Foss vs Harbottle Case
Foss v. Harbottle (1843) 2 Hare 461: Explanation
Background:
This is a landmark English company law case from 1843.
The case involved two shareholders, Foss and Turton, who sued the directors of a company for mismanagement and misappropriation of company funds.
They alleged that the directors had committed fraud and misapplied company property.
The question before the court was whether individual shareholders could sue on behalf of the company or whether the company itself must sue.
Key Facts:
The company’s articles provided a procedure for calling general meetings and making decisions.
Foss and Turton, minority shareholders, claimed the company was wronged.
The majority shareholders supported the directors.
The minority shareholders wanted to bring a suit for the alleged wrong.
Legal Issue:
Whether individual shareholders can sue for wrongs done to the company, or whether the company itself is the proper plaintiff.
Court’s Decision:
The court held that the proper plaintiff in an action alleging wrongs to a company is the company itself, not individual shareholders.
The company is a separate legal entity from its shareholders (a principle established in Salomon v. Salomon later on).
If the wrongdoers are in control of the company, and the company fails to sue, the individual shareholders cannot generally sue.
The Rule in Foss v. Harbottle:
This case gave rise to what is known as the “Rule in Foss v. Harbottle” which establishes two fundamental principles:
Proper Plaintiff Rule:
Only the company itself can sue for wrongs done to the company, since the company is a separate legal entity.
Majority Rule Principle:
If the alleged wrong can be ratified or decided upon by a simple majority of the shareholders in a general meeting, the courts will not intervene at the suit of a minority shareholder.
Exceptions to the Rule:
The courts have recognized certain exceptions where minority shareholders can bring a “derivative action” (a suit on behalf of the company) despite the rule:
Fraud on the Minority: Where the wrongdoers are in control and prevent the company from suing.
Ultra Vires Acts: Acts beyond the company’s powers.
Acts Illegal or Beyond Authority: Acts violating the company’s articles.
Personal Rights of Shareholders: Cases involving rights personal to shareholders (not the company).
Injustice or Oppression: Where the majority’s conduct is oppressive or unfairly prejudicial.
Importance in Indian Company Law:
The Rule in Foss v. Harbottle is followed in India as well.
It is the basis for the derivative suit provisions under the Companies Act, 2013 (Sections 245-252).
It emphasizes that the company is a separate legal entity and majority rule governs corporate decisions.
Minority shareholders are protected through statutory remedies like class action suits and oppression and mismanagement petitions.
Related Indian Case Laws:
Securities and Exchange Board of India v. Subrata Roy Sahara, (2012) 10 SCC 603
Affirmed principles of majority rule and separate corporate personality.
Bachhaj Nahar v. Prothibha Industries Ltd., AIR 2001 SC 1441
Recognized the principle but allowed minority to seek relief in cases of fraud or oppression.
S. Ramanatha Aiyar, Guide to Company Law Practice (Indian Commentary)
Discusses the application of Foss v. Harbottle rule in Indian courts.
Summary:
| Aspect | Explanation |
|---|---|
| Case | Foss v. Harbottle (1843) |
| Principle Established | Only the company can sue for wrongs done to it. |
| Majority Rule | Decisions of the majority binding on the company. |
| Exception | Minority can sue in cases of fraud, oppression, ultra vires. |
| Importance in India | Basis for derivative actions and protection of minority rights. |
Conclusion:
The Foss v. Harbottle rule is a fundamental doctrine in company law that safeguards the separate legal personality of the company and upholds the principle of majority rule. However, it balances this with exceptions to protect minority shareholders against fraud and oppression. This doctrine continues to influence company law jurisprudence in India and worldwide.
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