Case Analysis : Foss v. Harbottle

Authors

Shivangi Khattar, Jim's School of Law, IP University

Lalima Gupta, UILS, Punjab University

Rajat Maheshwari, NLC Bharti Vidyapeeth University Pune


Editor : Sheetal Sharma, Faculty of Law, University of Delhi

Case: Foss v. Harbottle

Court: Court of Chancery

Citation: (1843) 67 ER 189

Foss v. Harbottle, renowned as the Majority Supremacy and Minority Rule Principle in Corporate law is a case law discussing the position of corporation and its shareholders in a situation when a wrong is done against the company.

Facts: A company named “Victoria Park Company” had been set up in September 1835 to buy 180 acres (0.73 km2) of land near Manchester (later became Victoria Park, Manchester, when the Act of Parliament turned it into an incorporation). But contrary to the actual work which was reportedly ‘enclosing and planting the same in an ornamental and park-like manner, and constructed houses thereon having attached gardens and grounds, and then selling, letting or otherwise disposing thereof’, the company’s directors along with others were indulging in the misappropriation of the property that belonged to the company and which could result in serious loss to both company and its share-holders.

The problem was highlighted by two minor Share-holders Richard Foss and Edward Starkie Turton. They alleged that the company’s five directors Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey and the solicitors and architect (Joseph Denison, Thomas Bunting and Richard Lane); and also H. Rotton, E. Lloyd, T. Peet, J. Biggs and S. Brooks ( the several assignees of Byrom, Adshead and Westhead), have misapplied and wrongly mortgaged the company’s property thus acting in contrast to what the company was established for. Demanding simply that the wrong doers must be held accountable and that a responsible receiver be appointed for all the transactions.

Issue: Whether or not a mandatory right to sue is often exercised by its join forces characters in their own capability or within the name of the corporate.

Contentions: 1st objection taken within the argument for the Defendants was that the individual members of the corporation cannot in any case sue within the type within which this bill was framed.

Arguments of the Plaintiff’s counsel was that no creditors of the insolvent at the time of filing his petition have any interest in his estate below the economic condition, unless the insolvent has volunteered to place their names upon his schedule. The apparent purport of the Act seems to be that each one the debts of the insolvent shall be determined.

On argument of a demurrer, facts not averred within the bill, and which could presumably be denied by plea, if they'd been averred, meant against the lawyer. The bill was filed in Gregorian calendar month 1843 by Richard Foss and Edward Xtarkie Turton, on behalf of themselves and every one alternative the investor or proprietors of shares within the company known as ‘‘ The Victoria Park Company,” except such of identical shareholders or proprietors of shares as were Defendants to that, against Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Beakey, Joseph Denison, Thomas Bunting and Richard Lane ; and additionally against H. Rotton, E. Lloyd, T. Peet, J. Biggs and S. Brooks, the many assignees of Byrom, Adshead and Westhead, who had become bankrupts.

Judgement: In this case, Wigram VC dismissed the claim of the shareholders and held that an individual shareholder or any outsider of the company cannot take any legal action against the wrong done to the corporation as both company and its shareholders are considered as the separate legal entities. It is also mentioned under Section 21 (1) (a) of the Companies Act that a company may sue and be sued in its own name and a member may not take any legal action on behalf of the company, and if a company has a right against the party under a contact, then it is for the company to sue. The reason that shareholders of the company cannot sue is that the company is the one who has actually suffered injury and not its members, so it is on the company to sue or take any legal action against those members who have misappropriated its property.

In this case Wigram VC followed the judgements passed in older cases on the unincorporated companies and insisted the minorities to show that they have exhausted all the possibilities of redressal within the internal forum as he has stated that the courts will not intervene in those cases where majority of the shareholders can ratify the irregular conducts, but this rule was considered as unfavourable for the minorities because it barred them from taking any legal action whenever the alleged misconduct was in law capable of ratification. Therefore, in effect the two principle rules were established by the court. First and the foremost rule was the “Proper Plaintiff Rule” which laid down that if any wrong done to the company or company suffers any loss due to the fraudulent or negligent acts of directors or any other outsider , then in such situation only the company can sue the directors or outsiders in order to enforce its rights. Whereas, the members of the company or any outsider cannot sue on its behalf because of the principle of “Separate Legal Entity” which considers company as a separate legal person from all the members of the company, so, it can sue and be sued in its own name. This is the only reason that why only a company can bring legal action or institute legal proceedings not any member in order to cover the losses that has been suffered by the company. A member of the company can take a legal action on its behalf against the wrong doer only if he is authorized to do so by the board of directors or by an ordinary resolution passed in the general meeting. The second rule was “Majority Principle Rule” which laid down that if the alleged wrong can be confirmed or ratified by a simple majority of members in the general meeting, then in those cases the court will not interfere. However, the application of these strict principles appeared to be very harsh and unjust for the minority shareholders, as although a substantive right have been provided to them, still they were barred from obtaining justice under the rule and have to submit to the wrongs done by the majority as they were the ones who controls the company and minority members have no say due to their small strength. Therefore, in order to mitigate this harshness, four exceptions to the general principle have been laid down where the litigation will be allowed. The first and the foremost exception is where the alleged act is ultra vires and illegal[1]. Second exception is concerned with a situation where the alleged act could only have been validly done or sectioned, in violation of a requirement in the articles by some members of the special majority[2]. The third exception is related with the alleged acts that cause invasion of the claimant’s personal and individual rights in his capacity as a member of the company. Last but not the least, the fourth exception deals with a situation where a fraud on minority has been committed by the majority who themselves control the company[3]. Therefore, all these exceptions help in protecting basic minority rights that are necessary to protect regardless of majority’s vote.

[1] Taylor v National Union of Mineworkers (Derbyshire Area) [1985] IRLR 99 Smith v Croft [1988] Ch 114 [2] Edwards v Halliwell [1950] 2 All ER 1064 [3] Menier v Hooper’s Telegraphs works (1874) Estmanco Ltd v Greater London Council (1982)


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