NOTES OF CASES
| Date | 01 May 1976 |
| DOI | http://doi.org/10.1111/j.1468-2230.1976.tb01460.x |
| Published date | 01 May 1976 |
NOTES
OF
CASES
CONTROL
OF
CORPORATE
LITIGATION
WHERE docs authority lie to initiate, withdraw or defend proceedings
in the name
of
a company? Two recent decisions,
Alexander Ward
and
Co.
Ltd.
v.
Samyang Navigation Lid.l
and
Re Argentum Reduc-
tions
(U.K.)
have once more spotlighted but done little to solve,
this long-standing problem. Their failure to solve
it
contrasts strangely
with other recent developments in company law.
The traditional starting point for authority to control corporate
actions is the general meeting
of
shareholders. But modern articles
of
association. such as Article
80
of Table A. Companies Act
1948,
invariably delegate general powers
of
management to the board
of
directors; and case-law establishes that by such articles the share-
holders have denied themselves the right to interfere with ordinary
day-to-day management decisions of the directors by contracting in
the articles that
“. .
.
the directors and the directors alone shall
manage.’’ That the decision to commence or defend legal proceedings
is within such general powers to manage the company’s business, and
therefore reserved for thc directors, is supported by high authority
‘;
and would seem logically to follow. Yet, in modern cases in which
disputes have arisen as
to
whether authority existed to use the com-
pany’s name, judges have taken the view that the right course
is
still
“
to adjourn any motion brought to strike out the company’s name,
with a view to a meeting
[i.e.
a
shareholders’
meeting] being called to
see whether the company desires the action to be brought
or
not.”6
Moreover, in one notable and much debated case, general powers of
management were delegated to directors but the majority shareholder
was permitted to override the directors’ decision not to sue
in
defence
of the company’s rights.”
To
explain the curiosities of these judicial
decisions relating to corporate litigation.
it
has been suggcsted that
1
C19751 2
All
E.R.
424,
H.L.;
also
C19751
2
W.L.R.
673.
2
C19751 1
W.L.R.
186; C19751 1
All E.R.
608,
Megarry
J.
3
Automatic Self-CIeansing Filter Syndicate Co.
v.
Cuninghame
C19061 2
Ch.
34,
44
per
Cozens-Hardy L.J.;
Quin
and Artens Ltd.
v.
Salmon
119091
A.C.
442,
H.L.;
C19091 1
Ch.
311,
C.A.
See
Gower,
Modern Company Law
(3rd ed.) pp.
130-
138
on
the problems discussed in this note; and Hornsey
(1950),,13
M.L.R.
474.
For
a more restrictivc interpretation of the case law,
see
Goldberg, Article
80
of
Table
A
of the Companies Act
1948
”
(1970) 33
M.L.R.
177,
whose explanation that such
cases turncd upon special features of the articles seems unconvincing, especially
in
the light
of
Scott
v.
Scott
C19431
1
All
E.R.
582.
4
John
Shaw and
Sons
(Salford) Ltd.
v.
Shmv
C19351
2
K.B.
113,
especially
134,
Greer L.J., and
143,
Slesser L.J., where the permanent directors’ decision to initiate
legal action was upheld against the attempt by shareholders to stop it.
5 Danish Mercantile
Co.
Ltd.
v.
Beaumont
C19511
Ch.
680, 686-687
per
Jenkins
L.J., where the directors’ powers to manage under the articles appear not to have
been any objection to this procedure.
6
Marshall‘s Valve Gear Co.
V.
Manning
Wurdle
&
Co.
C19091
1
Ch.
267,
Neville
J.; a decision sometimes explained as resting
upon
the exact wording of the article
(Goldberg,
op.
cit.
p.
179)
or
the fact that the majority
of
the directors may have
acted
in
breach
of
duty (Gowcr,
op. cit.
p.
133,
note
53);
see
infra,
note
15.
327
328
THE
MODERN
LAW REVIEW
"vol.
39
perhaps
both
directors
and
shareholders retain parallel authority to
initiate proceedings on behalf
of
a company, even with articles in the
usual form.' thereby retaining harmony, which would otherwise be
fractured, with the
"
Rule
in
Foss
v.
Harbottle."
It is still unclear whether that is the right analysis of the law, But
the problem is less acute, even when powers of general management
have been delegated,
if
the board of directors is wholly disabled from
exercising its powers. In such a
case,
the residual power of the general
meeting of shareholders ~evives,~
as
does that of anyone exercising
the powers of shareholders. The
Alexander
Ward
lo
case involved an
application of that doctrine. Two individuals issued a summons
in
Scotland in the name of a company which claimed
€160,000
from
the defenders. They had no authority to use the company's name.
Warrants for arrestment
of
the defenders' ship were also issued. The
defendants raised the preliminary point that, since, at the time the
individuals acted, the company had not appointed them, or anyone
else, as directors, the company had not authorised the action, which
should be dismissed. Before the point came
to
trial the company went
into liquidation and the liquidator ratified, in the name
of
the company.
the acts done by the individuals. The House of Lords accepted that the
liquidator had power to decide upon corporate litigation and had
power to ratify these proceedings, thereby, by the doctrine of relation
back, validating them retrospectively. This
was
a clear case where
there was no functioning 'board of directors,
so
the liquidator could
exercise residual powers equivalent to those of the general meeting
of shareholders. Counsel's attempts to distinguish an existing but non-
functioning board from a non-existent board were understandably
swept aside. But it is noteworthy that Lord Hailsham cited the passage
in Gower's
Modern Company
Law
which suggests
parallel
powers
over corporate litigation for directors and for the shareholders when
the board
is
functioning,ll without any apparent disapproval.
Re Argenturn
l2
might have been decided on the same point.
Mrs.
M
held
48
of the
95
voting shares in a company and
Mrs.
J
the remainder.
Their husbands constituted the board of directors which was in
"
an
unhappy state of deadlock.''
la
The company was being wound up;
7
Gower,
op. cit.
pp. 137-138, thereby reconciling the
Shaw
case with the
Mursholl's
Valve
case. Pennington
Company Law
(3rd ed.) pp. 501, 561 seems
to
take the same
view.
8
Wedderburn, "Shareholdcrs' Rights and the Rule
in
Foss
v.
Harbottte."
[I9573
Camb.L.J. 194, 200-203.
0
Burron
v.
Potter
119143
1
Ch. 895, C.A. (dendlock
on
the board);
Foster
v.
Foster
119161 1 Ch. 532.
This
is
a genuine example of
''
residual
"
powers, as opposed
to
the Shareholders' ratifying or validating an act otherwise voidable.
e.g.
a directors'
act done in excess'of their powers:
Bamford
V.
Bamford
119701 Ch. 212, C.A.
10
El9751
2
W.L.R. 673; C19751 2 All
E.R.
424.
11
Op.
cit.
pp. 137-138 where the
Murshdl's Vdve
case is cited
(supra,
note 6).
Sea
[la751 2 All
E.R.
p. 429, where Lord Hailsham
also
;Flies upon
Dunis:
Mercantile
Co.
Ltd.
v.
Beaumont
119511 Ch. 680, which was
from the
Aexander
Ward
case, a view
also
advanced by Lord Kilbrandon at p. 433.
Sed quaere
whether the
Danish Mercantile
case
(supra.
note
5)
was a case
of
a
disabled board?
12
C19751
1
W.L.R. 186; C19751
1
All
E.R.
608.
indistinguishable
13
Megnny J. 119751
1
All
E.R.
at 609.
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