Foss vs Harbottle (1843) Case Analysis
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Foss vs Harbottle case related to company law that established important principles like the ‘Proper Plaintiff Rule’ and the ‘Majority Principle Rule’. The case addressed the question of whether individual shareholders can sue for wrongs done to a company and highlighted the status of the company as a separate legal entity. The decision clarified that only the company or a derivative action can seek legal action for fraud or mismanagement. The case shaped the corporate governance and minority shareholder rights and also outlined the key exceptions like ultra vires acts and fraud on the minority. For an understanding of important judicial decisions explore Landmark Judgements.
Case Overview |
|
Case Title |
Foss vs Harbottle |
Date Of The Order |
1843 |
Jurisdiction |
England |
Bench |
Sir James Wigram VC, Sir Knight Bruce VC |
Appellant |
Richard Foss, Edward Starkie Turton |
Respondent |
Thomas Harbottle, Others |
Provisions Involved |
Majority Rule Principle, Corporate Law, Derivative Action |
Foss vs Harbottle : Historical Context and Facts
In Foss v harbottle case summary, the Victoria Park Company was formed in 1835 to acquire and develop 180 acres of land near Manchester. It was later known as Victoria Park, Manchester after incorporation by an Act of Parliament. The purpose of the company was also the establishment of ornamental and park-like spaces, construction of houses with gardens and fields and selling or renting of these properties.
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Allegations of Fraud and Misappropriation
The Directors and other individuals associated with the company diverted from the intended purposes of the company. They got into fraudulent activities including the misappropriation and false mortgaging of company assets for their personal use.
Actions by Minority Shareholders
In Foss vs Harbottle case, Richard Foss and Edward Starkie Turton, who were the minority shareholders, took a legal action and contended that the directors and associates of the company were misusing its assets. The individuals accused included the five directors namely, Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead and Richard Bealey along with others such as Joseph Denison, Thomas Bunting, Richard Lane, H. E. Lloyd, Rotton, T. Peet, J. Biggs and S. Brooks (assignees of Byrom, Adshead, and Westhead).
Legal Proceedings
In foss vs harbottle case law, the legal proceedings was instituted on the basis of the following three main grounds-
- Fraudulent Practices: The shareholders said that the directors and associates are engaged in practices which are fraudulent.
- Lack of Qualified Directors: The board of directors was accused of being unqualified to manage the company
- Absence of Administrative Infrastructure: The shareholders showed the lack of administrative infrastructure which made it impossible for the company to function properly or address grievance effectively
Relief Sought
The minority shareholders sought the intervention of the Court to hold the wrongdoers accountable and requested the appointment of a responsible receiver to manage the assets of the company.
Foss vs Harbottle : Issue addressed
The main question which was addressed in the case of foss vs harbottle was 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?
Foss vs Harbottle: Judgment and Impact
The Court in Foss vs Harbottle case ruled in favor of the Defendants and rejected the claims brought by the shareholders. The Court held that individual shareholders or outsiders could not take legal action for wrongs done to the corporation. The Court stated the reason that as the company is a distinct legal entity separate from its members outsiders cannot take legal actions. This principle is aligned with Section 21(1)(a) of the Companies Act which states that a company may sue and be sued in its own name and that members cannot initiate legal proceedings on behalf of the company.
The principle in the case of Foss vs Harbottle which the Court stated was the responsibility of the company to take legal action against those who misappropriated its property. In this case Wigram VC also highlighted that the minority shareholders must demonstrate that all internal mechanisms for redress have been exhausted. Moreover, if the alleged irregularities can be ratified by the majority of shareholders, the courts will refrain from intervening.
The principle in the case of Foss vs Harbottle established the following foundational rules -
Proper Plaintiff Rule
The company itself is the only proper party to sue directors or third parties for any harm or loss caused by fraudulent or negligent acts. This rule arises from the doctrine of the company as a separate legal entity and distinct from its members.
Majority Principle Rule
The Courts will not intervene if a wrong can be ratified by the majority of shareholders at a general meeting.
The Court also acknowledged few exceptions in the case of Foss vs Harbottle where minority shareholders could pursue legal action-
Ultra Vires Acts
Any member can bring legal action to challenge those acts if the company engages in activities beyond its powers.
Fraud on Minority
Any member can bring legal action to challenge those acts if the majority engages in fraudulent acts that harm the minority.
Oppression and Mismanagement
Shareholders may seek legal remedies under the Companies Act if there is oppression or mismanagement within the company.
Violation of Individual Membership Rights
Shareholders can enforce their individual rights such as the right to vote or stand for election against the company.
Derivative Action
Shareholders may bring a derivative action on behalf of the company to address wrongs committed against it.
Conclusion
FAQs about Foss vs Harbottle (1843)
What is the Foss vs Harbottle case about?
The case involved allegations of fraud and misappropriation of company assets by the directors and associates of the Victoria Park Company.
What were the allegations made by the Plaintiffs?
The plaintiffs alleged in the Foss vs Harbottle case that fraudulent practices by the directors and associates and absence of administrative infrastructure.
What principles were established in Foss vs Harbottle?
The court laid down two key principles i.e., ‘Proper Plaintiff Rule’ and ‘Majority Principle Rule’.
What was the decision of the Court?
In the Foss vs Harbottle case, the Court held that the company is a separate legal entity and only the company itself could bring a claim for wrongs done to it.
What are the exceptions laid down in Foss vs Harbottle?
The Court recognized the following exceptions which are as follows: Ultra Vires Acts, Fraud on Minority, Oppression and Mismanagement, Violation of Individual Membership Rights and Derivative Action.