T H E P R O P E R P L A I N T I F F R U L E

FOSS V HARBOTTLE (1983)

FAITS DE LA CAUSE

• Richard Foss and Edward Starkie Turton were two minority shareholders in the "Victoria Park Company". The company had been set up in September 1835 to buy 180 acres of land near Manchester and, according to the report, "enclosing and planting the same in an ornamental and park-like manner, and erecting houses thereon with attached gardens and pleasure-grounds, and selling, letting or otherwise disposing thereof".

• This became Victoria Park, Manchester. Subsequently, the company was incorporated. The claimants alleged that property of the company had been misapplied and wasted and various mortgages were given improperly over the company's property. They asked that the guilty parties be held accountable to the company and that a receiver be appointed.

• The minority shareholder took action against the majority shareholder

• The defendants were the five company directors and the solicitors and architect

Held• The company and its members are separate legal

entities and the company has power to sue whenever its rights have been infringed upon.• Its legal personality is a statutory creation and

therefore its powers could be exercised by and subject to the wishes of the majority• The shareholders/members cannot enforce the

rights and remedies of the company. The company should sue in its own name.

ADVANTAGES

• Minimizing the risk of multiplicity of suits regarding the same matter• Company will not be subjected to unnecessary

suits in respects of matters which are mere irregularities in internal management and which can be set right by the majority

DISADVANTAGES

• The majority could restrain any proceedings which are for the benefit of the minority and not to the advantage of majority• A wrongdoer may escape a company action to

enforce its rights as they will not proceed with the action against himself if the wrongdoer is in control and is authorised by the company’s AoA to decide so.

THE COURTS HAVE ALLOWED MEMBERS TO TAKE ACTION AGAINST THE WRONGDOER IN CERTAIN

SITUATIONS

EXCEPTIONS TO THE FOSS V HARBOTTLE RULE

The recognized situations where a shareholder may take action against the other shareholder or company:(i) Ultravires acts (ii) Fraud on minority (iii) Special majority (iv) Personal rights(v) justice of case requires

ULTRA VIRES ACT

Section 20(2) and (3)- Permits members to take action against the

company to restrain its performance- Restraining ultra-vires acts and to take action

against the officers who authorised the ultra vires transaction- Minister may wind up the company under s 20(2)

(c)

PAIDAH GENGANAIDU V LOWER PERAK SYNDICATE SDN BHD

• The company passed a resolution to reduce the amount of judgement debt owed to the company.

• The appellant's case so far as it is based on the first exception was argued on the basis that the amount of the judgment debt represents capital which the company has no power to reduce. The answer to this is that paragraph 5 of the Memorandum clearly gives the company power to increase or reduce capital.

• The Third Schedule to the CA 1965 which applies by reason of section 19(1)(c) & by reason of paragraph 3(22) of the Memorandum sets out the powers of the company in addition to those mentioned in the Articles. The powers in paragraphs 12 and 21 of the Schedule seem wide enough to authorise the company to act in terms of the resolution.

• Where the act complained of is wholly ultra vires the company or association the rule (Foss v Harbottle rule) has no application because there is no question of the transaction being confirmed by any majority.• In this case, the act was not ultra vires based on

the facts.

FRAUD ON MINORITY

Meaning of fraud

• Fraud requirement – actual fraud or deception enough?

Abdul Rahim bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd• 1. Fraud on minority a term of art and has nothing to do

with actual fraud or deception at common law• 2. Lack of probity comes within expression but no need

to prove dishonesty • 3. Sufficient if show majority in power abuse powers –

improper use of powers

EXAMPLES

• Expropriate the company's propertyCook v Deeks

• Expropriates minority's propertyBrown v British Abrasive Wheel Co

COOK V DEEKS

• The ¾ directors expropriated a project which the company was negotiating. As they formed the majority, they passed a shareholder’s resolution to declare that the company had no interest in the contract.

• The Privy Council advised that the three directors had breached their duty of loyalty to the company, that the shareholder ratification was a fraud on Mr Cook as a minority shareholder and invalid. The result was that the profits made on the contractual opportunity were to be held on trust for the Toronto Construction Co.

BROWN V BRITISH ABRASIVE WHEEL CO

• Shareholders holding 98% of the company’s shares wanted to buy out the remaining shareholders.• When the minority refused, the majority passed a

resolution to alter the company’s articles to effect that a member was required to sell his shares if so requested by members holding 90% of the company’s shares.• Court held alteration was ineffective.

FRAUD ON MINORITY 2ND ELEMENT - MEANING OF WRONGDOERS IN CONTROL

Plaintiff need to establish that fraud has been committed by the person who is in control and who decides whether action is to be taken by the company.

Ting Chong Maa v Chor Sek Choon.

Peh Swee Chin J –• Case both P and D equal shares – P not a minority and

neither the D a majority shareholder• The plaintiff and defendant had equal shares in the

company but the defendant was the managing director. Defendant was in control.

Tan Guan Eng & Anor v Ng Kweng Hee &Ors • The control can be determined from the

shareholding.• When wrongdoers do not hold the majority

shares, the court “may go behind the apparent ownership of the shares in order to determine whether wrongdoers do in fact control the company)

SPECIAL MAJORITY

• There are transactions requiring special majority (e.g passing of member’s special resolution)• Similarly, if the AoA requires certain transactions

to be approved by a certain shareholder, the decision of the shareholder cannot be overridden.

SPECIAL MAJORITY

• Quin & Axtens Ltd v Salmon• The company’s articles provided that certain

contracts must be approved by Salmon and Axtens. In one instant, Salmon refused to consent and the directors called for an EGM to approve the transaction.• The court granted injunction to restrain the

company from acting on the member’s resolution.

PERSONAL RIGHTS

Where the personal and individual rights of the shareholders were invaded, shareholder may sue • Pender v Lushington (1877) • One vote for every 10 shares – maximum of 100

votes• A member transferred his shares to Mr Pender for

him to vote• Company meeting: vote disallowed

• Jessel MR • This is an action by Mr Pender for himself. He is a

member of the company and whether he votes with the majority or the minority he is entitled to have his vote recorded- an individual right in respect of which he has a right to sue.

IN THE INTEREST OF JUSTICE

English position – Prudential Assurance Co Ltd v Newman Industries Ltd (no 2) & Ors ( 1982) • This exception is not recognised as it is not a practical test

Australian Position – Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd & Ors • fifth exceptions to cater for development and unforeseen

eventualities that might not flow under existing exception but justice require the case to be brought.

Abdul Rahim bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd &Ors [1995] 3 MLJ 417• Malaysian position – Gopal Sri Ram JCA inclined to agree with

Australian position

STATUTORY PROTECTION AND REMEDIES FOR OPPRESSION / UNFAIR CONDUCT

• Statutory grounds S181 and relief S 181 (2) • S181A ( procedure to bring derivative action) • S217 and S218 (winding up esp s 218(1) f) and

(i)) • S368A Injunctions