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Key takeaways

  • In this case, the plaintiffs claimed that the company's property had been misused, wasted, and the wrong kinds of mortgages had been granted on it. They demanded that a receiver be appointed and that the responsible people be made liable to the business.
  • Wigram VC rejected the claim and declared that only the firm has legal standing to file a lawsuit when its directors wrong a company.
  • The principle expressed in Sections 397 and 398 of the Indian Companies Act, which provide for the prevention of oppression and mismanagement, was ruled by the Calcutta High Court to be an exception to the rule in Foss v. Harbottle

Court actions continue to be the best defence against any mistreatment of corporate executives. Democracy is based on the principle of majority rule, and a company, which is association of people and operates in line with decisions made by the majority of its members, operates similarly. The sole remaining course of action for a disgruntled minority is to file a legal appeal if they are unable to gain satisfaction for what they perceive to be a director wrongdoing through the regular process of interventions at company meetings. Therefore, provisions for the protection of the investor's interests in the company are included in the Companies Act, 2013.

The registration statute of 1844 had a significant impact on the joint-stock company control procedures by bringing about judicial control of corporate activities under English law. This was done to make sure that they are under control and that the law is upheld. This authority had always been used by the King's Court. Because of this, it was deemed practical to analyse the issue using 1844 as a pivotal year.

Facts of the case

In September 1835, the "Victoria Park Company" was established. Minority shareholders in the company Richards Foss and Edward Starkie Turton filed a lawsuit against the promoters and directors.

The plaintiffs claimed that the company's property had been misused, wasted, and the wrong kinds of mortgages had been granted on it. They demanded that a receiver be appointed and that the responsible people be made liable to the business. Additionally, the defendant can be ordered to make up the business losses.

Five business executives (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, and Richard Bealey) as well as attorneys (Joseph Denison, Thomas Bunting, and Richard Lane) and an architect made up the defendants.

Judgement of the case

Wigram VC rejected the claim and declared that only the firm has legal standing to file a lawsuit when its directors wrong a company. The court essentially created two rules. First, under the "appropriate plaintiff rule," only the company may seek redress for wrongs committed against it. Second, the court will not intervene if the alleged injustice can be affirmed or ratified by a simple majority of members present at a general meeting, according to the "majority rule principle."

The Rule of Majority

This court is not to be necessary on a regular basis to assume control of every theatre and brewery in the kingdom, according to Lord Eldon. The courts have generally adopted a laissez-faire principle and allowed majority rule to function unchecked.

A rule of procedure, most often known as the rule in Foss v. Harbottle, has been the primary judicial tool used to uphold this non-interventionist policy. This rule is further based on two principles:

(a) the proper claimant principle; and

(b) the internal management principle.

Both of these concepts assume that the company itself is the claimant in the case and has the authority to resolve the alleged injustice that was done to it.

Because of its intricacy and because it is viewed as unfair to recognise a substantive right yet refuse a remedy on procedural grounds, the rule established in the case received harsh condemnation from across the Atlantic and in other areas of the world. The requirements and interests of controllers and minorities have been attempted to be balanced by requiring a special resolution rather than a simple majority vote in significant matters, such as constitutional amendments and judicial sanctions in cases of capital reduction. The courts are also accessible to members directly via various statutory procedures.

Exceptions to the rule

The application of stated regulation includes situations when corporations have the authority to approve managerial transgressions. However, there are some actions that cannot be approved or affirmed by a majority of shareholders, and each and every shareholder has the right to bring legal action to enforce a debt owing to the corporation. A representative action of this type is referred to as a "derived action" in American literature.

Ultra Vires: When it comes to matters that are outside the scope of the company's authority and that a majority of shareholders cannot approve, a shareholder has the right to file a lawsuit against the company and its officers.

"There does not appear to be any case where the necessity of the corporation being a party has been expressly decided," according to the Bharat Insurance Company case, "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: Even one shareholder may impeach the actions of the majority of a company's members if they use their influence to cheat or mistreat the minority.

The landmark Menier Case provides the clearest explanation of it. It was decided that Hooper should face a derivative lawsuit because of its oppressive expropriation of the minority shareholders through its schemes to profit from the unlawful agreements it had signed.

Wrongdoers in Control: Any member or members may file a lawsuit in the company's name to protect its interests because it would be pointless if the wrongdoers didn't have a decisive impact on the outcome, whether directly or indirectly. Glass v. Atkin reached the same conclusion.

Acts Requiring Special Majority: At a general shareholder meeting, special resolutions are necessary for a number of acts. Therefore, any member may file an action to restrain the majority if it intends to perform any such act by passing merely an ordinary resolution or without passing special resolution in the manner required by law. In the Dhakeswari Cotton Mills Case and the Nagappa Chettiar Case, such action was permitted.

Individual Membership Rights: Each shareholder has specific personal rights that he may exercise against the company and his fellow shareholders. Many of these rights were granted to shareholders by the act itself, although they may also result from the articles of association. These rights are frequently referred to as individual membership rights, and without respect for them, the rule of majority is inapplicable.

Class Action: A class action lawsuit enables a group of claimants with the same complaint against a company to do so. For people with limited resources or tiny claims that make individual lawsuits expensive and impractical, the scale of economies associated with class actions seem especially crucial. When a company's management or conduct of its operations is allegedly detrimental to the interests of the company its members, or its depositors, shareholders or depositors may submit an application with the National Company Law Tribunal (NCLT).

Oppression and Mismanagement:The principle expressed in Sections 397 and 398 of the Indian Companies Act, which provide for the prevention of oppression and mismanagement, was ruled by the Calcutta High Court to be an exception to the rule in Foss v. Harbottle, which establishes the Sanctity of the Majority Rule.

Conclusion: Foss v Harbottle

It might be said that the well-known case law of Foss v. Harbottle holds a special place in English jurisprudence. Numerous statutes dealing with company law in many nations have their roots in its ramifications. However, in light of minority rights and the repressive tactics of majority stakeholders, the application of the rule of majority established in the aforementioned case has become vulnerable to various exceptions. Not every decision-making process is won by the majority leadership. Therefore, India cannot mechanically apply the principles established in this instance.


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