. Also, the 1914 Act was deficient in assigning no specific powers to the elected board of directors in such companies.36 Despite these legislative and practical deficiencies there was little discussion for some time after the First World War of the matter of Company Law reform, as more pressing matters took centre stage. Nevertheless, there continued to be considerable local antipathy to the managing agent system. This is reflected in the tenor of debate when the matter again finally came before Parliament in 1936. The Indian Companies (Amendment) Act 1936 was specifically aimed at curbing the powers of managing agents.37 It detailed for the first time the rights and duties of managing agents as an integral part of Indian Company Law.38 However, this amending legislation had numerous deficiencies, not the least being that managing agents were placed under the direction of directors except when otherwise provided for in ‘the agreement’. It is therefore not surprising that many agreements conferred broad powers on the managing agents. For instance many agreements contained a clause that authorised managing agents to do ‘all acts and things not specifically reserved to be done by directors’.39 By the years leading up to Indian independence the managing agency system was in many quarters regarded symbolically as a vestigial remnant of British rule and the long period of subservience of the Indian economy to overseas rather than local interests. At a more pragmatic level the managing agency system was also considered by many as a significant brake on enterprise and initiative in India and a major contributor to corruption in business practice: The Managing Agency System, which has been described in certain quarters as the pivot of industrial enterprise in India, has been principally responsible for the growth of those evils and abuses which have become too patent to need detailed description . . . Their insistence on the enjoyment of unregulated license is in our considered opinion a most suicidal claim which in course of time, is bound to evoke measures of
35
ibid Goel (1961) at p. 402. 37 ibid at p. 403. 38 Indian Companies (Amendment) Act 1936, s2(9A). 39 Bombay Shareholders' Association (1936) particularly at pp.29 and 102. 36
13 an extreme character to suppress this license40. The paternalistic aspect of this system, which effectively restricted the capacity of Indians to participate in management, was again seen in the years leading up to independence as an undesirable remnant of colonial practice. Commenting on the various factors, which gave rise to the managing agent system the Indian Company Law Committee Report of 1952, remarked: History, geography and economics all combined to create and develop a system which, in some of its distinctive features, still retains its unique character. While history has changed and geography has been countered by modern developments in transport and communication, this country still lacks a properly organized capital market. An integrated capital market, with issue houses or investment syndicates occupying a central position in it, provides the main channel through which private investments are made in all advanced countries of the world. In this country, the functions performed by these financial institutions have been hitherto largely carried on by the managing agents, who have been able to entrench themselves in a very strong position in the private sector of the country’s economy41. The Report on Indian Company Law of 1952 and the subsequent debates on amending the legislation in 1955 were dominated by proposals respecting the abolition of the managing agent system. The resultant legislation, the Indian Companies Act of 1956, made very strict provision regarding the terms of appointment of managing agents, their duration of appointment, the methods by which they might be remunerated and the extent of their powers and duties.42 As one participant in the parliamentary debate on the legislation put it - it was not a case ‘putting fetters on private enterprise, but rather of growing hedges around it’.43 The Committee Report and the parliamentary debates that ended in the passage of the 1956 Companies Act were dogged by criticism from vested interests. Those who most benefited from the managing agent system ensured that attacks were made on these deliberations. Dire predictions were made as to the deleterious effects of upsetting commercial certainties and replacing them with untried and potentially discouraging provisions.44 The Eastern Economist of 29th July 1955 stated in this respect: In the Joint Select Committee, there seems to have been no attempt to control the work and keep it within the bounds normally to be observed by a Parliamentary Committee translating a definite Government policy into law. If the same attitude is repeated in subsequent stages of the enactment of the law, the outlook for sound legislation is not bright.45
40
ibid Indian Company Law Committee Report(1952) at pp.82-83, para. 114 42 Goel (1961) at p.405. 43 Shri C Deshmukh, The Minister for Finance, Lok Sabha Debates, August 10, 1955, vol. V, col. 9800. 44 See, for instance the dissenting comments of N C Chaterjee, in the Report of the Joint Committee on the Companies Bill, 1953, in which he states: This power of abolition of the Managing Agency System by the executive fiat may be influenced by political objectives and mat act as a deterrent on company formation and may check initiative and may lead to undue cramping of the existing concerns. 45 Eastern Economist, New Delhi: R P Agarwala, 29 July 1955. 41
14 These attempts to discredit the process of reform were themselves subject to vigorous attack in parliament from some of the more radical elements in the Lower House. Shri Sadhan Gupta held aloft a copy of one of the August editions of the Eastern Economist and urged fellow parliamentarians to cite the journal for contempt of Parliament for its continuing attacks on the Company Law Committee Report and the parliamentary discussions respecting reform to the corporations law. He also identified the interests which he felt had benefited from the existing provisions and why even more drastic reforms than those proposed should be made: [Referring to the continuing dominance of foreign interests in the Indian economy after independence ] …this is the kind of economic dependence we still have on foreigners, in spite of the fact that we have won political freedom...What has this Bill done to relieve our economy of the vicious grip of the foreigner? Let us not forget that this grip is exercised by foreign interests in joint stock companies in various forms. This being a Bill to regulate the affairs of joint-stock companies, I ask, what provision has this Bill made to liberate our economy form the vicious grip of the foreigners?46 Shri Gupta went on to propose that foreign shareholding in almost all sectors of the economy be prohibited. He felt that the Companies Law should spell out these prohibitions. He also went on to say that even more robust provisions than those contained in the proposed legislation in respect of the managing agent system should be legislated. He elaborated on how the managing agent system was yet another aspect of the mechanisms through which foreign interests maintained their economic dominance, even after India had achieved political independence.47 Despite the nationalist rhetoric of Shri Gupta, the central issue raised in his speech the manner in which core economic legislation, such as how corporations law and associated ‘economic’ legislation establishes and perpetuates relationships of dependence, which extend far beyond the formal cessation of colonization, is a matter of significant importance to formerly colonised states. In Pakistan the managing agency system was not finally eliminated until 1972. In a series of articles in the Pakistan Times of that year the hostility to this institution is clearly manifested48. The front page of the Pakistan Times on the 13th January1972 carried a banner headline trumpeting ‘Good Riddance!!!’ celebrating the abolition of the managing agency system, which had been inherited by Pakistan as a consequence of its own history as a part of colonial India. This salvo was followed by another article on the abolition of the managing agent system on the 17th January, which stated: Under the `Managing Agency and Election of Directors order 1972 Dr Mubashir Hasan, the Finance Minister, announced the abolition of the managing agency system, terminating the agents’ agreements and contracts without compensation…Control of companies previously wielded by the managing agencies was transferred to the directors of the companies. In strong language Hasan said, according to the Pakistan Times, (p.83) `that managing agencies were one of the 46
Lok Sabha Debates, August 10, 1955, vol. V col. 9901 Ibid, col 9908. 48 For further details see Gustafson, W. Eric (1974) at pp.81-82 47
15 worst institutions of loot and plunder through which the `cream of profit was skimmed by a handful of people who were able to control capital worth about Rs. 50 to 60 crores with an investment of Rs. 50,000 or so. They had a complete stranglehold over the industry’49. The pressure on postcolonial states to adopt forms of corporations’ law that conforms to the corporate laws of globally dominant economies is immense50. However, rather than simply the crude use of the joint stock company mechanism and use of other legal devices, such as the managing agent system, to perpetuate control being the sole aspect of such post colonial influence one should also note the importance of language and the enduring nature of the specific frames of reference of thinking which are inherited from the colonial past. The manner in which our frameworks for thinking about certain matters, such as how to provide for economic organizations such as corporations, have often, in the case of formerly colonised societies been set by the colonising power in a prior epoch to suit their needs rather than the needs of the colonised state. Whilst this is possibly an unexceptional observation its ramifications in the period following independence are profound. In India the 1950s represented a period in which the government and the broader community were looking for a distinctively Indian alternative to the corporate laws which they inherited from the colonial period; or at least a system of corporations law and regulation which was not a simulacrum of the English legislation. Whilst Shri Gupta was arguing for the ‘Indianization’ of corporate law, other members of parliament were suggesting a wide variety of models - one of the most popular suggestions was to reconstruct Indian corporations law in the image of the then Yugoslavian corporate legislation.51 The trajectory of company law in India illustrates the problems presented for formerly colonized economies in a global system in their attempts to develop a jurisprudence of company law which attempts to be independent and to serve, at least to a degree, local interests over the interests of some former colonial power. The substantive legislative structure of Indian Company law, like that of many other colonies, slavishly followed the English model. Even when substantial amendments were made to the local legislation these were generally simply consolidations of the more frequent amendments made to English legislation. Even after independence India continued to follow the English template, rarely diverging from what was now a familiar model.52 Indian company law has thus, until recently, like most of the other former colonial systems we have been examining borne the imprimatur of its origins in English company laws of the nineteenth century. As with South Africa there has, however been a recent impetus for significant change in Indian company law. Driven by a 49
Pakistan Times, 17/1/1972, 1:2 For an argument respecting the negative aspects of this pressure for convergence in corporate laws see Bakan, J., (2004) & also Glasbeek, H. (2002). For an alternative view see Micklethwaite, J & Woolridge, A. (2003) 51 Lok Sabha Debates, August 10, 1955, vol. V 52 Verma S.K & Guta Suman (2004) in their recent influential report on Indian companies law and corporate governance Corporate Governance and Corporate Law Reform in India, IDE, March 2004, Japan state the following in regard to the continuing subservience of Indian corporate law to its English origins post independence: The development of company law in India has so far followed the footsteps of English law with some minor exceptions, at p.7. 50
16 revival of interest in the Hindu past there has also been a rediscovery of the ancient Indian origins of the corporate form. The recent Institute of Developing Economies Report on Corporate Law Reform in India states that: Globalisation of the marketplace has ushered in an era wherein the quality of corporate governance has become a crucial determinant of survival of corporates. The compatibility of corporate governance practices with global standards has also become an important constituent of corporate success. The practice of good corporate governance has, therefore, become a necessary pre-requisite for any corporation to manage effectively in the globalised market53. This Report also notes the drag of colonial experience on contemporary practices, and the need to change these historical inheritances to enable contemporary evolution of Indian corporations law. In particular the IDE Report notes the manner in which the legacy of the managing agent system still infests aspects of Indian company law practice, particularly in respect to corporate governance structures. The Report notes that: Business groups are notable features of the Indian corporate sector. They are organized through extensive cross–ownership and are often dominated by a controlling family, who has good contacts in the government…This type of ownership structure has its roots in the pre-independence managing agency system that was abolished on 1 April. 1970. But there are few signs of a well-functioning corporate control in this structure. One reason for this is that a typical public corporation is closely held and in most cases dominated by the founder and his family or his associates. Secondly, the external equity is a relatively small part of the capital structure54. (ii) South Africa The introduction of limited liability incorporation legislation into the Southern African colonies well illustrates the point made earlier in respect to the subservience of such developments to metropolitan rather than colonial needs. Southern Africa, even though a settler economy, already had a relatively developed system of company law, which had apparently worked well in serving local needs until the ‘need for modernization’, in the form of the introduction of legislation modeled on the English Companies Act was raised in the early to mid 1860s55. Shortly afterwards legislation modeled on the then current English legislation was introduced. As the recent South African Department of Trade and Industry Report on the future directions of company law notes in regard to the emulative nature of South African company law at this juncture: Company law has existed in South Africa since 1861, beginning with the Joint Stock 53
ibid at pp.1-2 ibid, at p.27 55 For a recent brief, but scholarly, account of the introduction of company laws based on English models into South Africa, see Burdette, D.A. (2000) 54
17 Companies Limited Liabilities Act No 23 of 1861 of the Cape Colony, which, along with other provincial company legislation, was a carbon copy of equivalent English legislation 56.
Joubert57, in his monumental reference work, The Law of South Africa, analyses the impelling force behind this sudden enthusiasm for introducing this new business form modeled on the then extant English companies legislation, despite the fact that existing legal structures seemed to be functioning adequately: The discovery of diamonds and gold in this country in the latter part of the nineteenth century led to an explosion in commerce and industry. One obvious and immediately felt need was for a developed system of company law. The indigenous legal system insulated as this country was from the tremendous economic expansion in Western Europe in the first half of the nineteenth century has not yet experienced the benefits enjoyed by other legal systems such as that of England. Its mercantile law came under strain but in the main proved capable of adaptation to the rapid change in conditions and holding its own against the fierce competition posed by the readily accessible English law. Company law, however, was an exception. English company law at the time was relatively sophisticated…whereas Roman-Dutch law had little to offer. Perhaps not surprisingly the Joint Stock Companies Limited Liability Act of the Cape (1861) took over virtually verbatim prior English companies legislation. This practice of extensive borrowing from the English legislation, being achieved directly or indirectly, was followed in all the states and colonies until Union.58 Here we again see English company law being perceived as an important conduit of ‘modernity’ in a colonial setting. Even though existing alternatives were available, they were apparently considered too backward and unsophisticated to be able to assist in the economic modernization of the South African colonies. Girvin, in his historical analysis of the development of company law in South Africa has also noted the perceived inadequacy of Dutch-Roman law in this area to the process of economic modernization necessary to provide a ‘favorable’ climate for investment in the new extractive industries then being developed.59 Girvin also notes a further reason for the process of adopting British models occurring at this juncture in the corporate law of the Southern African colonies: During the course of the nineteenth century South Africa came under the influence of the surge of industry and trade in England and Europe, but the opening up of the diamond and gold-fields in the latter nineteenth century marked the first real explosion in commercial activity. In the early part of the nineteenth century English law began to have a profound effect…eventually the developments of English law were irresistible, especially when all the judges recently appointed were English (with the notable exception of Menzies, a Scot) and thus familiar with English mercantile law. Company law is a prime example of the assimilation of English statutory law by the Cape legislature…60
56
DTI Report, South Africa (2004) at p.12 Joubert, W. A. (1982). 58 ibid, p.11. 59 Girvin S. (1992) at pp.63-77 60 ibid at pp.69-70 57
18 Both Joubert61 and Girvin62 take a leap of faith in their historical account – we are told that Roman-Dutch company law had little to offer, but are offered no elaboration of this. Surely Roman-Dutch law in this respect was not substantially different than the Roman law based systems of company law, which dominated in European countries other than England? Surely such a system of company law had proved just as efficacious as that in England in promoting development and investment? This narrative recounted by Joubert of the importance of English company law in the economic development of Southern African natural resources, indeed its core importance, reads as if Mr. Goldbury (the company promoter in Utopia Limited) must have been acting as an adviser to the Southern African colonial governments. Whilst not mentioned in Joubert’s account parliamentary debates in the colonial Parliaments of Southern Africa at the time suggest that ‘expert opinion’ was behind the perceived need to adopt legislation modeled on the English Companies Act. Girvin is a bit more ‘realist’ on this point, seeing an intimate relationship between the specific investment needs of English capitalist in Southern Africa as being the prime motive force for the close relationship between English company law and South African company law.63 He is less prepared than Joubert to accept the ‘tale’ of English company law and English company law alone being the exemplar of modernity and progress. Indeed, as we shall see a little later in this section of the paper, Girvin sees the realignment of Southern African company law more in line with European and United States models after its departure from the Commonwealth as again to do with creating a favorable trading and investment climate for those countries who have the greatest interest in the local economy.64 Girvin indeed seems to imply that the South African company law is in a constant spiral of emulation, from which it cannot escape.65 There can be no real indigenous form of company law as a consequence of the external demands (in particular in the areas of foreign investment and trade) made on the corporate form as a vehicle for a range of trading and investment purposes. Once introduced companies legislation in Southern Africa largely kept pace with developments in England until the 1960s, amendments being made to the local legislation shortly after amendments were made to the English legislation.66 A decisive turning point in this practice of ‘copying’ wholesale the ‘latest’ English legislation was the Report of the de Vries Commission in 1970.67 However, even before this conscious attempt to break with the past, just as in a number of other colonial settings, the use of English legislation in a ‘foreign’ environment had a number of unexpected results, which were not apparent in its application in the vastly different context of Great Britain.
61
Joubert (1982) vol. 4 at p.11 Girvin, S. (1992) p.70 63 ibid 64 ibid, pp.70-71. 65 ibid, pp.72-73. 66 ibid, p.75 67 Van Wyk de Vries Commission Report (1970) R 45/1970; Supplementary Report containing Draft Bill (1972) R 31/1972 62
19 As with any landmark legal decision, the Salomon68 case that definitively recognized the separation of the legal personality of a corporation from that of its shareholders also provided individuals with new strategic possibilities. The decision and its assertion of the separate legal personality of a company form, gave the ‘conceptive ideologists’ for a range of colored and African small business men and women a new means by which to potentially evade or circumvent the racial restrictions then applying to particular types of investment and landholding. That small group of attorneys who Chanock69 notes were the advisers of African and colored clients quickly seized on the potential of the company form to ‘get around’ a number of the social and economic restrictions under which their clients laboured. In particular the recognition by the Salomon’s case suggested that as a separate entity a proprietary limited company would not be able to be racially classified under the then applicable racial laws in South Africa. The disabilities which applied to individuals would not, so it was considered, apply to the `racially neutral’ proprietary limited company in respect to landholding and a range of other legal impediments under which colored and black citizens labored at that time in South Africa. In February, 1915, acting on the advice of their attorney, a Mr. Dadoo and a Mr. Dindar registered a company in Pretoria called Dadoo Ltd. Mr. Dadoo held 149 of the shares and Mr. Dindar the remaining one share. About a month after its registration Dadoo Ltd. acquired land from a Mr. Spiller. The deed to this land had a condition in it that prohibited its transfer to any coloured person. The Krugerspdorp Municipal Council applied for the setting aside of this transfer of land on the basis that Mr. Dadoo was a coloured person and thus the transfer was prohibited by law.70 Mr. Dadoo argued that Dadoo Ltd. was the beneficial owner of the land, not him, and the company was not a coloured person. It was asserted in return by the Council that this whole transfer was an attempt to commit a fraud on the legislature and thus could be set aside. The argument, in short, was in these circumstances the corporate veil could be lifted to expose the ‘racial characteristics’ of the person(s) who stood behind the corporate veil. Before this litigation legal opinion in South Africa around the decision in Salomon’s case71 had been mixed, but was largely favourable, seeing it as providing a more certain environment in which small businesses could incorporate with limited liability without having any uncertainty as to the legality of such a course of action.72 Salomon’s case was seen as a relatively benign acknowledgment of what had already become reality, the ‘legitimate’ existence of small partnership-like private companies operating with the benefit of limited liability. Just as in England the decision was seen as an almost inevitable, if nevertheless inconvenient, development for creditors, in particular trade creditors and other varieties of unsecured creditor. Little thought was given at the time of the introduction of legislation as to the possible limits of the 68
ibid. Chanock, M (1999) at pp.72-74. See also: Chanock, M, (1985) Chanock M, (2000) 70 Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530. The Dadoo family were prominent activists in the South African Indian Congress, Yusef Dadoo, the son of Mr. Mohamed Dadoo, the plaintiff in this case, was the leader of the South African Indian Congress for many years and was also a long-time member of the Revolutionary Council of the ANC. Yusef Dadoo is buried in a plot in Highgate Cemetery, London adjacent to Karl Marx’s grave. 71 Salomon v A Salomon & Co. Ltd. [1897] A.C. 22 72 Joubert, W (1982) vol.4 at p.11 69
20 separate legal personality conferred on companies so created. There was not developed doctrine of lifting the corporate veil even in the United Kingdom to guide colonial courts and practitioners in this regard. In the trial court decision, which preceded the appeal to the Supreme Court in Dadoo’s73 case, the trial judge stated that by forming a company to hold the land in question Mr. Dadoo and Mr. Dindar had indeed intended to commit a `fraud’ on the legislature and in such a circumstance it was permissible for the court to lift the corporate veil: If therefore the law prohibits an Indian or coloured person from obtaining the disposal of and the control over a stand in Krugersdorp, it equally prohibits a body of Indians from becoming a corporate body in order to control as such property in the Municipality. The limited company of Dadoo Ltd. was manifestly formed to acquire what Dadoo himself could not hold. If [the legislature intended] to guard against the acquiring of a right by Indians or coloured persons to stands on a proclaimed area…then this mischief is not avoided if we allow a collection of Indians to hold these stands under the guise of being incorporated…it is in fraudem legis for a number of Indians to combine and to float themselves into a limited liability company and so laugh at the Legislature.74 When it went on appeal to the Supreme Court, Dadoo’s case presented a number of dilemmas. In the first instance it presented one of the first opportunities to the superior courts in Southern Africa to interpret and apply the decision in Salomon’s case in a local setting. Secondly, it involved an interpretation of the limits of and circumstances in which the corporate veil might be lifted. Finally, it presented a dilemma in regard to the intersection of one local set of rules - those restricting full involvement by coloured and Asiatic citizens in the civil life of the colony on racial grounds - and another set of rules emanating from the ‘home country’ - those regarding the ‘separateness’ of a corporation from the shareholders who held interests in it. Could a court pierce the corporate veil to determine the ‘race’ of corporations? Was it a fraud on the legislature on the part of shareholders to use a company to hold assets that they themselves were not entitled to hold? Innes, J. followed Salomon’s case fairly closely and came to the conclusion that the company was legitimately formed, was separate as a legal person from its shareholders and that no fraud on the legislature had been committed.75 In other words, Dadoo Ltd. was able to hold the Stand (or freehold to the land) in question. Solomon, J. concurred with this approach in his judgement.76 He stated that the Salomon case had made it quite clear that a company, even if a single shareholder owned all the beneficial interest, was a separate entity from its constituent members. He continued:
73
Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530 ibid, at 536. 75 ibid, 552-553. 76 ibid, 562. 74
21 The conclusion, then to which I come is that there is no direct contravention of Article 2 of Law 3 of 1885, inasmuch as the stands are owned not by the Asiatic shareholders but by the company itself, which can in no sense be described as Asiatic77. De Villiers, J.A. had somewhat more difficulty in reconciling the various threads of the case than did his colleagues. Whilst acknowledging that the company, Dadoo Ltd., was indeed a separate entity from its Indian shareholders de Villiers, J.A. nevertheless felt justified in reaching the conclusion that the whole arrangement had been a fraud on the legislature: No doubt the corporation is a separate and distinct persona for most if not all purposes, but it does not follow that in a statute such as this the Court is debarred from looking at the character of the individual shareholders...I have come to the conclusion that as far as Dadoo Limited was formed for the purpose of dealing in land in the Transvaal it was formed for an unlawful purpose, and the registration of the stands in question in this application…in the name of the company was in fraudem legis and null and void78. Many Indians observed this legal case at a distance, with a keen interest in the treatment of Indian interests and investments in South Africa. No less a figure than Mahatama Gandhi maintained a keen interest in the Dadoo case. In a letter to the press in January, 1920 Gandhi noted the following respecting the Dadoo case: [In South Africa] thousands of pounds worth of landed property is registered in the names of companies in which Indians enjoy a dominating position. If the judgment stands, everyone of these companies will become dispossessed of the land they have occupied for years, lands which they acquired openly and under legal advice and which has been registered in the Land Registry Office with the full knowledge of all the circumstances by the registrars, and only last year, when the new disabling Act was passed by the South African Legislature. We were told that the holding of land in this manner...would not be affected by the legislation, and in justification of the measure, we were told by all the speakers in the Union Assembly that the legislation would protect existing companies and mortgages. The judgement in question comes, therefore, as an eye opener. I venture to submit that, even if the judgement is sound, it evidently frustrates the intention of the Legislature and deprives Indians of rights they have enjoyed without question for years past. I hold the impending sin must be averted, even if it be done by special legislation, as was done in 1914 in connection with the legal recognition of Indian marriages. The second point raised in the cablegram refers to a magisterial judgement, and it means that Indians as Indians may be declared as undesirable, not on the ground of insanitation or immorality, but because they compete with European traders to their detriment. If this doctrine were to hold good, not a single Indian can engage in trade whatsoever in South Africa79.
77
ibid, 562. ibid, 573. 79 Gandhi, M (2000) vol. 19 at p.343 78
22 The issues involved in Dadoo's case were, however, effectively resolved even before the majority decision of the Supreme Court in favor of Dadoo Limited was handed down. Adopting that most ‘South African of solutions’ the legislature passed an Act to prohibit companies with predominately ‘coloured’ shareholders from holding stands of land of the type in question in Dadoo’s case. This legislation produced its own problems, particularly in respect of investments by overseas companies in South Africa. One of my former colleagues who had just entered his articles in a South African law office in the 1950s recounted to me the saga surrounding his first case as an articled clerk.80 British arms manufacturer Vickers Armstrong was purchasing property in South Africa on which to erect an arms plant and had to provide a certificate that it did not have a significant number of shareholders who were ‘coloured’. My former colleague was assigned the task of following this up with Vickers’ head office in London. When he finally got through on the telephone to the managing director he was told that providing such a certificate was impossible. Vickers Armstrong had thousands of shareholders from all over the world and for the entire managing director knew a number of them were ‘probably Indian Rajahs’. After this was communicated, in somewhat less colourful language to the responsible partner of the law firm it was decided to seek a certificate from the government ‘deeming’ Vickers Armstrong a ‘white corporation’. This was duly granted, as apparently it was for a number of overseas enterprises investing in South Africa at this time. Of course, no such leniency was shown in respect to locally registered companies with shareholders who were racially either in the ‘doubtful’ or ‘unknown’ category. South African company law continued to follow English developments very closely until 1960, when South Africa left the Commonwealth.81 Even in the 1960s South African company law continued to follow English developments.82 However, as we have noted above, with South Africa’s principal trading arrangements shifting from England to other parts of Europe and the United States pressures were starting to mount to have local companies legislation more closely reflect the laws of these countries with which they did most trade. The English Jenkins Committee recommendations on reforming company law were a touchpoint for change83 (just, as we will note below they were to a certain extent in Canada also). The radical cast of a number of the Jenkins Committee recommendations led to a certain degree of perturbation in company law circles in South Africa as to the wisdom of adopting these English reforms holus bolus. This led to the appointment of a local committee of inquiry, the Van Wyk de Vries Commission of Enquiry into the Companies Act in 1970.84 In advocating a move away from simply accepting English developments as gospel and thus an essential part of local companies law the Commission noted that the future would be characterized by ‘more difficult and complex problems. Company law is never static (and thus) must keep abreast of new methods and techniques which are being evolved 80
Personal communication with Professor Martin Chanock, La Trobe University, 20 September 1999. see the recent Department of Trade and Industry Report in South Africa on company law reform: South African Company Law for the 21st Century DTI, South Africa (2004) 82 On this see Girvin (1992) and DTI Report (2004) 83 Girvin (1992) at p.71 84 ibid. 81
23 by the business community in ever increasing tempo’.85 The precise source of these new adaptive mechanisms becomes clearer in a number of the recommendations in the Main Report: While we are able to benefit from many of the findings of the Jenkins Committee (1962) and from the ensuing legislation, the English Companies Act of 1967, they should be approached with some caution. The past decades have witnessed the emergence of differences between company activities and their underlying concepts in the respective countries. The time has passed that South Africa can simply rewrite into its own legislation what it finds in the corresponding English legislation86. Since the de Vries Commission Report, despite the momentous changes in the political landscape of South Africa there was, until very recently, little in the way of change in the company laws of the country. The recent Department of Trade and Industry Report of 2004 entitled `South African Company Law for the 21st Century’ makes the following observations respecting the need for change: In the last ten years our economy and its legislative framework have undergone a massive programme of reform…The decision of the DTI in South Africa to review and modernize company law in this country was based on the need to bring our law in line with international trends and to reflect and accommodate the changing environment for business, both in South Africa and globally… The current framework of South African company law is currently built on foundations, which were put in place in Victorian England in the middle of the nineteenth century…The review of company law in South Africa is now a priority. South Africa has fundamentally changed since the last review of its company law. A new constitutional framework and political, social and economic environment have been established post 1994...[This is] an important opportunity to carry out path breaking changes in our commercial environment that will benefit our economy and citizens87. Thus, when it was largely dependant on trade and investment from England South African company law was a virtual replica of the company law of England. However, it of course could never be so in its entirety. Certain adaptations were necessary to accommodate local requirements - Dadoo’s case and its prologue are an illustration of how colonial company law could be adapted around the margins in quite odious ways without any major effect on its primary objective of allowing close integration between the colonized and the colonizer. In the postcolonial period it is not the case that these historically inherited structures will disappear. Formerly colonized nations are still integrated into an international economy and thus will need to have corporation’s laws that are assimilable into the global economy, unless the nation in question wishes to become economically isolated.
85
Van Wyk de Vries Commission Report (1970), South Africa, RP 45/1970 9-04. ibid 87 The Department of Trade and Industry, South Africa (2004) at pp.4-5 86
24 It is also the case that as part of the post colonial legacy the manner of thinking and discourses surrounding companies is more or less established and will in many cases remain in place for some time after the colonial nexus is broken. The parameters of thinking in regard to companies and the role of company law are thus often set within a series of clearly marked boundaries. Disrupting commercial expectations and changing a language and range of concepts that is already familiar is extremely difficult, and is often countered by resistance when attempted. It is only with the emergence of the new State of South Africa that alternative models for company law could again be imagined. Even then in a global economy there are strong forces against localism in company law. Even countries long removed from the orbit of normalized trading arrangements, such as China, have quickly spawned a simple, facilitative form of company law, which is not at odds with the systems of company law in operation in the leading world economies. 88 It would indeed be surprising, for the same reasons, if South Africa spawned a new corporate law based on local ideas and specifically ‘regional’ in its focus. Despite the apparent break from the past represented by the recent DTI Report on Company Law it is nevertheless the case that norms of international trade are the greatest force dictating the architectonic structure of South African company law in the postcolonial period. This is clearly recognized in the Report where it states: This policy paper sets out the basic approach we intend taking in the reform...which is up-to-date, competitive and designed for a modern corporation that is not only a domestic institution operating in a new environment but also an international competitor. We have taken into account that these days many companies are global and operate in many economies and jurisdictions, not only that of South Africa89. Conclusions: At the beginning of this paper it was stated that the adoption in colonial economies of companies legislation modeled on British legislation not only facilitated an Empirewide system of company law with a common terminology and set of practices, but also came to symbolically represent ‘progress’ `civility’ and ‘modernity’ for these States. The shadow of this domination of a particular model of corporations law inherited from a colonial past continues to cast its pall (in various degrees) over corporations law in all the jurisdictions we have examined. Law School curricula in many of these jurisdictions until recently or still ‘require’ grounding in the principles of British or United States corporations law and offer little in the way of a comparative dimension. Indeed some recent, influential writings on corporations law have proclaimed the `end of history’ in corporations law90 with the ascendancy of particular `universal’ values in respect to corporate governance in the context of the continuing globalization of trade. 88
Though whether companies legislation modeled on US and other leading capitalist economies corporations law operates in the same manner as in the West when placed in these different cultural contexts has been questioned by one of the leading comparative lawyer s working in this area, Professor Teemu Ruskola. For a detailed analysis see Ruskola, T (2000) at pp. 1599-1729. 89 DTI Report (2004) fn. 88 p.5 90 See, in this regard, the extremely influential paper by Hansmann H & Kraakman R (2000)
25 The possibilities of the particular in corporations law now seems if anything even less likely than may have been the case during the colonial era. The recent Reports on company law by the Department of Trade and Industry in South Africa91 and the privately commissioned IDE Report on Corporate Governance in India92 are both indicia of this phenomenon. Utopia Limited is in the ascendant, even though, as Teemu Ruskola93 reminds us, just as WS Gilbert did in his operetta, the nuances and inflections in meaning of identical or similar corporations laws in different cultural settings may nevertheless carry quite different significance for those who utilize them in these different settings. References Primary Sources Archival material Report of the Proceedings of 2nd Special Session (1958) of the Basutoland Council 30/7/1958-1/8/1958, Basutoland Company Law (Central and South African Department ) PRO, Kew Gardens London,), originally BBS 120/17/1 now DO 35/7269 Cases Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530 (South Africa) Salomon v A Salomon & Co. Ltd. [1897] A.C. 22 (U.K.) Legislation Indian Companies Act 1913 Indian Companies (Amendment) Act 1936 Indian Companies Act of 1956 Parliamentary Debates India Lok Sabha Debates, August 10, 1955, vol. V Reports Report of the Companies Acts (Amendment) Committee 1895 B.P.P., LXXXVIII, 91
DTI Report, South Africa (2004) Verma S.K & Guta Suman (2004) 93 Ruskola, T (2000) 92
26 155 (U.K) The Record of Twelve European Dam Building Companies, February 2000, A Report by The CornerHouse published by The Swedish Society for Nature Conservation, p. 120 available at: http://www.rivernet.org/general/dams/dams_incorp.htm Indian Company Law Committee Report, New Delhi, 1952 Report of the Joint Committee on the Companies Bill, 1953, New Delhi, India The Department of Trade and Industry, South Africa (2004): South African Company Law for the 21st Century: Guidelines for Corporate Law Reform Van Wyk de Vries Commission Report on Company Law (1970), South Africa, RP 45/1970 9-04. Verma , K & Guta S (2004), Report on Corporate Governance and Corporate Law Reform in India, IDE, March 2004 Pamphlets Bombay Shareholders' Association (1936) Representation, Indian Companies Act, the Case for Amendment, Bombay, 1936 Secondary Sources Books Anderson, D., (2005) Histories of the Hanged, WW Norton & Co, New York & London Bakan, J., (2004) The Corporation: The Pathological Pursuit of Profit, Free Press, New York Basu S.K (1958), The Managing Agency System in Prospect and Retrospect, World Press, Calcutta Chanock M, (2000) The Making of South African Legal Culture, 1902-1936: fear, favour, and prejudice, New York: Cambridge University Press Gandhi, J S (1982), Lawyers and Touts: A Study in the Sociology of Legal Profession, Delhi: Hindustan Publishing Corporation, 1982 Gandhi, M (2000) Collected Works of Mahatama Gandhi Online, volume 19, p.343 available at http://www.gandhiserve.org/cwmg/cwmg.html Gilbert W S (1984) ‘Utopia Limited; or The Flowers of Progress’ in A Jefferson, The Complete Gilbert and Sullivan Opera Guide, Exeter: Webb & Bower Glasbeek, H. (2002) Wealth By Stealth: Corporate Law, Corporate Crime, and the Perversion of Democracy, Between The Lines, Toronto, Canada
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