NOTES OF CASES
| Date | 01 November 1968 |
| DOI | http://doi.org/10.1111/j.1468-2230.1968.tb01219.x |
| Published date | 01 November 1968 |
NOTES
OF
CASES
GOING
TEE
WHOLE
Hoao
v.
CRAMPHORN?
FIVE
principles of company law interlock in an inelegant manner.
This relationship has never been fully investigated by the courts; but
in
Bumford
v.
Bumford,’
Plowman
J.
began to unravel their twisted
skein.
The principles are: (i) The memorandum and articles constitute
a contract under section
20
of the Companies
Act
1948;
and there-
fore each individual member can sue to assert his personal rights
qua
member. (ii) He cannot sue, however, where the matter
is
within the control of an ordinary majority in general meeting by
reason of the rule in
Foss
v.
Harbottle;
and, therefore, he cannot
normally challenge mere
‘‘
procedural irregularities
”
a
or
mere
breaches of fiduciary
or
other duties by the directors,s
or
even acts
by them that are merely in excess
of
their powers, which can be
so
ratified.4 Such breaches of duty are said to be wrongs done to the
company for which it alone can sue. (iii) Although residual powers
of control are still regarded by the courts as belonging to the general
meeting (as illustrated by (ii)) nevertheless when the articles dele-
gate powers to directors the general meeting cannot interfere with the
exercise of those powers (although it is not clear how far this prin-
ciple extends to the right to control corporate litigation). (iv) The
shareholder’s personal right of action probably extends to a right
to
have the constitution (memorandum and articles) generally
observedy6 a right which is limited by principle (ii), but as yet
limited to an uncertain extent. (v) The individual shareholder can
bring
in
representative form a
‘‘
corporate
”
or
‘‘
derivative
”
action to protect
his
company’s rights against wrongdoers who are
in control and have committed a “fraud
”;
these
(‘
frauds
”
are
not open to ratification
or
approval by an ordinary majority
’;
but
again the ambit and definition of
‘‘
fraud
yy
is uncertain.
It
had been once thought that where directors had acted for a
‘‘
collateral purpose
”
although honestly, principle (v) would apply
and ratification was not possible.s
Hogg
v.
Crumphorn Ltd.,O
1
19681
2
All
E.R.
655.
2
McDougall
v.
Gardiner
(1875) 1
Ch.D.
13.
3
Ladides
v.
Jensen
[1956]
Ch.
565.
4
Grant
v.
U.K.
Switchback
Rys.
(1888)
40
Ch.D.
135;
Imine
v.
Union
Bank
of
Australia
(1877)
2
App.Cas. 366, 373-374 (P.C.).
5
Shaw (John)
d
Sons
(Salford) Ltd.
V.
Shaw
[1935
2
E.B.
113,
and the
line
6
Salmon
v.
@in
R
Axtenn Ltd.
19091
1
Ch.
311;
affd.
Quin
d
Axtens Ltd.
7
Cook
v.
Deeks
[1916] A.C. 654
(P.C.).
8
Gower,
Modern Company Law,
p.
512.
9
[1967]
Ch.
254 (1963:
Buckley
J.).
of
cases leading
to
it
:
me Oower,
Modern Company
2
am,
p.
127.
v.
Salmon
[1909] A.C. 442
(FI.
L
.):
and see Wedderburn
[1957]
Camb.L.J.
194, 207-214.
688
Nov.
1968
NOTES
OF
CASES
689
however, demonstrated that this was not the case. Although a
minority shareholder could sue to challenge such acts (there the
issue of new shares to retain control for the directors), his action
might be ultimately defeated because the court would send the
matter back for
a
decision by the general meeting.
In
a previous
note,
it
was suggested that
Hogg’s
case involved a
‘‘
corporate
’’
action, the
writ
being
in
representative form; and that therefore
the decision represented an exception to the rule in
Foss
V.
Harbottle
and the principles set out above.lo
Barnford
V.
Bamford
‘I
suggests that the exception may be of a slightly different character,
though the result was the same.
Barnford’s
case also involved directors who issued ordinary shares
previously unissued. This they were given express power to do by
article
12
of the company’s constitution. Two shareholders (suing in
a representative action) alleged that the directors had not exercised
the power bons fide in the
best
interests of the company. At a
general meeting the issue of the shares was approved but the plain-
tiffs alleged that such a ratification was invalid. Plowman
J.
assumed for the purposes of this preliminary issue that the allegation
was correct that the directors did not exercise their power
of
allot-
ment bona fide
in
the interests of the company but he made
it
clear
that the
“
assumption
is
merely that the board exceeded its powers
not that
it
acted mala fide.”
la
The case was, therefore parallel to
Hogg
v.
CTamphoTn
Ltd.
Plowman
J.
was disposed to agree with
that decision but went into the problems more deeply because they
ha+
been more fully argued.
His lordship first sets out the cases that clearly establish
principle (iii), which he states as follows
:
“A
company cannot by ordinary resolution dictate
to
or
over-rule the directors in respect of matters entrusted to them
by the articles.
To
do that it is necessary to have a special
resolution.”
10
&e (1967)
30
M.L.R.
77, where other authoritie!, are cited which are not
repeated
in
this
note.
The “collateral purpose was the same that
alleged in
Barnford,
an
attempt to retain control in the face
of
a take-over bid.
It
was clear that. undef, the
o!!
law, the courts would
not
interfere with
directors’ acts
short
of
fraud at the suit
of
minority shareholdere: aee
Bailq
v.
Birkenhcad, Lancs.
d?
Cheshire Junction
Rg.
(1850) 12
Beav.
433
(allegation
of
unfair calla made for improper motives; action in representa-
tive form: Lord Langdale M.R.
I‘.
. .
it would.
I
think, be impossible for
this
wurt
to
entertain jurisdiction in such
a
case
&s
this without assumin
authority
to
interfere in the internal management of
all
companies
an!
partnerships
.
.
.”
p.
442): and
Anglo-Universal Bank
v.
Baragnon
(1881)
45
L.T.
362
(C.A.):
although there
is
a hint in that
case
that action might
be permitted in some cases
of
improper motive.
11
[l968]
2
All
E.R.
655.
12
The case was thus not in the same category
as
Re Roith Ltd.
[I9671
1
All
E.R.
427; noted (1967)
30
M.L.R.
566.
On
“collateral purposes
”
where
the directors were bona
fide
Ree
alao
the Report
on
the Savoy Hotel Dispute
(Milner Holland,
Q.C.,
1954.
H.M.S.O.)
.
13
119681
2
All
E.R.
at
p. 662.
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