Scribd Logo
Upload

Welcome to Scribd!

  • 38 views

    Foss Vs Harbottle Case

    Uploaded by

    D sunitha
    The Foss vs Harbottle case established two key principles of company law: 1) Only the company, not individual shareholders, can sue directors or third parties for wrongs done to the company (the "proper plaintiff" rule) and 2) Courts will generally not interfere if the alleged wrong can be ratified by a majority vote of shareholders (the "majority principle" rule). However, there are exceptions that allow shareholders to sue, such as if the act was ultra vires or involved fraud against minority shareholders. This case helped define the balance between majority rule and minority shareholder protections in companies.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Foss Vs Harbottle Case

    Uploaded by

    D sunitha
    38 views5 pages
    The Foss vs Harbottle case established two key principles of company law: 1) Only the company, not individual shareholders, can sue directors or third parties for wrongs done to the company (the "proper plaintiff" rule) and 2) Courts will generally not interfere if the alleged wrong can be ratified by a majority vote of shareholders (the "majority principle" rule). However, there are exceptions that allow shareholders to sue, such as if the act was ultra vires or involved fraud against minority shareholders. This case helped define the balance between majority rule and minority shareholder protections in companies.

    Original Description:

    Foss vs Harbottle Case

    Original Title

    Foss vs Harbottle Case

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The Foss vs Harbottle case established two key principles of company law: 1) Only the company, not individual shareholders, can sue directors or third parties for wrongs done to the company (the "proper plaintiff" rule) and 2) Courts will generally not interfere if the alleged wrong can be ratified by a majority vote of shareholders (the "majority principle" rule). However, there are exceptions that allow shareholders to sue, such as if the act was ultra vires or involved fraud against minority shareholders. This case helped define the balance between majority rule and minority shareholder protections in companies.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    38 views5 pages

    Foss Vs Harbottle Case

    Uploaded by

    D sunitha
    The Foss vs Harbottle case established two key principles of company law: 1) Only the company, not individual shareholders, can sue directors or third parties for wrongs done to the company (the "proper plaintiff" rule) and 2) Courts will generally not interfere if the alleged wrong can be ratified by a majority vote of shareholders (the "majority principle" rule). However, there are exceptions that allow shareholders to sue, such as if the act was ultra vires or involved fraud against minority shareholders. This case helped define the balance between majority rule and minority shareholder protections in companies.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5

    Foss vs Harbottle Case

    Title of the case: Foss vs Harbottle

    Citation: [1843] 67 ER 189, (1843) 2 Hare 461

    Court: Court of Chancery

    Quorum: Wigram VC, Jenkins LJ

    Petitioner: Richard Foss and Edward Starkie Turton

    Defendants: Thomas Harbottle & Others

    The Foss vs Harbottle case is a significant English precedent in company law.


    According to the rule established in this case, if the company suffers losses due to its
    members’ or outsiders’ negligent or fraudulent actions, legal action can be taken to
    address those losses. The company or a derivative action can initiate such action.

    This rule gave rise to the principles of majority and minority shareholders’ rights. In
    matters of company management, decisions are made through resolutions passed by
    a simple majority or a three-fourth majority of the company’s members. The court
    generally does not interfere in the company’s internal management and affairs, as
    most members decide them. Consequently, the company becomes the appropriate
    plaintiff to institute a lawsuit or legal proceedings, and it does not typically allow a
    single shareholder to take direct legal action against the wrongdoer. The rule
    empowers the company to address irregularities through its internal procedures.

    However, there should be a balance between the effective control of the company
    and the protection of individual shareholders’ interests. In certain circumstances, an
    individual shareholder may also be allowed to bring legal action.

    Minority shareholders have often faced challenges, as derivative claims usually cover
    them and may not receive equal redress for discrimination. Some researchers have
    suggested that the Rule of Foss v Harbottle may have been altered or repealed after
    the introduction of current formal derivative actions. However, concerns about
    potential overlaps in derivative claims and unequal remedies for prejudice have been
    raised. The fundamental values established in the Foss vs Harbottle case remain
    critical in modern company law.

    Contents hide

    1. Facts of Foss vs Harbottle


    2. Issues of the Case
    3. Arguments of the Petitioner
    4. Arguments of the Defendants
    5. Judgement in Foss vs Harbottle
    5.1. Rule in Foss v Harbottle
    5.2. Exceptions to Rule in Foss vs Harbottle
    6. Foss vs Harbottle Summary

    Facts of Foss vs Harbottle


    In September 1835, the Victoria Park Company was established to acquire 180 acres
    of land near Manchester (later known as Victoria Park, Manchester, after
    incorporation by an Act of Parliament). However, instead of fulfilling the company’s
    objectives of developing the land for ornamental and park-like purposes,
    constructing houses with gardens and fields and then selling or renting them, certain
    individuals, including the directors and others, engaged in unlawful misappropriation
    of the company’s property.

    Richard Foss and Edward Starkie Turton, both minority shareholders, brought
    attention to this matter. They reported that Thomas Harbottle, Joseph Adshead,
    Henry Byrom, John Westhead, Richard Bealey (the five directors of the company), as
    well as lawyers and architects Joseph Denison, Thomas Bunting and Richard Lane,
    along with H. E. Lloyd, Rotton, T. Peet, J. Biggs and S. Brooks (Byrom, Adshead and
    Westhead’s assignees), were involved in misapplying and falsely mortgaging the
    company’s assets, thus deviating from the company’s intended purpose. They argued
    that these wrongdoers should be held accountable for their actions and appointed a
    responsible receiver.

    Their arguments in Foss vs Harbottle were based on three grounds. Firstly, they
    pointed out fraudulent practices that misused the company’s funds. Secondly, they
    highlighted the lack of qualified directors on the company’s board. And thirdly, they
    emphasised the absence of a company clerk or office. These conditions left the
    owners with no recourse but to pursue legal action against the directors instead of
    reclaiming their property directly.

    Issues of the Case


    The central issues at hand were twofold in Foss v Harbottle:

     Whether the company members had the authority to bring a lawsuit on behalf
    of the company, in other words, could the shareholders or members of the
    Victoria Park Company legally file a lawsuit to address the alleged
    misappropriation of the company’s property and funds?
     Whether the individuals responsible for the wrongdoing could be held
    accountable for their actions pertains to whether the directors, lawyers,
    architects and other involved parties could be held legally liable and face
    consequences for their misapplication and fraudulent mortgage of the
    company’s assets.

    Arguments of the Petitioner


    The plaintiffs in Foss vs Harbottle contended that the Victoria Park Company should
    be considered unique and distinct from ordinary companies due to its incorporation
    by an Act of Parliament. They emphasised that the purpose of this incorporation was
    to benefit the company as a whole, but the directors acted in their self-interests
    instead.

    The petitioners further asserted that the directors had a fiduciary duty to act as
    trustees for the company and that they should be held accountable for
    misappropriating its assets. According to the petitioners, the Act of Incorporation
    granted the directors the authority to take legal action against those who harmed
    the company. Still, it did not provide such rights to the members of the company or
    external parties to sue the board of directors.

    Arguments of the Defendants


    On the other hand, the defendants in Foss vs Harbottle countered the plaintiffs’
    claims, arguing that the petitioners lacked the legal right to initiate a lawsuit against
    them on behalf of the company. They contended that only the directors, as
    authorised by the Act of Incorporation, possessed the standing to bring legal action
    against individuals who caused harm to the company.

    In their defence, the defendants in Foss vs Harbottle sought to challenge the


    petitioners’ authority to sue, asserting that it was outside their rights as company
    members.

    Judgement in Foss vs Harbottle


    In Foss vs Harbottle, Wigram VC, the judge, ruled in favour of the defendants and
    dismissed the shareholders’ claims. The court held that individual shareholders or
    outsiders of the company could not bring legal action against wrongs done to the
    corporation, as the company and its shareholders are considered separate legal
    entities. This principle in Foss v Harbottle is supported by Section 21(1)(a) of the
    Companies Act, which states that a company may sue and be sued in its name, and a
    member cannot take legal action on behalf of the company. If the company has a
    right against a party under a contract, it is the company’s responsibility to sue.
    The court in Foss v Harbottle emphasised that shareholders cannot sue because the
    company has suffered the injury, not its individual members. Therefore, the company
    should be the one to initiate legal action against those who misappropriated its
    property.

    The judge based his decision in Foss vs Harbottle on previous judgments regarding
    unincorporated companies and stressed that the minority shareholders must
    demonstrate that they have exhausted all possibilities for redress within the internal
    forum. Suppose the majority of shareholders can ratify the irregular conduct. In that
    case, the courts will not intervene, which some consider unfavourable to the minority,
    as it restricts their ability to take legal action in cases where misconduct can be
    ratified.

    Rule in Foss v Harbottle

    As a result, the court in Foss v Harbottle established two principal rules.

     The first is the “Proper Plaintiff Rule,” which states that only the company can
    sue directors or outsiders for any wrong or loss due to fraudulent or negligent
    acts. Members of outsiders cannot sue on behalf of the company because of
    the principle of “Separate Legal Entity,” which treats the company as a distinct
    legal person from its members.
     The second rule is the “Majority Principle Rule,” where the court will not
    interfere if the alleged wrong can be ratified by a majority of members in a
    general meeting.
    However, these strict principles seemed harsh and unjust for minority shareholders as
    they were prevented from seeking justice despite having substantive rights. To
    address this, the court in Foss vs Harbottle established four exceptions to the general
    principles where litigation would be allowed.

    Exceptions to Rule in Foss vs Harbottle

    However, there are certain exceptions to the Majority Principle Rule to protect
    minority shareholders:

     Ultra Vires: If an action is taken by the company that is beyond the scope of
    its Articles of Association, any member can bring legal action against it.
     Fraud on Minority: When the majority oppresses the minority and commits
    fraud, even a single shareholder can initiate legal action to protect the
    minority’s rights.
     Oppression and Mismanagement: Shareholders have the right to seek legal
    action if there is oppression or mismanagement within the company. They can
    approach the tribunal or court under specific sections of the Companies Act.
     Individual Membership Rights: Members can enforce their rights against the
    company, such as the right to vote or stand in elections.
     Derivative Action: Shareholders can bring an action on behalf of the
    company for wrongs done, acting as representatives of other members whose
    relief is sought. This action is called a derivative action, and the company must
    be joined as a co-defendant so that the company is bound by the judgment
    given.
    These exceptions protect minority shareholders and allow them to seek justice in
    certain circumstances despite the Majority Principle Rule.

    Foss vs Harbottle Summary


    Foss vs Harbottle is a significant case in company law where the court ruled that if a
    company suffers losses due to the negligent or fraudulent actions of its members or
    outsiders, legal action can only be brought by the company itself or through a
    derivative action. The court emphasised the separate legal entity principle, which
    prevents individual shareholders from suing on behalf of the company.

    Majority shareholders, through resolutions, manage company affairs, and the court
    generally does not intervene in internal matters. However, a few exceptions allow
    individual shareholders to bring legal action as per Foss vs Harbottle rule. The Foss
    vs Harbottle case established the “Proper Plaintiff Rule” and the “Majority Principle
    Rule.” Despite concerns about unequal remedies for minority shareholders, the core
    principles of the case remain vital in company law.

    You might also like