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1 ISSUE 3 Jus Corpus Law Journal (JCLJ) ISSN:2582-7820

FOSS VS. HARBOTTLE (1843)

Rohan Aniraj*

“Title of the case: Foss v. Harbottle

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

Court: Court of Chancery

Quorum: Wigram VC, Jenkins LJ

Parties to the dispute:

Petitioner: Richard Foss and Edward Starkie Turton

Defendants: Thomas Harbottle & Other’s”

INTRODUCTION

Foss vs. Harbottle case is a leading English precedent in company law. According to the rule
laid down in this case, if any loss is suffered by the company by the negligent or fraudulent
actions of its members or outsiders, then the action can be brought in respect of such losses,
either by the company itself or by a way of derivative action.”

This rule led to for formation of the rule of majority and the minority shareholders rights.
This rule is related to the management of the affairs of the company. When a decision must
be taken a resolution is passed in the company by a simple majority or a three forth majority,
the resolution becomes binding all the members of the company. 1 The court in ordinary
matters does not interfere in the internal management and matters of the company as it is
decide by majority of members. The result of this makes the company the right plaintiff to
institute a suit or any legal proceedings and does not let a single shareholder take any legal
action against the wrongdoer. The rule in this case allows the company to correct the
irregularities by its own internal procedure. However, a balance must be struck between the

*
BA LLB, THIRD YEAR, KIIT UNIVERSITY, BHUBANESWAR.
1
AVTAR SINGH, COMPANY LAW, 509 (Eastern Book Comxpany, 15th ed.).
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effective control of the company and the interests of the individual shareholders. Therefore in
few circumstances an individual shareholder is also allowed to bring a legal action.”

Minorities have often been on the other side of the coin, usually covered by derivative claims
and unequal redress for discrimination. Many researchers suggested that the Rule of Rules
was repealed after the coming into effect of the current formal derivative actions, that there
will also be a rise in shareholder lawsuits and have further voiced concern over overlaps in
both derivative claims and unequal remedies for prejudice. Its basic values are still of critical
significance today.”

FACTS OF THE CASE

In September 1835, a company called the Victoria Park Company was set up to purchase 180
acres (0.73 km2) of land near Manchester (later became Victoria Park, Manchester, when the
Act of Parliament turned it into incorporation). But counter to the actual work allegedly
enclosing and planting the same in an ornamental and park-like way, and constructing houses
thereon having attached gardens and fields, and then selling, renting or otherwise disposing
of them, the directors of the company along with others were indulging in the
misappropriation of the property that belonged to the company and that may result in the
misappropriation of the property that belonged to the company.”

The concern was illustrated by Richard Foss and Edward Starkie Turton, two minor
shareholders. They reported that the five directors of the firm were Thomas Harbottle, Joseph
Adshead, Henry Byrom, John Westhead, Richard Bealey, and the lawyers and architects
(Joseph Denison, Thomas Bunting, and Richard Lane), as well as H. E. Lloyd, Rotton, T.
Peet, J. Biggs and S. Brooks (Byrom, Adshead and Westhead’s various assignees) misapplied
and falsely mortgaged the property of the company, thereby behaving in contradiction to
what the company was formed for. It clearly demands that the wrongdoers be kept liable for
all the transactions and that a responsible receiver be named.”

Their argument was based on the ground below. The first argument was the fraudulent
practices by which the company’s funds were misappropriated. The second ground was due
to the inadequacy of qualified directors in the company who could potentially make up the
board and the third ground was that there was no clerk or office in the company. Because of

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these conditions, the owners had no right to remove the property from the directors’ hands
and instead had to pursue legal action against them.”

ISSUES OF THE CASE

The issues were whether the members of the company can file suit on behalf of the company
or not and can the guilty parties be held accountable for their wrong deeds or not.”

ARGUMENTS OF THE PETITIONER

It was argued by the plaintiffs that the company should not be treated as an ordinary company
as it was incorporated by the Parliament. Moreover, the act of incorporation was passed with
the aim to benefit the company, but the directors tried to fulfill their own interests. They
further argued that directors should have acted as the trustees of the company and should be
held accountable for misappropriating the assets of the company. Therefore, this act enabled
the directors to sue those people who cause any harm to the company, whereas it did not give
right to the members of the company or outsiders to sue the board of directors.”

ARGUMENTS OF THE DEFENDANTS

It was argued by the defendants that the plaintiffs do not have any right to bring a legal action
against them on behalf of the company.”

JUDGEMENT OF THE CASE

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. He 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
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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 unfavorable 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. 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. 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. Therefore, all these

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exceptions help in protecting basic minority rights that are necessary to protect regardless of
majority’s vote.”

ANALYSIS OF THE CASE

The decision of the court was that minority shareholders cannot bring such an action. It was
held that a single shareholder or an outsider to the company cannot file a suit against such
wrong to the company as the company and its shareholders are separate legal entities.
Company being a separate legal entity means that it can be sued, and it can sue under its own
name. Therefore, the proper plaintiff here would be the company as the wrong is done against
the company. The majority shareholders can act under the name of the company and they
have the power to decide what suit is to be instituted for the wrong done. This rule was
unfavorable for the minority shareholders as it did not allow them to take any legal action for
any wrong done. This led to the formation of the two rules established by the court. The first
rule being the proper plaintiff rule and the second rule is the majority principle rule. 2 The
proper plaintiff rule states that when some wrong is done to the company or if any loss is
suffered due to any fraudulent or negligent acts of members or directors then company sue
those particular people for the wrong done. The separate legal entity principle allows the
company to sue in its own name and enables the company to be sued. If a member wants to
take a legal action an ordinary resolution in the board meeting can be passed regarding it or
he can do so by taking approval of the board of directors on the company. The second rule is
the majority principle rule, it states that the court will not interfere of the internal matters of
the company where the issue can be resolved or confirmed by the simple majority. There are
certain exceptions made to this rule as if the rule is applied strictly it can lead to unjust and
harsh for the minority shareholders. The exceptions are as follows:”

1. “Ultra vires: When there is any action done which is ultra vires to the Articles of
Association, an action by the shareholders of the company can be brought. The ultra vires
actions are not covered under the internal management and any member can bring action
against it.3 The plaintiff should be acting in good faith if he is initiating a legal action.

2
Foss v. Harbottle (July 14, 2020), https://lawlex.org/lex-bulletin/case-summary-foss-vs-harbottle-1843/24620.
3
Bharat Insurance Co Ltd v. Kanhaiya Lal AIR 1935 Lah. 792.
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2. Fraud on minority: When the majority of the members of the company oppress the
minority and commit any fraud, even a single shareholder can bring legal action against the
wrong doer.4 In such cases the court will interfere to protect the minority. 5

3. Oppression and Mismanagement: It is a statutory right granted to the shareholder where

if the functioning of the company is done in a oppressive or mismanagement is being done,
the shareholders can bring an action by applying to the tribunal under section 214 of the
companies act.6 Under section 397 and 398 7 of the act the shareholders can approach the
court in such cases. 8

4. Individual membership rights: The individual members can enforce their rights against
the company like the right to vote, right to stand in elections etc. 9 In a case the plaintiff
moved an amendment to the proposed resolution. The Chairman refused to record the
amendment in spite of the fact that it was seconded, and the original resolution was passed
without amendments. No reasons were given for this decision either. It was held that the
shareholders have a right to move amendments to resolutions. 10

5. Derivative action: When some wrong is done to the company the shareholders can bring
an action for the wrong done as they are not suing under their own right but under the right of
other members whose relief is sought. The company has to be joint as the co-defendant so
that the company is bound by the judgement given. When the action is against a third party it
is called a derivative action as individual member sues under a claim which belongs to the
company thus the right is derived from it.”

CONCLUSION

A company is a legal entity that is given a different legal body rather than the members who
create it, i.e., the company’s owners. The company’s decisions are made on behalf of the
company by the Member-Owners and the Board of Directors. The group also makes
decisions on seeking lawsuits. As per the Companies Act 1956, the corporation is governed

4
Edward v. Halliwell 1950 2 All ER 1064.
5
Cook v. Deeks [1916] UKPC 10.
6
Sec 214, Indian Companies Act, 2013.
7
Section 397 & 398, Indian Companies Act, 2013.
8
O.P. Gupta v. Shiv General Finance Ltd. 1977 47 Comp. Cas. 297.
9
Nagappa Chettiar v. Madras Race Club (1949) 1 MLJ 662.
10
Henderson v. Bank of Australasia 1890 45 Ch. D. 330.
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by shareholders who own most of the shares. This majority theory is accepted in Foss v
Harbottle, a ground-breaking case. The majority of the shareholders’ vote was binding on the
minority. This theory has since been replaced and under the Companies Act 2013, minority
owners have been granted more control.”

In order to protect the rights of minority owners, there are provisions under the Companies
Act, 1956 but because of lack of time, redress or capacity, the minority was unable or unable,
financial or otherwise. Hence, there have been several instances of minority shareholder
discrimination. The Companies Act, 2013 has provided for the protection of the interests of
minority shareholders which can be called a game-changer in the battle between majority and
minority shareholders.”

This rule strikes a balance as it prevents frivolous and large-scale litigation, but it also
enables to take legal action for the specified exceptions. The shareholders can raise issues for
mismanagement and can communicate regarding their issues. It allows the company to figure
out the individual responsible for the harm caused to the company. Once a shareholder has
tried to get the issues resolved within the company, then he can take a legal action if it comes
within the exceptions.”

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REFERENCES

 “Wedderburn, K. W. (1957). Shareholders’ rights and the rule in Foss v. Harbottle.

The Cambridge Law Journal, 15(2), 194-215.
 Sealy, L. S. (1981). Foss v. Harbottle—A Marathon Where Nobody Wins. The
Cambridge Law Journal, 40(1), 29-33.
 Taylor v. National Union of Mineworkers (Derbyshire Area) [1985] IRLR 99 Smith v
Croft [1988] Ch 114
 Edwards v. Halliwell [1950] 2 All ER 1064
 Menier v. Hooper’s Telegraphs works (1874) Estmanco Ltd v. Greater London
Council (1982)
 Gregory, R. (1982). What Is the Rule in Foss v. Harbottle. The Modern Law Review,
45(5), 584-588.
 Kershaw, D. (2013). The rule in Foss v Harbottle is dead; long live the rule in Foss v
Harbottle.
 Pandya, P. (2014). The Fate of Class Action Suits in India: Then & Now”

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