“Company” is a word without any technical meaning but is commonly used to denote a gathering or meeting of people. In the plural, however, the word is readily understood as referring to associations of persons incorporated into a separate legal entity for trading purposes. In New Zealand the great majority of companies in business are incorporated under local legislation which is based on United Kingdom law modified in the light of local conditions and requirements. Thus the Companies Act 1955, which came into force on 1 January 1957, was substantially modelled on the United Kingdom Companies Act 1948. Previous to the 1955 Act, the primary source of law relating to companies was the 1933 Act which repealed the 1908 Act. This, in turn, repealed earlier statutory provisions.
In the United Kingdom, prior to the passing of the Companies Act 1844, trading companies were incorporated by Royal Charter or by special Act of Parliament. One notable example was the East India Company, which was formed under Royal Charter in 1600. Another is the Hudson's Bay Company, formed as long ago as 1670. In 1825 the principle of limited liability was recognised for the first time in the Bubbles Company Act, but applied only to chartered companies. It was not until 1862 that statutory authority was given for the registration of companies with members' liability limited by shares or by guarantee. Since then United Kingdom legislation has, of course, been considerably altered and is at present contained in the 1948 Act.
The contribution made to economic growth by the introduction of limited liability, which substantially paved the way for the ensuing expansion in the number and size of companies, is incalculable. As even a cursory glance at any business directory will reveal, a large proportion of trading, manufacturing, and commercial activity is now carried on by limited liability companies. In passing it may be noted, however, that it is exceptional in New Zealand for farms to be owned and operated by companies.
The scope and importance of companies may be briefly illustrated by the figure for company income (before distribution). In 1962–63 it amounted to £159 million (in a total private income of £1,344 million), compared with £20 million in 1938–39. On 31 March 1964 the number of companies registered in New Zealand was 49,333. This total comprised 1,562 public companies and 47,771 private companies.
Under the Companies Act 1955 any number of persons from two to 25 may form a private company but a public company must have at least seven members. In the 10 years to 1962 over 30,000 private, about 229 public, and 216 overseas companies were registered. All but a handful, which were limited by guarantee, were companies with members' liabilities limited by shares.
Several factors explain this activity in company formation, prominent among them being the general growth in population, trade, and production, and the associated business expansion. Within the general framework of growth there has been the development and manufacture of new products by new as well as established firms and a trend for overseas companies to establish local subsidiaries. Undoubtedly, however, a principal factor especially in regard to the formation of private companies has been recognition of the advantages to be obtained from incorporation of a business as a company. These advantages include the limitation of members' liability, access to better financing facilities, transferability of shares, and continuity of existence. With relatively high death duties, this last is often the main factor influencing members of a private company to change to public company status.
As the recent experience of the liquidation of a major public company, the Standard Insurance Co. Ltd., shows, limited liability is an advantage not to be regarded lightly. Liability usually is limited by shares, that is to say, the liability of members – the shareholders – to contribute to the assets of the company is limited to the amount, if any, unpaid on their shares. The Act, however, also provides for a company to have “the liability of its members limited by the memorandum (of association) to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound up”; that is, limitation by guarantee. Very few companies registered in recent years have been limited by guarantee.