Ultra Vires Notes PDF

q Consequences of breach of directors’ duties. q The rule in Foss v Harbottle. q The derivative action. q The common law exceptions to the rule in Foss v Harbottle. q Statutory remedies for minority shareholders. } Directors owe duty to co. so it is the co itself that can enforce...

q Consequences of breach of directors’ duties. q The rule in Foss v Harbottle. q The derivative action. q The common law exceptions to the rule in Foss v Harbottle. q Statutory remedies for minority shareholders. } Directors owe duty to co. so it is the co itself that can enforce them. } When directors are in breach of their duties, the remedies for breach of duty would include: i. Payment of Damages as compensation where directors have been negligent. ii. Injunction to stop the director from carrying out or continuing with the breach; iii. Restitution and ask the director to account for profits, or iv. Restoration of any company property held by the director and/or v. Termination of the director's service contract. vi. Rescinding of a contract in which the director had an undisclosed interest. Directors are Relieved from liability: } By making full disclosure of director’s interest. } Ratification by GM for certain conduct of a director & exonerate them from liability,even if the powers are exercised for improper purposes. Bamford v Bamford Ch 212 Khoo Choon Yam v Gan Miew Chee @ Gan Khuan Poh & Ors 6 MLJ20 accepted ratification principle above,but did not allow ratification where appointment of additional directors behind plaintiff’s back without giving any notice of resolution. (Ratification will bar the bringing of a derivative action by member.) } S.354(3), court has discretion to provide relief from liability if it considers that a director has acted honestly and reasonably and it would be fair to do so s.354(1). Where the court grants relief to a director, he or she may be indemnified under the articles,for the legal costs in relation to the proceedings: s.140(2)  Two minority shareholders of Victoria Park Co. (on behalf of themselves and all other shareholders) attempted to sue the directors who were alleged to have mismanaged the co and defrauded it of its property. Wigram VC said "The corporation should sue in its own name and in its corporate character, or in the name of someone whom the law has appointed to be its representative.“ The action was dismissed on procedural grounds and two propositions were laid down. They were: } The proper plaintiff rule. In recognition of the co being a separate legal entity from its members, any wrong done to the co, is suffered by the co The co must be the proper plaintiff to seek legal remedy against the wrongdoers. } The internal management rule. Where certain matters may be ratified by an ordinary resolution passed by the members in GM, the court is normally reluctant to interfere with the internal irregularities of a co. Where the majority does not wish the co to sue, the court will not generally permit the minority to sue on its behalf.Law of Assoc 2/ Z.Elias  Advantages of rule: i. As the action would be taken by the co., it can avoid multiple suits by the members. ii. Since the majority can pass a resolution to ratify the matter, it would be wasting the court’s time to hear the case. iii. An action by the co. will be able to eliminate vexatious actions by troublesome minority shareholders who may try to harass the co. } As a co. is the ‘proper plaintiff’, legal actions can only be taken by the co. The co., however, has no physical existence. Legal actions brought about by the co. depend on the articles of association, which may specify a particular person or persons to act for the co. } PERSONAL ACTION – where member’s personal rts. have been infringed – action against co. } REPRESENTATIVE ACTION - action against co. } DERIVATIVE ACTION - Because co.s rarely bring a claim against their own directors, the law has, over the years, developed this mechanism that allows shareholders to force the company to seek redress. A shareholder dissatisfied with a board’s lack of action may take Derivative Action. With the permission of the court, shareholders acting on behalf of the co. can bring a claim against a director in the name of the co. The claim is initiated and run by shareholders, but it is brought in the co’s name and to recover the co’s loss where; v the wrongdoer is in control ,& v prevents co from taking legal action. The distinction is important: the shareholder is not claiming in their own name for their own loss; rather, they are claiming in the co’s name for the co’s loss.  Unfair to the minority shareholders. The directors of the company may not allow them to take any legal action, as the directors themselves may be the wrongdoers. The minority would then be at the mercy of the majority who may go unpunished. } Common law exceptions: As a result of the unsatisfactory effect of the rule, there are several CL exceptions to the rule in Foss v Harbottle. A minority member can bring an action against the co or its controllers where: Ø The act of the co is ultra vires or illegal; Ø The act of the co requires a special majority; Ø A member’s personal rights are infringed; Ø The majority perpetrate a fraud on the minority; and Ø The interest of justice requires. 1. Where the act is ultra vires or illegal } When the majority shareholders may take a decision for a company, it must be within the company’s powers and does not contravene the general law. } They may not ratify an ultra vires contract as in Ashbury Railway Carriage & Iron Co v Riche (1875) LT 450, or pass a resolution to pay dividends out of capital as in Flitcroft’s case. } An individual shareholder may bring an action at common law if the company was acting or intending to enter into an ultra vires or illegal transaction. } However, in Malaysia, s.35(2) allow members to sue a company or its officers involved in ultra vires transactions, without having to take an action under the common law.  2. Where the act requires special majority } Certain transactions of a co may require certain procedures be complied with. Either the Co. Act may require the passing of a special resolution, or the articles may specify a particular procedure. If the requirement of a particular procedure has not been complied with, an individual shareholder may bring action to restrain them. } The majority cannot ratify a transaction that has not complied with the required procedures. Edwards v Halliwell 2 A11ER 1064, CA; two members of a trade union successfully restrained an attempt by the delegate meeting to increase the members’ contribution without obtaining the two-thirds majority required under their rule. } Salmon v Quin & Axtens Ltd. AC 442 where the articles provide certain transactions could not be entered into without the consent of both managing directors. As one of the directors would not agree with a transaction, the co in GM tried to authorize the transaction without the said director’s consent by passing a resolution. The court held they could not do so as it was contrary to the articles that they were bound to. 3. Where member’s personal rights are infringed } Where an individual member’s rights have been infringed they may bring an action against the co. } These membership rights arise from the Act, articles or separate shareholder’s agreement. } In Pender v Lushington 6 ChD 70; where it concerned the right to have the member’s vote recorded; } In Wood v Odessa Waterworks Co. (1889)42 Ch D 636 where it was the right to have dividends paid in cash as the articles so specify.  4. Where there is fraud on the minority } This exception has been considered as the true exception to the rule, as the other exceptions may be commenced as personal actions, or where the statute provides for the necessary actions in case of a contravention. Two elements must be satisfied before a member can bring an action to enforce the company’s rights. He must establish: } Fraud on the minority; and } The wrongdoer is in control.  a. FRAUD ON THE MINORITY Includes abuse or misuse of power whereby the majority obtains an unfair gain at the expense of the minority. The term minority may refer to the company itself. Where the company is the injured party, the action is derivative in nature. Fraud on minority covers : i. Appropriation of corporate property or opportunities. Burland v Earle AC 83 established majority cannot ‘appropriate to themselves money, property or advantages which belongs to the company or in which the other shareholders are allowed to participate’. If they were to do so, it would amount to fraud on the minority. The majority cannot ratify any such transactions. In Cook v Deeks; where the directors took for themselves a contract that the company was interested in amounted to fraud on the minority. Menier v Hooper Telegraph Works 9 Ch App 350; where the majority diverted a contract from one company to another, to their own advantage, but to the detriment of the company. ii. Ratification of director’s breach of duty. } The GM has very wide powers to ratify the actions of directors who are in breach of their duty. This is normally where the director breaches his fiduciary duty, where he has acted in conflict of interest. Where directors have acted in their own interest rather than in the interest of the co, the minority can challenge any ratification by the majority as in Ngurli Ltd. v McCann 90 CLR 425. iii. Majority obtaining a benefit at the expense of the minority. } A minority member may take legal action where the majority members have gained a benefit at the expense of the co, even when there is no fraud involved. In Alexander v Automatic Telephone Co. 2 Ch 56; the majority shareholders who had exempted themselves from a call to pay up on partly paid shares, in the belief that they had done nothing wrong, was said to have deprived the co of the money that was due to it. iv. Preventing an action from being brought. A co’s right to take legal action is a form of property. The majority cannot use their majority power to prevent an action being brought. When the majority uses their power to block action against themselves, it would amount to fraud on the minority. In Estmanco (Kilner House) Ltd. v Greater London Council 1 A11ER 437; the court held that the decision of the company to discontinue proceedings against the Council amounted to a fraud on the minority. b. WRONGDOER IN CONTROL } The minority member who uses the exception of ‘fraud on the minority’ must also establish, that the wrongdoer is in control, and that the wrongdoer prevents action from being brought under the co’s name. } ‘Wrongdoer control’ exists if the wrongdoer has a majority of the votes, or the majority has approved a fraud on the minority where they obtain some benefit, or that the co suffered some loss or detriment, and where the co has shown that it was unwilling to sue. } According to Prudential Assurance Co. Ltd. v Newman Industries Ltd. (No. 2) 2 A11ER 841; A majority of the votes, may not necessarily be numerical control. Control can be construed either because of the wrongdoers influence over the majority, or due to the apathy of the majority, he can obtain control. } The minority member will not be able to sue on the co’s behalf: } Where the wrongdoer obtains no benefit for himself. Pavlides v Jensen 2 A11ER 518; the court held that mere negligence on the part of the controllers for selling the co’s assets at an undervalue, was not sufficient to bring the case within the fraud on minority exception. } Where the company has not suffered a loss. Regal (Hastings) the directors were said to have breached their duty by obtaining the shares which the co could not have subscribed for. The co suffered no loss, and the judge noted that the GM could have ratified the breach.  5. In the interest of justice } This exception is of little value today because of the statutory remedies given to minority shareholders. } Furthermore, the Court of Appeal in Prudential Assurance was doubtful that ‘in the interest of justice’ should be considered as an exception. The court was of the opinion, before this exception could be used, the plaintiff needs to establish a prima facie case: (i) that the co is entitled to the relief, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v Harbottle. } Common Law Derivative Action are now abrogated…section 347(3) } Bypass the narrow Foss v Harbottle rule that: the wrong is one that cannot be validly ratified by the majority as there has been a fraud on the minority, &, the perpetrators of the fraud were in control of the co. } The introduction of the statutory derivative action increases the scope of shareholder intervention, while the leave requirements will ensure that there are safeguards against abuse of unjustified litigation. } -proceedings brought must be in the name of the company’s.section 347(2) } Ss 347 a complainant is allowed to apply for leave of the Court to bring an action on behalf of the co - allows a shareholder to sidestep the restrictions of the common law derivative action. } Amendment sets out a new procedural form for the common law derivative action. } While the statutory derivative action may be a procedural streamlining of the common law derivative action brought by a member of a company, the statutory derivative action goes further by granting a director and even a former member of a company to bring an action. } Section 345 } S.345 allows a wider standing for a complainant to bring an application for leave from the Court. } Complainant defined as: 1. a member, or a person entitled to be registered as a member, of a company; 2. a former member of a company if the application relates to circumstances in which the member ceased to be a member; 3. any director; or 4. the Registrar for certain types of company. section 590 } Procedure : - Give 30 days notice to directors to apply to court under S.348 - Complainant must act in good faith. - It appears prima facie to be in the best interest of the company that the application for leave be granted.  provides that proceedings brought, intervened in or defended under may be settled only with leave of the Court.sect.348(5) This provision allows the Court to reject the settlement of the action if it considers the terms unfair or unjust. Section 349 provides that the fact the alleged wrong to the company may be approved or ratified by the members is not by itself sufficient for a stay or dismissal of the action. Such approval or ratification may however be taken into account by the Court when determining what order to make Section 350 Power of courts ;-grants the Court wide ranging powers in making such orders as it thinks appropriate: - (i) Authorizing control over conduct of meeting and direction for conducts of proceedings (ii) Access to Information - by accessing documents normally not available to him, for instance Board documents or management accounts,company’s books (iii) relieve the burden of costs on the complainant by allowing both a payment by the company of reasonable legal fees and disbursements incurred by the complainant, and also a wider order for indemnity } The rights of the minority members under the common law are limited, either due to circumstances in which the exceptions are allowed, or the procedure of the action. The Act has to a large extent expanded these rights. } S. 346(1) remedy in cases of oppresionprovides that a member may apply to the court by petition for an order on the ground that: } The affairs of the co. are being conducted in a manner oppressive to one or more members of the co.; or } The power of the directors are being exercised in a manner oppressive one or more of the members of the co.; or } The affairs of the co. being conducted in disregard of the interest of one or more members of the co.; or } The power of the directors are being exercised in disregard of the interest of one or more members of the co.; or } Some of the act of the co. has been done or is threatened which unfairly discriminates against one or more members of the co; or } Some resolution of the members (or any class of them) has been passed or is proposed which unfairly discriminates against one or more members of the co.; or } Some act of the co. has been done or is threatened which is otherwise prejudicial to one or more members of the co.; or } Some resolution of the members (or any class of them) has been passed or is proposed which is otherwise prejudicial to one or more members of the co. } Section 346(2) provides that the court may, with a view to bring an end or remedy the complaint, make such orders as the court deems fit. } Some of the orders which may be made by the court are: ◦ Direct or prohibit the wrongful act; ◦ Cancel or vary the transaction or resolution; ◦ Regulate the conduct of the company’s affair; ◦ Order other members or debenture holders or the company itself to purchase the interests of the affected member; or ◦ Wind up the company. } allows derivative action over wider area than the common law. It covers cases of fraud on the minority, and allows for just and equitable grounds to have a co. wound-up. } The applicant under this section may initiate action where the “affairs of the co.”, or the “powers of the directors” are being conducted or exercised; or “some act of the co.” or “some resolution of the members” has been done, or merely proposed. } Remedy under may be sought against any person who controls any aspect of the cos affairs e.g. directors, majority shareholders, or the co. itself. } It could be anyone holding dominant power, not necessarily hold the majority of the votes. He could be conferred powers under the articles, having control of proxy votes, or have personal influence over the majority and as such have control over their votes. } The range of conduct that may be the basis for a minority member to take derivative action is extensive. This section may be invoked: o Where there is “oppression” of a member, or o where a member’s interest is “disregarded”, or o where there is a resolution or act that “unfairly discriminates” against or o is “otherwise prejudicial” to a member. } The terms “oppression”, “unfairly discriminates” and “otherwise prejudicial” as meant under s. 346 will need some clarification. Oppression } “Oppression” under has not been defined under the Act. It was defined as “burdensome, harsh and wrongful” by Viscount Simonds in Scottish Co-operative Wholesale Society Ltd. v Meyer AC 324. } In Re Kong Thai Sawmill (Miri) Sdn. Bhd. [1950 – 1985] MSCLC Lord 14; Lord Wilberforce said, “There must be a visible departure from the standards of fair dealing, and a violation of the conditions of fair play which a shareholder is entitled to expect before a case of oppression can be made… ‘disregard’ involves something more than a failure to take account of the minority interest: there must be awareness of that interest and an evident decision to override it or brush it aside and to set at naught the proper co. procedure.” } “Oppression” is viewed from the effect it has on the oppressed. Even if the oppressor acted honestly, but the effect of his act is oppressive, it may be ground for action. In Re HR Harmer Ltd. 3 A11ER 689; the court considered a controlling director’s conduct as oppressive, where he ran a company as if it was his own private property, disregarding the wishes of the others and the views of the board. } Re Cast Iron Products 3 MSCLC 91,039; the court considered the failure to pay dividends over a long time in total disregard of the shareholder’s interest when the company was profitable as evidence of oppression. } An oppressive conduct may on its own, seem quite insignificant, but repeatedly done it amounts to oppression. In Ng Teong Kiat Highlands Plantations Ltd. [1950 – 1985] MSCLC 279; the director’s indifference and neglect of the company was considered as oppressive, because they had, over time, allowed the company’s assets to deteriorate to the extent they were almost forfeited to the authorities. } A member who alleges “oppression” may succeed in his action if he can show he has suffered some damage or loss as a member or debenture-holder. “Unfairly discrimination’ and ‘prejudicial’ } Under s.346(1b), suggests that, where the effect of an action or omission cause unfair discrimination or prejudice to the interests of one or more members of a company, a remedy is available even in cases where the co is run in good faith. } In Re H W Thomas Ltd. 2 ACLC 610; Richardson J. said, together with the term “oppression” “…they reflect the underlying concern of the subsection that conduct of the co which is unjustly detrimental to any member of the co whatever form it takes and whether it adversely affects all members alike or discriminates some only is a legitimate foundation for a complaint under s.209 (the New Zealand equivalent of s.346. } The statutory concern is directed to instances of courses of conduct amounting to an unjust detriment to the interests of a member of the co. } It is not necessary for a complainant to point to any actual irregularity or to an invasion of his legal rights or to lack of probity or want of good faith towards him on the part of those in control of the co. } Examples of “unfair discrimination” or “prejudice” mostly relate to the overall way in which the co. is run. } Re Cumana Ltd. 2 BCC 99where the director and major shareholder in question had awarded to himself excessive remuneration and the court considered it as prejudicial to the petitioner’s interest. } Re Sam Weller & Sons Ltd. 5 BCC 810. Payment of very low dividends over 37 years despite the co being profitable was also unfairly prejudicial where the major shareholder and sole director and his sons were all paid remuneration by the co: } Re Bird Precision Bellows Ltd. Ch. 419; where a quasi- partner was excluded from management of the co: } Re London School Of Electronics Ltd. Ch 211; where the business and corporate opportunities of the co was diverted away; and. } The court has the power to make any order it thinks fit in an application under this section. } It may order directing or prohibiting any act or } to cancel or vary any transaction or resolution. } Where an oppressive, unfair discriminatory or prejudicial act is proposed but has not been carried out, or is ongoing, such an order would be suitable. } The court may also make an order regulating the future conduct of the company’s affairs; or } order the purchase of shares or debentures of the company by other members or debenture holders of the company or by the company itself; or } even order that a company be wound up. An order for winding up of a company will not be made if the court is of the opinion that winding up would unfairly prejudice the interest of the members. } Under s. 346(3)… the court may wind up the company if the directors have acted in their own interest rather than the member’s interest as a whole, or in any other manner which is unfair or unjust to other members. Under s.465(h), the court may order winding up if it is of the opinion that this would be just and equitable. Here the court has a very wide discretion. The circumstances where the courts have wound up a company on just and equitable grounds include: } Breakdown in the mutual trust and confidence of members; } A deadlock; } Fraud misconduct or oppression in the conduct and management of the company’s affairs; and } A failure of substratum. } S.347 allows for statutory derivative action since the law was less flexible under the common law. Controllers of the companies now are aware that the interests of the minority shareholders are protected to a certain extent under this section. } S.91 – variation of class rts. Members must consent to any variation of their rights.. } S.36(1) allows co to alter objects clause by special resolution. S.37(1) directs the court to have regard to the rts & interest of any class of members. } S. 35(2)(a)– any member of co may restrain any ultra vires transaction of the co. } S. 33 - gives contractual effect to the memorandum and articles between co and members and members to each other. } S. 313 – permits members carrying not less than ½ voting rts to requisition the BOD to convene a GM. } Injunction under section 351