Section 205 of the Companies Act 1963 provides a more flexible, more available and more effective remedy

against directors wrongdoing than any of the exceptions to the Rule in Foss v Harbottle (1843) 2 Hare 461

Company Law and Partnership LA4928 Lecturer: Philip Smyth Shane Gaughan ID 0173061 4/13/2013

Introduction
The Foss v Harbottle (1843) 2 Hare 461 case is a leading precedent in company law in Ireland. The outcome of the case was the Rule in Foss v Harbottle1 and Exceptions to the Rule in Foss v Harbottle. The law relating to these exceptions were described as rigid, old fashioned and unclear by the UK Law Commission more than a century later2 (CP142 Shareholder Remedies Consultation, 1996). In Ireland the Companies of Act 1963 legislated for these exceptions in Section 205 of the act primarily based on the work of the Company Law Reform Committee (1958)3 It has been describe by Courtney as the most powerful and far-reaching remedy against the company and its directors in cases of oppression and disregard of their interests.4 (Rozentale, 2011) This paper will outline the case of Foss v Harbottle its outcomes and cases that have relied on its rulings. Section 205 of the Companies Act will be outlined with reference to cases that relied on it. The paper will conclude with whether or not Section 205 provides a more flexible, more available and more effective remedy against directors wrongdoing than any of the exceptions to the Rule in Foss v Harbottle

Foss V Harbottle
In the case of Foss v Harbottle, the defendants made up of five directors of the company and promoters, had purchased land and then sold it to the company at an inflated price. The plaintiffs were two minority shareholders took the case against the defendants looking for the transaction to set aside and to be compensated for the company paying the over inflated price for the land. The case was dismissed and they lost their action against the defendants. The lost on the grounds that it was the company who had lost out not the shareholders and therefore it should have been the company to sue not the shareholders. The Wigram VC gave the following observation on the case. It could not nor could it successfully be argued, that it was a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation. In law, the corporation and the aggregate members of the corporation are not the same thing for purposes like this... (Callaghan, 2007, p. 175/176)

Where the company has been wronged, the company and not the shareholders is the proper person to institute proceedings 2 UK Law commission 3 Some of its recommendations where included in the Companies Act of 1959, but the 1963 Act contained most of its recommendations 4 nd T B Courtney, The Law of Private Companies (2 ed Tottel Publishing Ltd, Dublin 2008) 1090.

This basically means that the company is a separate legal entity which is separate from its shareholders as determined in Salomon V Salomon5, and that if a company is wronged it is not up to any individual shareholders to take legal action to right the wrong but it is up to the company itself. On top of this members of a company have to abide and respect majority rule in decisions made in the company. All this leaves the minority shareholder in an unprotected position with no recourse. Linehan D viewed that it left the minority shareholder undefended and unarmed (Rozentale, 2011). In light of this exceptions to the rule in Foss V Harbottle were established. 1. An Ultra Vires Action; This allows an individual member to seek an injunction to prevent the company from committing an Ultra Vires act, it also allows where an Ultra Vires act has being committed, an individual to sue on behalf of the company for a declaration that the act was indeed Ultra Vires. Parke v Daily News Ltd6 2. An Illegal Act The leading Irish case in this is Cockburn V N.S.S.L. Co7 (Callaghan, 2007, p. 178) 3. Where the requisite majority for the passing of the vote is not reached and the company purports to act on the strength of that lesser vote; this allows action to be taken where a special resolution should have been passed and was not done or was done in breach of procedure. Also if inadequate notice of a proposed resolution is not given a member can bring action to prevent the company from acting on the resolution that has passed. The leading case in this is Baille V Oriental Telephone & Electric Co. Ltd8 4. Fraud by the majority on the minority; This exception allows an action to be brought where the majority in control commit or attempt to commit a fraud on the minority. There is no set definition of fraud and fraud in this context has being described as notoriously vague concept9 (Callaghan, 2007, p. 179). This exception was tried in the case of Cooks V Deeks10 where the directors of the company had diverted profitable contracts away from the company to themselves. A general meeting of the company had ratified the action, however it was deemed to be a fraud on the minority. The minority shareholders sought an order for the directors to return profits to the company. In the case Menier V Hoopers Telegraph Works11, Sir G
5 6

Salomon V Salomon and Company Ltd (1897) AC 22 [1962] 2 All ER 929 7 Cockburn V Newbridge Sanitary Steam Laundry Company [1915] 1 IR 237.MD of company paid bribes to officials for contracts for the company. Two shareholders issued proceedings to compel MD to pay bribes to company. MD defence of internal management was dismissed. Court held that acts that which are beyond the power of the company may be challenged by shareholders. 8 Baillie V Oriental Telephone & electric Co. Ltd [1914-15] All ER Rep 1920. The directors in Oriental had issued notice of a special resolution to approve remuneration that had being given some years earlier. The notice however did not state amount of remuneration which was substantial. A shareholder took action on behalf of all shareholders that the resolution was not binding on grounds of insufficient notice of meeting and sought injunction to restrain company and directors from acting on them 9 Report of the Company Law Committee ( the Jenkins Committee) (1962) (Cmnd 1749) 10 [1916] 1 AC 554 11 (1947) LR 9 Ch App 350

Melish LJ said The majority should not have the right to put something into their pockets at the expense of the minority (Smyth, 2013)However if the negligent act did not benefit the directors themselves, their actions may be ratified at a general meeting as in the case Pavlides V Jensen12 5. Where the justice of the case requires it. There has being reference made to this exception in a number of cases13 however none of these required to rely on this exception and so it has not being fully tested. Courtney suggests that the Supreme Courts continued references to the justice of the case exception albeit neutral references, indicates that should a suitable case arise, the court is unlikely to recoil from its application. (Smyth, 2013) A shareholder though will not be able to take a derivative action on behalf of a company unless they are acting bona fide for the company in respect of any wrongs against the company14 nor will the courts entertain a derivative action if the plaintiff was found to have an ulterior motive. Finally if the court deems that another adequate remedy is available the the court will not allow the derivative action to succeed.

Section 205 of the Companies Act 1963

provides for: (1) Any member of company who complains that the affair of the company are being conducted or that the powers of the directors of the company are being exercised in a manner oppressive to him or any of the members (including himself), or in a disregard of his or their interests as members, may apply to the court for an order under this section. (Office of Attorney General, 2013) The key aspect of this paragraph is oppressive and disregard of his or their interests, Irish courts seek to determine has the member or members been oppressed by the actions of the defendant or disregarded their interests. Section 205 also has a wider definition of a member in Section 205(6) than the normal definition15. It takes into account situations where a member dies and the takes into account the will or intestacy of the deceased, and gives their personal representative the right to petition under Section 205 (1).

Oppression It is left to the court to decide what constitutes oppression based on the facts of the case. In Scottish Wholesale Co-Operative Society v Meyer16 the plaintiff refused to sell his shares to
12 13

[1956] 2 All ER 518 ONeill v Ryan [1993] ILRM 557: Crindle Investments V Wymes [1998] 4 IR 567; Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] Ch 204 14 Barrett V Duckett & Others {1995} 1 BCLC 243 15 Section 31 of Companies Act states person will not become a member until his name has been registered in the register of members 16 [1959] AC234

the defendants and they used their majority to squeeze out the minority share holder by underhanded means. The majority shareholder was said to have exercised its power in a manner which was burdensome, harsh and wrongful by the Court of Appeal (Callaghan, 2007). This definition was accepted by Keane J in an Irish case Greencore Trading Co Ltd17 The action in this case was deemed to be unlawful. However an action does not need to be unlawful to be considered under section 205. A companys failure to hold general meetings and provide full accounts for members can also be seen as oppression as decided in Re a Company (No. 00789 0f 1987)18 A failure by a company to operate a management agreement in Irish Press plc v Ingersoll Irish Publications Ltd19 was stated as a repudiation of the agreement which was seen as oppressive behaviour. The respondents were order to sell their shares in that case to remedy the wrong. It is also seen a oppressive to exclude a director from the management of the company in certain circumstances20In Re Westwinds Holding Co. ltd21 the case is viewed as the authority on an isolated act that may suffice as oppression (Rozentale, 2011) Kenny J held that selling land by a company at an undervalue was a sufficient act of oppression to invoke section 20522 (Callaghan, 2007). It is not however possible to invoke section 205 of the possibility of oppression as determined in Re a Company (No. 004475 of 1982)23 in this case the majority wished to use company funds to purchase a wine bar. The minority shareholders petition failed as it was deemed premature to bring such an action before any final decision to proceed with the purchase was actually taken (Callaghan, 2007) Disregard of Members Interest Under this heading section 205 may be invoked by a petitioner if they can demonstrate that the affairs of the company if the powers of the directors are being conducted in disregard of the members interest. (Callaghan, 2007) Similar to being viewed as oppression, the failure to hold AGMs and lay accounts before members is also viewed as a disregard of members interests24 The word interests has provoked much commentary such as Courtney stating that interests enables the court to have regard to the widest matters, unconnected to the petitioners purely legal rights as a member of the company. (Smyth, 2013). The term covers more than the members strict legal rights25 (Rozentale, 2011) and points out that it would encompass the members financial and business interest and his proper interest in the

17 18

[1980] ILRM 94 [1990] BCLC 384 19 [1998] 2 ILRM 275 20 Re Murphs Restaurants Ltd [1979] ILRM 141 21 Unreported High Court, Kenny J., May 21 , 1974 22 In Re Williams Group (Tullamore) Ltd [1985] IR 613 Barrington J. Also accepted that a single act was sufficient for a member to petition the court under section 205. 23 [1983] 2 All ER 36 24 Re a Company (No. 00789 of 1987) [1990] BCLC 384 25 H Linnane, Oppression of Members: Section 205 Companies Act, 1963 (1995) 2(1) CLP 3, 9

running of the company.26 Also since it is present in section 205 it was the intent of the Oireachtas to provide for each members different interests where their rights as members are the same.27 (Rozentale, 2011) The leading Irish case on this point in Re Williams Group (Tullamore) Ltd.28 the articles of association of the company stated that only the preference shareholders could attend and vote at general meetings. Ordinary shareholders received dividends which were substantial in this period and as is the norm preference shareholders received a fixed dividend. Since the company making considerable profits, this was seen as an imbalance that needed to be addressed. It was proposed to offer a new class of share, which would increase the amount the preference shareholders would receive at the expense of the ordinary shareholders, who in turn applied for relief under section 205. Barrington J held that the issue of the new share was carried in disregard of the interests of the ordinary shareholders (Smyth, 2013).

The Courts discretionary powers under Section 205

The courts have a number of remedies to bring an end to the matter complained of Section 205 (3) this included: Direct or prohibit any act; or Cancel or vary any transaction; or Provide for the future regulation of the conduct of the company; or Order the purchase of the shares of any member by the other members or by the company itself

The courts cannot however issue damages as determined in Irish Press V Ingersoll29 where damages were awarded and later reversed on appeal at the Supreme Court30 on the grounds that damages could not achieve the objective of section 205 which was to bring oppression to an end. Awarding damages is a common law remedy and not appropriate actions under section 205 and if damages were to awarded the legislature would have made provision in section 205 for it. The courts have ordered the purchase of shares in cases such as Rolville Ltd31 but in the case of Charles Kelly Ltd32 neither party was able to purchase each others shareholding, nor did either wish for a winding up order to be issued by the court33. To resolve the issue Laffoy J ordered that the company purchase the shares of the responder at fair market value.

26 27

Linnane (n 22) Ibid 80. 28 [1985] IR 613 29 Irish Press V Ingersoll Irish Publications, unreported, High Court, Barron J 15 December 1993 30 Irish Press V Ingersoll Irish Publication Ltd [1995] 2 IR 175;[1995]] ILRM 270 31 [2011] IEHC 79 32 [2011] IEHC 349 33 Courts can issue a winding up order through Section 213 of the Companies Act 1963

Conclusion
It could be said that the Rule in Foss V Harbottle is about the companys/corporate rights and Section 205 is about the members rights having read the above. Without Section 205 a minority member who could not fit within the exceptions provided by Foss V Harbottle is left with very little options. Who would want to be a minority member when one is left so exposed? However the questions originally asked were Is Section 205? More flexible: It gives the courts huge discretion in deciding what is viewed as oppression as shown in the varied judgements outlined and are flexible in its remedies. More available: It widens the definition of a member to allow for deceased personal representatives to make a petition under section 205 (6). More effective remedy: It seeks to bring an end to the matter complained of and affords the courts various remedies through Section 205 (3) (4) to right a wrong in an equitable manner. On the basis of the questions asked and answer brief answer provided a yes can be concluded on all three counts.

Bibliography
Callaghan, G. (2007). An Introduction to Irish Company Law. Gill & Macmillan. Office of Attorney General. (2013, April 02). Companies Act 1963, Section 205. Retrieved March 14, 2013, from Irish Statute Book: http://www.irishstatutebook.ie/1963/en/act/pub/0033/sec0205.html Rozentale, I. (2011). Section 205 of Companies Act 1963: A comprehensive remedy for aggrieved shareholders. Retrieved April 2013, from www.scribd.com: http://www.scribd.com/doc/104316133/Section-205-of-Companies-Act-1963-a-comprehensiveremedy-for-aggrieved-shareholders Smyth, P. (2013). Company Law and Partnership. unknown.