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234 Critical company law

reconceptualisation of property directly a ected large swathes of the population by rendering them homeless and without their traditional means of survival, but facilitated the unique historical development of the market economy enabling Britain to become the first industrialised economy in the world. With the weight of history bearing down upon the issue of property, it would not be surprising that, as building societies maintained as their object the acquisition of property, the politics of property would have a profound impact on the development of the building society movement. The emergence of early building societies encapsulated a basic conflict, for while the members of building societies were ‘buying into’ the norms of a market economy through the acquisition of private housing or land, they were maintaining a more desirable position of independence and self-determination.

As noted earlier, the creation of private property in the land was almost entirely completed by the passage of hundreds of Enclosure Acts in the latter half of the eighteenth century. Over a thousand Enclosure Acts were passed from 1761 to 1780, with 900 being passed from 1781 to 1800.50 In the period spanning 1793 to 1813, 1,883 such Acts were passed, putting 2,260,000 acres of land into cultivation.51 By this process, ‘common land lying continually fallow on which everyone had the right to pasture his cow, to cut a little wood, and dry some leaf, became by virtue of the Enclosure Act, the private property of an individual owner’.52 Or as EP Thompson puts it, prior to enclosure and engrossment laws, land was held subject to a ‘hierarchy of co-incident use-rights’, a hierarchy that correlated to an individual’s social status.53

Property rights in land prior to the domination of the market economy did not merely denote an individual’s wealth. More significantly, it demonstrated an individual’s political, social and legal status. Formally, there was little in the way of a universally socially stratified justice, although there were many exceptions to the principles of common law. For example, Scottish miners remained as ‘bound labour’ until 1774, slavery remained legal until 1772, while the Master and Servant Acts (the first passed in 1823), which made breach of contract by an employee a criminal o ence, was not repealed until 1875. Under the common law, servants continued to be treated as the chattels of the master. Cornish cites a number of cases in the nineteenth century where servants were punished for very minor acts. Indeed, he states, an underage servant could be physically punished without repercussions for the master unless beaten to death. In that event case the master could face imprisonment or be required to pay damages.54 However, property dominated the legal system by the fact that appointment to legal o ce carried a property

50Op. cit., Atiyah, pp 26–27.

51Op. cit., Halevy, p 201.

52Ibid.

53Thompson, EP, Whigs and Hunters: The Origins of the Black Act, 1977, Pelican Books.

54Op. cit., Cornish, p 287.

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qualification. Cornish, while maintaining that there was a long-standing tradition of common law in England, indicates that social position remained the cornerstone of legal appointment. Judges in the higher courts, or Royal courts, were men of ‘considerable social position’.55 Indeed, he argues, ‘it would have been remarkable had it been otherwise. Those who acquired the highest o ce were expected to purchase an estate commensurate with their station; and they had to show the social accomplishment befitting their place in the order of precedence.’56 Lower down the judicial hierarchy, justices of the peace were drawn from lesser property owners and jurors too were selected by a ‘householder property qualification’.57 Indeed, those who administered justice were those who had the most to gain from existing property arrangements. In the towns, ‘milland mine-owners were drawn onto benches, to continue there the hostilities over discipline and conditions that infected many work-places.’58

Atiyah, in The Rise and Fall of the Freedom of Contract, notes that until the complete emergence of the market economy, it was property law that dominated the English legal system, usurped in the latter part of the eighteenth century by contract law. He argued that ‘this transition from property to a law of contract relating to property merely reflects the now familiar process by which the significance of property rights changed from their use value to their exchange value’.59 Transformed under the market economy, property emerged as just another commodity, valued by the market. Previously, property denoted stability, continuity and heritage, providing for material needs and ensuring the continuity of relationships of deference and domination. However, Atiyah’s assertion that the increased ability to alienate and exchange property (through the contract form) had depoliticised property is not in accord with other important work on the nature of property. Macpherson, for example, argues that property itself is not neutral, but representative of a particular set of social and political relationships.60 He argues that when (and only when) property is for the most part held as private property it appears to be the case that ‘property is a thing’. This is because the right to both enjoy and dispose of property is held by one legal entity. The true essence of property is that it exists as a ‘political right between persons’. And, in the case of private property, it is the political right to exclude all persons from use of the thing. Alternatively, common property represents a shared mutual right of all individuals to the thing. Property rights are, by their very nature, only

55Ibid, p 21.

56Ibid, p 22.

57Ibid, p 20.

58Ibid.

59Op. cit., Atiyah, p 103.

60Quoted by Macpherson, CB in The Political Theory of Possessive Individualism: Hobbes to Locke, 1962, Oxford: Clarendon Press, p 123.

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meaningful when accompanied by a political and coercive organisation that is capable of enforcing recognition of these rights. Private property, therefore, is only a meaningful right because of the political phenomenon of the state, an organised, specialised system of enforcement that ensures private property owners’ absolute right to exclude others – the nature of a right being entirely derived from its enforceability as a claim and the enforceability of that claim depending upon a particular set of political relations.

In pre-capitalist agricultural England, an individual’s legal rights to the land gave a highly visible testimony to their social status. Thus, at the level of politics, real property ownership entirely determined an individual’s right to enfranchisement. Ownership of property was central to the right to vote and remained relevant even after the Reform Act of 1868.61 Macpherson argues that the association of property rights with political (voting) rights had posited itself in the English consciousness for many centuries and this association was so deeply and universally entrenched that it was part of the ideology of the ruling class and radical working class groups alike. In the protracted debates on enfranchisement in the seventeenth century, that most radical of organisations, the Levellers, consistently excluded the possibility of giving the right to vote to wage labourers, beggars and to those receiving alms. The Levellers argued that these men could not experience the independence of mind and freedom that ownership of their own means of subsistence would have given them. Freedom was associated with private property ownership, and free will could only be expressed by the free-born Englishman, free because he was not dependent on the property of another. In debate with Oliver Cromwell, the Leveller Petty stated:

I conceive the reason why we would exclude apprentices or servants, or those who take alms, is because they depend on the will of other men and should be afraid to displease (them). For servants and apprentices, they are included in their masters, and so for those that receive alms from door to door.62

While the Levellers argued on the basis of pragmatism or merely an acknowledgement of material reality, political philosophers, in the emerging liberal tradition, presented private property as a universal, natural and even moral right. John Locke and those following in the Lockean tradition argued that private ownership was an intrinsic quality of a physical object, and that private property ownership was intrinsic to human nature. The ‘natural state’ of mankind was to be engaged in private property ownership, even if that property was limited to ‘property in self ’. Adam Smith emphasised the importance of legislation that underpinned the absolute nature of private

61Reform Act 1868.

62Quoted by Macpherson, op. cit., p 123.

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property rights as essential toward facilitating the exchange of goods and services. As a corollary to this, government should be restrained in its power to intervene with individual property rights; private property rights should be maintained as an immutable principle to which all other interests, including that of the governments, should be subordinate. The political theory of private property was co-opted (notwithstanding its libertarian potential) into the politics of Whig landowners who were undoubtedly keen to uphold the immutable right to private property as against the interference of sovereign or state.

Thus, property underpinned the ideology and aspirations of diverse groups in England and the economic, social and political relations therein. For the working class, private property ownership, if only in one’s labour, determined freedom, in the sense of freedom from a fixed occupation. Thus material freedom was seen as a crucial mainstay of political freedoms. For the landed Whig classes, the maintenance of private property sustained a privileged lifestyle, as a moral imperative. Politically and philosophically, Whigs associated with the ascending liberal principles. The political correlation between the aims of building societies and liberalism created powerful if not pragmatic advocates for the movement. The universal right of individuals to make choices as to how they utilised and acquired property in self and other commodities served both these groups’ interests.

The correlation of these interests crystallised in a surprising and ingenious manner in the middle of the nineteenth century with the emergence of a particular strand of building societies, the freehold land societies. This movement incorporated the political aspiration of working men to achieve enfranchisement and private property in land with the political aspiration of liberal politicians.

Following the passage of the Reform Bill in 1832, the vote was extended to those who owned property worth £10 in the boroughs and in the counties to £10 copyholders, £10 long-leasers and £50 medium leaseholders as well as the existing 40-shilling freeholders. This meant that building societies could play a direct role in the extension of the franchise through the provision of property of su cient value to allow the owner to meet the voting qualifications.

In 1847, the first society to operate for the joint purpose of obtaining both property and the vote was established by a James Taylor and was called the Birmingham Freehold Land Society. This organisation and the others that followed represented a hybrid of both constitutional reform groups and building societies. Initially registering as friendly societies, when the legitimacy of advancing funds for the purchase of property was fully appreciated following the 1836 Act, subsequent societies tended to register under the Building Societies Act.

Strictly within legal limits and aimed precisely at Conservative strongholds in the counties, Taylor organised collectives of 40-shilling freeholders.

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Working people were invited to become members of the society and to form a common fund based on small weekly subscriptions with which freehold land was purchased and distributed among its members in small plots. As long as the plots maintained a market value of 40 shillings, members obtained a county vote. At the end of the first year, subscriptions amounted to £500 per month and allotments had been made to over 200 members. The movement spread rapidly throughout the country and after only three years consisted of 80 similar societies with 30,000 members subscribing for 40,000 shares with paid up subscriptions of £170,000. As building societies, they operated under trustees who guaranteed mortgages and on occasion put up the initial funds for purchasing property. Up until the 1852 election, trustees were drawn from the ranks of liberal politicians. Particularly prominent in the freehold land movement were anti-corn law leaguers and free marketeers Richard Cobden and John Bright, whose success through the freehold land vehicle was often perceived as highly disreputable. As an article, More Faggot Votes – New Purchase by the League, in the Morning Herald of 1852 stated:

An estate containing between 400 and 500 acres of land, situated at Horfield, two miles from Bristol, has just been bought by Cobden, Sir Joshua Walmsley and another Anti-Corn Law Leaguer; for the purpose of creating 1000 40s freeholds in West Gloustershire. The property is bought at 40L. per acre, and belonged to the Rev. Mr Richards, whose solicitor took it to a country farmer looking man, who, when he had paid the deposit, gave the names of Cobden et al as the purchasers. Mr Richards has since ascertained that the estate is positively bought for these parties, and the purpose named.63

The mood of the freehold land movement in contrast was focused and inspired:

Economy is the beginning of independence. A man who is always hanging on the verge of debt, is in a state not far removed from that of slavery. He is in bondage to others, and must accept the terms they dictate to him. He is not his own master, he cannot help looking servile.64

However, by accumulating some property and engaging in a thrifty existence,

his self respect is maintained and he can still walk tall without the fear of parish overseers. He is no burden to society – neither himself nor his little

63Quoted in the Freeholder’s Circular No 6, 2 August 1852.

64Ibid, ‘Independence for working men’, p 75.

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ones. His character is unimpaired, his virtue untainted; he looks forward with hope; he can neither be bought or sold.65

The potential of this movement was soon realised in the cities and in 1849 the National Freehold Land Society was started with the purpose of extending the franchise and land ownership in more industrialised areas. It opened with 750 members subscribing for 1,500 shares and quickly became the largest of all such societies. By 1852, The National boasted 9,000 members. It had purchased 37 estates costing over £200,000 and, of the £230,000 invested in freehold societies as a whole between 1851 and 1852, The National had received £96,137.66 By 1851 it had purchased estates in many areas in and around London, including 32 acres in Stoke Newington, 204 acres in Romford and 220 acres in Barnet. Its popularity led it to publish a monthly circular, ‘for the guidance of its members’, which contained financial advice and a forum for discussion on the orientation of the movement and the various problems members encountered. In the first edition of The Freeholder’s Circular, the objects of the National were stated as to ‘facilitate the acquisition of freehold land, and the erection of houses thereon, to enable such of its members as are eligible, to obtain the county franchise, and to a ord to all of them a secure and profitable investment for money’.67

Freehold land societies functioned as ordinary mutual building societies in that they were established under the Benefit Building Society Act of 1836 ‘for the purpose of raising a fund, out of which every Member shall receive the amount or value of his share to erect or purchase a dwelling-house, or dwelling houses, or other real or leasehold estate’.68 However, they distinguished themselves by virtue of the fact that they dealt solely in the distribution of freehold land that had not been previously built upon. Mutuality of rights between members was scrupulously attended to, both as a virtue and as a point of marketing. The National’s circular was keen to emphasise the equal opportunity of members in the acquisition of plots stating that. ‘lots are after a time o ered, on the same terms, to all the members’.69 Furthermore, it emphasised the right of the members to choose the plots that were most suited to their needs, saying, ‘members are enabled in a great measure to select their lots in the situations most convenient to themselves’.70

By the end of 1852 there were 130 societies, with 85,000 members subscribing to 120,000 shares. An estimated 310 estates had been purchased divided into 19,500 allotments with paid up subscriptions of £750,000. Politically, it

65Ibid.

66Reported in the Freeholder’s Circular, 1st edn, 1852, p 11.

67Ibid, p 3.

68Benefit Building Society Act 1836.

69Op. cit., Freeholder’s Circular.

70Ibid.

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represented a highly successful allegiance between Liberal politicians and building societies and in the 1852 election Liberal candidates won decisive victories in the previously Conservative strongholds of Middlesex and East Surrey. Perhaps ironically, the movement was bolstered by the adoption of its own tactics by the Conservative Party, who set up the Conservative Land Society. The experience of this society was that within four years 1,803 shares had been taken up of which £218,158 had been paid up and it had allotted 22 estates sold into plots worth £150,000.

As a politically expedient tool, the land society movement formally ceased to be functional following the Reform Act of 1868. However, as one commentator noted, as early as 1853, ‘the political idea has almost vanished from the societies; members enter without any declaration of political opinion, and not one in 500 cares a rush about the franchise at all’.71 Land societies had become successful economic organisations that were easily subsumed into the building society movement. So, for instance, marrying the status of both building society and land society, the Birkbeck Freehold Land Society and the Birkbeck Building Society, although legally separate organisations, operated from the same building and under the same management.

The freehold land society movement graphically joined politics and property under the organisational tool of the building society, yet, significantly, the success of freehold land societies served to undermine the original conception of mutuality. Compared to the early building societies with memberships of around 50, freehold land societies were huge, with some, like The National, numbering tens of thousands in their membership. The numbers involved meant that many freehold land societies o ered extra shares to those with the means and desire to finance them. Di erent levels of investment by members meant the acquisition of more property, thus making them attractive propositions for the more moneyed classes.72

The e ect of the freehold land movement on the building society movement as a whole had been transformative. For 70 years building societies had been small in size and number, never exceeding 80. But, by 1850, 2,000 societies had registered under the 1836 Act.73 In addition to this they attracted large sums of money. By 1850 the entire movement was estimated to hold a total annual income of £2,400,000.74 This meant that the traditional terminating societies had become increasingly inappropriate, designed as they were for a small, non-fluctuating group of saver/borrower members.

However, the most important factor in reconceptualising mutuality lay in

71Editorial from Chambers’ Edinburgh Journal, 10 December 1853.

72Evidence by Table: ‘Subscriptions of Members form Commencement of Society to Present Time’, op. cit., Freeholder’s Circular.

73Scratchley, A, Industrial Investment and Emigration, 2nd edn, 1858, London: John W Parker, p 50.

74Ibid.

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the reorganisation of the mutual society. A particular problem with terminating societies was that individuals who wished to join some time after a society had been founded were often unable to do so due to the high costs of joining late and, e ectively, having to ‘catch up’ with other members’ savings.

The solution to this organisational problem was presented and published by the actuary Arthur Scratchley, who argued for a society that did not terminate in a fixed period, but existed indefinitely. These he called ‘permanent societies’. Under this organisational form, members would have an individual contract with the society designating them as either investors receiving interest or borrowers paying interest. Investors would be able to withdraw their investment with relative ease, while borrowers would make periodic repayments (usually monthly) over a fixed period, making their loan arrangement ‘terminating’ rather than the society itself. In this way the society could extend its borrowing according the amount invested in it and borrowers could join without ‘making up’ the payments made by founder members.

Scratchley highlighted two attributes of terminating building societies that made it imperative to adopt the permanent principle of organisation. The first of these attributes was the general popularity of building societies, the second being the inadequacies of members’ actuary skills. On the first point, he argued, ‘no benefit building society has ever been started, however ridiculous its pretensions, which has not speedily succeeded in drawing together a number of shareholders’.75 On the second point, he noted a general inability to calculate compound interest that led many building societies to misrepresent the financial benefits of membership. In his words, ‘not one in twenty, or even a greater number can possibly realise for its members, whether investors or borrowers, the advantageous results originally promised’.76 This problem, exacerbated by an uncritical enthusiasm for building societies, could be resolved by the use of a permanent system. Scratchley argued that the benefits of a permanent over a terminating society were, in the main, that ‘the di culty of funding borrowers, at any time in the course of the existence of a society is removed . . . members don’t pay arrears if they join later and the numbers of share holders increase rather than diminish in the life of a building society’.77 In contrast, a terminating society was founded upon a fixed number of subscribers who paid a monthly subscription until all members had received housing and had paid o outstanding loans undertaken for that purpose, housing, in the main, being allocated by a lottery scheme. Members who wished to join after the founder members were required to pay higher premiums in order to equalise with the payments of earlier

75Ibid, p 7.

76Ibid, p 50.

77Ibid, p 52.

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subscribers, that is, individual subscriptions were determined in line with the finite life of a terminating society. This meant that if a member joined half way through the life of the terminating society he would be required to pay double the premium of that paid by founding members, a sum that would obviously increase the later a member joined. This inhibited the desirability of late entry and, as a result, terminating societies would tend to have only a small number of members. In contrast, in a permanent society, the large number of members would mean that the administrative costs of setting up and running the society could be more equitably spread. Furthermore, members could withdraw their investment more readily and the duration of investment could be more easily ascertained.

These stated advantages notwithstanding, it appears to be the case that, in practice, the development of permanent societies was not the result of conscious planning. In the 1874 Royal Commission Report it was noted that it was probable that permanent societies grew organically from the tendency of larger terminating societies to incorporate members throughout their existence, creating indefinitely existing terminating societies.78 Thus the terminating aspect of these societies more correctly described the relationship of individual members to the society, rather than the organisation per se. Put another way, ‘a permanent society is a terminating society to every individual from the date at which he enters’.79

Terminating societies operating with an increasingly unwieldy membership were experiencing organisational problems that the permanent system could easily accommodate. For example, larger terminating societies tended to engage in periods of great economic activity followed by more fallow periods. As the Commission noted,

it is a pretty general feature amongst terminating societies that all their activity is concentrated within the first few years of their existence. During these first few years, again, it is almost invariably the case that they resort very largely to loans, in order to obtain as much money as they can for the placing out; advances being made either on the principle of ballot, or of sale to the highest bidder . . . during the latter years of their existence, as repayments come in more and more, terminating societies have generally a plethora of money.80

In contrast, permanent societies operated on the more regular basis of supply and demand. Investments determined the capital available for the making of

78The Royal Commission Friendly Societies was set up in 1870 and soon after concerned itself with Building Societies and the problems of the 1836 Act.

79Op. cit., Royal Commission, p 14.

80Ibid, pp 13–14.

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loans, capital obtained either through deposits or through paid up shares. Thus the Commission concluded, ‘there be no alternation of energy and stagnation: the money has not all to be put out in the first few years: the demand for it increases steadily with the progress of the society’.81

Crucially, as Scratchley had noted some years before, this was facilitated by the separation of members into two separate classes, borrowers and lenders, each class maintaining entirely distinct roles and benefits. A borrower would receive a full advance, secured on a mortgage, itself supported by fixed monthly repayments. Thus ‘the members, who become borrowers, at once cease to be investors in respect of the shares on which they obtain advances’; this means that they ‘do not participate in any of the subsequent liabilities, or expenses of the society, nor consequently in its profits’.82 In contrast, investor members do participate in the profits made by the society, and this is the sole motivation to becoming members (although in practice individuals may be both borrowers and investors).

The absolute mutual character of terminating societies that derived from members’ equal engagement, commitment and benefit in the organisation was necessarily undermined by the organisation of the permanent principle. In a terminating society members invested in order to borrow. Collective participation enabled them to do as a group what they could not do as individuals. This collective solution was embraced precisely because of the economic status of members who, as we have seen, were largely composed of the better-o working class. In contrast, permanent societies distilled the two functions performed by members into two distinct roles, investor and borrower, thereby drawing a distinction between the benefits and responsibilities attributed to each. In the words of the Royal Commission, ‘instead of all the members being expectant borrowers, as appears to have been first the case, and is still the case in some groups, the two classes of investors and borrowers are now distinct, the former usually outnumbering the latter and monopolising the profits’.83

Investing members were drawn into the society by the prospect of expanding their own private capital by lending money, secured by a mortgage on property, to individuals who could only finance such purchases by monthly payments over a number of years and who paid interest on these advances. Investing members, therefore, were induced to invest by two main factors. First, the degree to which borrowing members would pay additional moneys on their advancement and, second, upon the security of the investment; in short, the character of the borrower and that of the property held on a mortgage.

81Ibid.

82Op. cit., Scratchley, p 64.

83Op. cit., Royal Commission, p 13.