If you have a real situation, this information will serve as a good springboard to get legal advice from a lawyer. Judges have for long been reluctant to interfere in the internal affairs of companies. The money forming the consideration for the mortgages was received, and was expended in, or partly in, the transactions which are the subject of the first ground of complaint. The company acquires causes of action for breaches of contract and for torts which damage the company. In fact if the factual matrix of the case appears again, it will undoubtedly favour the plaintiff shareholders. But, on the other hand, it must not be without reasons of a very urgent character that established rules of law and practice are to be departed from, rules which, though in a sense technical, are founded on general principles of justice and convenience; and the question is whether a case is stated in this bill entitling the Plaintiffs to sue in their private characters. The Court rejected the two shareholders' claim and held that a breach of duty by the directors of the company was a wrong done to the company for which it alone could sue.
However, all other judges felt that its application would be abhorrent to the company law jurisprudence India with its strong socialist traditions. Individual Membership Rights These rights are personal or indiviguals rights vested in eacd shareholder either by Articles or by a statute. Where an alleged wrong is a transaction which might be made binding on the company by a simple majority of members, no individual member of the company may bring an action against it because if a majority of members is in favour of what has been done, then cadit quaestio and it is considered that no wrong has been done to the company and there is no longer any reason for anyone to sue. Even if he were wrong in that, the judge felt that any judgment against the counterparty would be hollow, in that it would have insufficient assets. It would squarely fall under the exceptions of breach of duty, fraud on minority and mismanagement. This avoided a slew of litigations which would be detrimental to the interests of the company. Since derivative claims in England can only be brought under the Companies Act, the rule in Foss v Harbottle is consigned to the dustbin.
The defendants thus conveyed the property which was conveyed to them in trust and those properties given through agreement, to other person so that they could be mortgages. Harbottle provides that individual have no cause of action in law for any wrongs done to the and that if an action is to be brought in respect of such losses, it must be brought either by the itself through management or by way of a. The case of fraud and equity was not made out by the plaintiffs. This in effect purports to be a suit by complaining of a fraud committed or alleged to have been committed by persons in a fiduciary character. Those two propositions appear clearly from the speeches of Lord Bingham of Cornhill and Lord Millett in Gore Wood.
If the shareholder however intends recover damages alleged to be due to the Company, the action should ordinarily be brought by the company itself. The majority rule of Foss v Harbottle is the common law principle on who may sue on behalf of the company which has, in England, been diluted by the statutorily governed derivate claim. I am of opinion that this question—the question of confirmation or avoidance—cannot properly be litigated upon this record, regard being had to the existing state and powers of the corporation, and that therefore that part of the bill which seeks to visit the directors personally with the consequences of the impeached mortgages and charges, the benefit of which the company enjoys, is in the same predicament as that which relates to the other subjects of complaint. Good faith is a key ingredient in determining maintainability in such instances since his action is for the purpose of doing justice to the company. The rule in Foss v Harbottle is prudent since it is unnecessary to give recourse to the courts in regard to a matter which a company can settle on its own, or an irregularity which it can ratify or condone through its own internal procedure. Because Foss v Harbottle leaves the minority in an unprotected position, exceptions have arisen and statutory provisions have come into being which provide some protection for the minority.
Subsequently, an Act of Parliament incorporated the company. Three directors soon became bankrupt and their shares were transferred to the remaining defendants. In the alternative, he relied on the fifth exception. Issue The only issue dealt with was that of maintainability. The Act enabled proprietors to sue and be sue and excused them from following the exact form of proceeding applicable to a pure corporation.
According to this rule, the shareholders have no separate cause of action in law for any wrongs which may have been inflicted upon a corporation. However the Act stated that this was not allowed till one half of the share-capital was paid. Even if the plaintiffs had used the name of the corporation, the governing body of the company could have applied for a stay and an investigation would have followed. On the other hand, where there is no wrong to the company, but only one to the shareholder, there is no reason to bar the shareholder from suing. They appropriated these amounts to themselves and others in lieu of reduction of the increased chief rents.
The Court will allow a derivative claim where the wrongdoers have benefited personally from their self-serving negligence. This, being beyond the powers of the corporation, may admit of no confirmation whilst any one dissenting voice is raised against it. The majority rule serves a dual purpose. In law the corporation and the aggregate members of the corporation are not the same thing for purposes like this; and the only question can be whether the facts alleged in this case justify a departure from the rule which, primâ facie , would require that the corporation should sue in its own name and in its corporate character, or in the name of someone whom the law has appointed to be its representative. The conduct with which the defendants are charged is an injury to the whole corporation. The dissenting judges opined that the rule in Foss v Harbottle should be applied particularly since the statute stated in clear terms an exhaustive list of who might be made parties to a winding up petition.
The powers of the body of the proprietors is still in existence. The existence of the majority rule encourages the aggrieved shareholder to raise issues of poor management in General Meetings and communicate with the management regarding their need for redressal. . This rule is the foundation of common law jurisprudence regarding who may bring an action on behalf of the company. Firstly, a company is a legal entity separate from its shareholders. Nevertheless, the entitlement of a shareholder to pursue by way of derivative action a claim for and on behalf of a company is an exception to the elementary principle… As such, it should broadly or liberally applied.