Historical Development of Concept of Corporate Law in India
The laws are developed by the common consciousness of the people, and corporate laws are no exception to it. Business people of the Indian subcontinent utilized the corporate form from a very early period. Corporations as such were not unknown to India as is clear from Kautilya’s Arthashastra (4th Century BC).
“Regulations concerning trade and industry in the Arthashastra have a surprisingly modern look. The trade and industry of the period were characterized by a highly developed organization. The institution called ‘Sreni’ was a corporation of men following the same trade, art, or craft, and resembled the guilds of Medieval Europe. Almost every important industry had its guilds, which laid down rules and regulations for the conduct of its members, with a view to safeguarding their interests. These rules and regulations were recognized by the law of the land. Each guild had a definite constitution, with a President or a Headman, and a small Executive Council. Sometimes the guilds attained great power and prestige, and in all cases the head of the guild was an important personage in Court.
The guilds sometimes maintained armies and helped the King in times of need, though at times, there were quarrels and fights between different guilds which taxed the power of the authority to its utmost. One of the most important functions of these guilds was to serve as local banks. People kept deposits of money with them with a direction that the interest accruing therefrom was to be devoted to specific purposes, every year, so as the Sun and Moon endure. This is the best proof of the efficient organization of these bodies, for people would hardly trust them with permanent endowments if they were not satisfied with their working. Sometimes the guilds proved to be centres of learning and culture, and, on the whole, they were remarkable institutions of ancient India.
There were also other types of corporate organizations besides guilds. Trade was carried on the joint-stock principles; there was Traders’ League, and sometimes we hear even of ‘Corner’ or ‘Trust’, viz., the Union of Traders with a view to cause rise and fall in the value of the articles and make profits cent per cent.”1
There is evidence to suggest that traders would often organize into a partnership form for the purposes of engaging in longer distance travel and trade over sea and land. Usually these would be entered into by two or more people and they would appoint a leader. The entity would be bound by the activity of the partners and the entity appeared to have the ability to own assets separately from its owners. These two features provide the entities with the imprimatur of a contracting entity.
There were also fairly detailed rules developed over the years for the division of assets and liabilities. The rules for sharing assets and liabilities could be determined by agreement or, failing that, by the laws existing at that time that would divide assets and liabilities equally or sometimes by the relative contributions (skill, labour and capital) invested in the entity by members. The latter was more common in partnerships amongst craft people.
There also appear to have been obligations that mirrored the duty of care and duty of loyalty that are such a common feature of today’s fiduciary duties. For a cause of action based on a partner negligently causing harm to the partnership the partners sat in judgment on their co-partner and decided whether such negligence in fact occurred. If the partner was found negligent he had to make good the losses. This bears some similarity to today’s duty of care. Moreover, if the allegation was fraud then the accused partner would face some kind of ordeal or oath. If the partner failed then he would have to make good the losses to the partnership, forfeit his profits and be removed from the partnership. This bears some similarity (except for the method of proof) to today’s duty of loyalty.
These early partnerships also regulated other matters. First, the interest a partner had in a partnership could be bequeathed to his children. Second, the various written sources provide guidance and, in some respects, rules about who should enter partnerships. The general pattern was that “learned” people with similar socioeconomic status and financial wherewithal were encouraged to enter these partnerships. Part of the explanation for this is that it makes monitoring of behavior easier and less costly when the partners are relatively similar, have roughly equivalent assets, and understand each other. Further, requiring partners to have assets means that they have something at stake in the partnership and this should induce them to exercise care in partnership matters. For example, a partner in a trading caravan with no goods to sell is likely to exercise less care and diligence than a partner with goods at stake. The Ancient Indians were clearly cognizant of some of the incentives that might inhabit this organizational form.
This advance and prosperity was the very undoing by way of successive invasion and occupation of India and the ruthless strafing of its institutions by foreign hands including the saga of the East India Company, till Independence.