Case Study On Foss Vs Harbottle

Case study: Foss vs Harbottle
Citation: [1843] 67 ER 189, (1843) 2 Hare 461

Court: Court of Chancery
Bench: Wigram VC, Jenkins LJ
Petitioner: Richard Foss and Edward Starkie Turton
Respondent: Thomas Harbottle & Others
Facts
 The Victoria Park Company was founded in September 1835 to purchase
180 acres of land close to Manchester; the property would eventually be
incorporated by an Act of Parliament and named Victoria Park, Manchester.
Nevertheless, some people, including the directors and others get engaged in
illegal misappropriation of the company's property rather than
accomplishing the goals of developing the land for ornamental and park-like
purposes, building houses with gardens and fields, and then selling or
renting them.
 In response to this mismanagement, two minority stakeholders acted as
whistleblower and reported the issue of this illegal activities and demanded
punishment to wrongdoers and all the same should be held accountable for
their actions and appointed a responsible receiver.
Judgment:
 Wigram VC, ruled in favour of the defendants and rejected the petitioner
claim and declared that only the firm has legal standing to file a lawsuit
when its directors wrong a company. Further the court ruled that any
specific shareholders or foreign element of the company is not capable of
initiating legal action against illegal activities committed with the
corporation, as the company and its shareholders are acting as separate
legal entities.
 This principle in Foss v Harbottle is further bolstered up by Section 21(1)
(a) of the Companies Act, which stipulate that a company may sue and
can be sued in its name, and a member cannot take legal action on behalf
of the company.1 If the company has a right against a party under a
contract, it is the company’s responsibility to sue.
 To prove abovementioned point court gave reasoning that the company is

the one who has actually suffered injury and not its members, so it is on
the company to sue or take any legal action against those members who
have misappropriated its property, not mere shareholder.
 Court in this case also laid down two important principles.
1) First rule was the “Proper Plaintiff Rule” which laid down that if
any wrong done to the company or company suffers any loss due
to the fraudulent or negligent acts of directors or any other outsider
(shareholder), then in such situation only the company can sue the
directors or outsiders in order to enforce its rights. Whereas, the
members of the company or any outsider cannot sue on its behalf
because of the principle of “Separate Legal Entity” which
considers company as a separate legal person from all the members
of the company, so, it can sue and be sued in its own name.
This is the main reason that why only a company can bring legal
action or institute legal proceedings not any member in order to
cover the losses that has been suffered by the company. A member
of the company can take a legal action on its behalf against the
wrong doer only if he is authorized to do so by the board of
directors or by an ordinary resolution passed in the general
meeting.
2) The second rule was “Majority Principle Rule” which laid down
that if the alleged wrong can be confirmed or ratified by a simple
majority of members in the general meeting, then in those cases the
court will not interfere.”
1
Section 21 (1) (a) of the Companies Act
 But as these strict principles were unjust for the minority shareholders,
because although a substantive right has been provided to them, still they
were barred from obtaining justice under the rule and have to submit to
the wrongs done by the majority as they were the ones who controls the
company and minority members have no say due to their small strength.
Therefore, in order to adjust this unjustness, four exceptions to the
general principle have been laid down in this case.
1) The first exception is where the alleged act is ultra vires and
illegal.
2) The second exception is that whenever the majority attempt to
oppresses the minority and commits fraud, then in such case, even
a single shareholder can initiate legal action to protect the
minority’s rights.
3) The third exception is that members can enforce their rights against
the company, such as the right to vote or stand in elections, which
ensure the rights of individual members.
4) Third exception is that shareholders can bring an action on behalf
of the company for wrongs done, acting as representatives of other
members whose relief is sought. This action is called a derivative
action, and the company must be joined as a co-defendant so that
the company is bound by the judgment given.
Key legal issue discussed:
 Whether the shareholders or members of the Victoria Park Company (any
company) legally file a lawsuit to address the alleged misappropriation of the
company’s property and funds?
No,
The court ruled that any specific shareholders of the company is not
capable of initiating legal action against illegal activities committed with
the corporation, as the company and its shareholders are acting as
separate legal entities, because the company is the one who has actually
suffered injury and not its members, so it is on the company to sue or
take any legal action against those members who have misappropriated
its property, not mere shareholder.

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Case study: Foss vs Harbottle

Citation: [1843] 67 ER 189, (1843) 2 Hare 461

 To prove abovementioned point court gave reasoning that the company is

 Court in this case also laid down two important principles.

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