FOSS v. HARBOTTLE: JURISPRUDENCE AND EXCEPTIONS
ABSTRACT – The present article deals with the legal theory and principle of majority rule laid down in the famous case of English Jurisprudence, i.e. Foss v. Harbottle. The main aim of this research work is to provide a jurisprudential approach towards the study of this case law. In order to carry out a deep analysis of the case, various articles, research papers and books on Company Law have been made as a source of study. Also, the exceptions to which the rule of majority is subject, is discussed with the help of various case laws.
The ultimate safeguard on any abuse of corporate executives remain in court action. Majority rule is the essence of democracy and same is true with a company, which is an association of individuals and acts in accordance with the decisions taken by the majority of its members. Where dissatisfied minority cannot through the ordinary process of interventions at company meetings obtain satisfaction for what they consider to be an impropriety on the directors, the only option left is appeal to the courts. The Companies Act, 2013 therefore, contains provisions for the protection of the investor’s interests in company.
Judicial control of corporate activities in English Law brought important change about by the registration statute of 1844 had great impact on procedures of control applicable to joint-stock companies. This was to ensure that the control is devised over them and law must be respected. The King’s Court had exercised this power from time immemorial. For that reason, it was thought convenient to study the question by taking the year 1844 as a turning year.
FACTS OF THE CASE
The company named “Victoria Park Company”, had been set up in September 1835. Richards Foss and Edward Starkie Turton, who were minority shareholders in the company, commenced legal action against the promoters and directors.
The claimants alleged that property of the company had been misapplied and wasted and various mortgages were given improperly over the company’s property. They asked the guilty parties be held accountable to the company and a receiver be appointed. Also, that the defendant might be decreed to make good of the company losses.
The defendants were five company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey) and solicitors and architect (Joseph Denison, Thomas Bunting and Richard Lane.
Wigram VC dismissed the claim and held that when a company is wronged by its directors it is only the company that has standing to sue. In effect the court established two rules. Firstly, “proper plaintiff rule” is that a wrong done to the company may be vindicated by the company alone. Secondly, the “majority rule principle” states that if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting, then the court will not interfere.
LEGAL PRINCIPLE: The Rule of Majority
Lord Eldon stated, “this court is not to be required on every occasion to take the management of every playhouse and brewhouse in the kingdom.” The courts have by and large followed the policy of laissez faire principles to reign and majority rule to operate unchecked.
The main judicial instrument by which this policy of non-intervention has been maintained is a rule not of substance but of procedure, which is popularly known as rule in Foss v. Harbottle. This rule is further based on two principles: (a) the proper claimant principle; and (b) the internal management principle. Both these principles envisage that the wrong alleged to be done to the company the claimant in that case is the company itself and the company itself is competent to settle that.
The rule laid down in the case underwent severe criticism across Atlantic and in other parts of the world because of its complexity and because it is considered unjust to recognise a substantive right but deny a remedy on procedural grounds. Attempts have been made to reconcile the needs and interests of controllers and minorities like, requiring a special resolution than a simple majority vote in important matters, such as constitutional alterations and court’s sanction in matters of reduction of capital. Besides this other statutory provisions give members direct access to the courts.
RULE OF MAJORITY IN INDIAN SCENARIO
The rule in the impugned case is not completely applicable in India and the right of minority members are protected by the law. In India, Law provides remedy to approach the Company Law Board when there is oppression or mismanagement in the Company where, board with certain express limitations, exercises all powers in orders to set the things in the Company right and to prevent the acts of oppression and mismanagement.
In Rajahmundry Electric Supply Corp. Case, the Hon’ble Supreme Court held that, in Law, the corporation and the aggregate members are not same things.
Also in ICICI Case, the Delhi High Court observed that mechanical or automatic application of Foss v. Harbottle Rule to Indian situations, conditions and corporate realities would be both inapposite, improper and indeed misleading.
EXCEPTIONS TO THE RULE
The operative field of said rule extends to cases in which corporations are competent to ratify managerial sins. But there are certain acts which no majority of shareholders can approve or affirm and each and every shareholder may sue to enforce obligation owed to the company. In the American literature a representative action of this kind is called the ‘derivative actions’.
· Ultra Vires –
A shareholder is entitled to bring an action against the company and its officers in respect of matters which are ultra vires and which no majority of shareholders can sanction.
In Bharat Insurance Company Case
“There does not appear to be any case where the necessity of the corporation being a party has been expressly decided; but with respect to the first class of action, the question can admit of no doubt – the relief therein claimed against the corporation itself.”
· Fraud on Minority –
Where the majority of a company’s members use their power to defraud or oppress the minority, their conduct is liable to be impeached even by a single shareholder.
It can be best understood in the landmark Menier Case It was held that Hooper’s machinations for profits derived from the improper arrangements it had made amounted to an oppressive expropriation of the minority shareholders, and that a derivative action would therefore lie against it.
· Wrongdoers in Control –
To safeguard the interest of the company, any member or members may bring an action in the name of the company as it would be futile because the wrongdoers would directly or indirectly exercise a decisive influence over the result. The same was held in Glass v. Atkin
· Acts Requiring Special Majority –
There are certain acts required special resolutions at a general meeting of shareholders. Accordingly, if the majority purport to do any such act by passing only an ordinary resolution or without passing special resolution in the manner required by law, any member can bring an action to restrain the majority. Such actions were allowed in Dhakeswari Cotton Mills Case and Nagappa Chettiar Case.
· Individual Membership Rights –
Every shareholder has vested in him certain personal rights against the company and his shareholders. A large number of such rights have been conferred upon shareholders by the acts itself, but they may also arise out of articles of association. Such rights are commonly known as individual membership rights and respecting them the rule of majority simply does not operate.
· Class Action –
A class action allows a number of claimants with a common grievance against a company to file a lawsuit against it. The scale of economies associated with class actions seem especially critical to those individuals who have limited resources or small claims that render individual lawsuits expensive and unfeasible. Shareholders or depositors may file an application with the National Company Law Tribunal (NCLT) alleging that the management or conduct of the affairs of any company are being conducted in a manner prejudicial to the interests of the company, its members or depositors.
· Oppression and Mismanagement –
Calcutta High Court in Kanika Mukherjee Case held that the principle embodied in S. 397 and 398 of the Indian Companies Act which provide for prevention of oppression and mismanagement, is an exception to the rule in Foss v. Harbottle which lays down the Sanctity of the majority rule.
It can be articulated that the prominent case law of Foss v. Harbottle, is marked with a place of exceptional importance in English Jurisprudence. Its implications have been the sources of many Statutes dealing with corporate law of many countries. However, the application of the rule of majority laid down in the said case has become subject to many exceptions, keeping in view the minority rights and oppressive approach of majority stakeholders. The majority leadership does not prevail in all decision making processes. Therefore, the principles laid down in this case do not have mechanical application in India.
. Demers & Robert, Corporate Litigation in Quebec (Montréal : Centre d’édition Juridique, 1978), P-6.
. Joint Stock Companies Act, 1844 (7 & 8 Vict. c. 110).
. Sealy L.S., Cases and Materials in Company’s Materials, infra, P-599.
. Carlen v. Dury (1812) 1 Ves & B 154.
. Sealy L.S., Cases and Materials in Company’s Materials (Oxfords University Press, New York, 2010), P-601.
. RWV Dickenson, JL Howard and Getz, Proposals for a New Business Corporation Law (Information Canada, Ottawa, 1971), P-482.
. Insolvency Act, 1986 (IA 1986) s 124.
. Section 397 & 398, Indian Companies Act, 1956.
. Rajahmundry Electric Supply Corp. v. A. Nageshwar Rao, 1956 AIR SC 213.
. ICICI v. Parasrampuria Synthetic Ltd., Suit Appeal No. 2332 of 1997.
. Bharat Insurance Company Ltd v. Kanhaiya Lal, AIR 1935 Lah. 792
. Menier v. Hooper’s Telegraph Works Ltd., (1874) 9 C App. 350.
. (1967) 65 DLR 501.
. Dhakeswari Cotton Mills v. Nil Kamal Chakravarty, AIR 1937 Cal 435.
. Nagappa Chettiar v. Madras Race Club, (1949) 1 MLJ 662.
. Section 245, Indian Companies Act, 2013.
. Kanika Mukherjee v. Rameshwar Dayal Dubey,  1 Comp LJ 65.
Aditi Sharma (Govt. New Law College, Indore)
The views of the author are personal only. (if any)