QUESTION - What is the Rule in Foss V Harbottle (1843) 2 Hare 461.

How has the

Companies Act 2019, Act 992 impacted on the application of this rule in Corporate
Litigation?

PRESENTATION OUTLINE

1.0. THE CASE OF FOSS v HARBOTTLE

1.1. Facts
1.2. Issue for determination
1.3. The Court’s ruling per Wigram VC:

2.0. THE EFFECT OF THE RULE

2.1. The Proper Plaintiff rule
2.2. The Majority Rule

2.2.1. The Exceptions created by Edwards v Halliwell (1950)

3.0. The application of the rule under the Companies Act 2019, Act 992 in Corporate
Litigation

3.1. The proper Plaintiff Rule

 Section 18 of the Companies Act, 2019 (Act 992)
 Section 144(3) of Act 992
 Section 144(5) of Act 992

3.1.1. Application of the Proper Plaintiff rule by the Ghanaian Courts

 Morkor v Kuma.
 Bank of West Africa v Apenteng,

3.2. The internal management or majority rule

 Section 218 (1) of Act 992,

 Professor Gowers’ commentary to section 217 of Act 179

3.2.1. Application of the internal management rule by Ghanaian Courts.

 Pinamang v Abrokwa [1991] cited In re West Coast Dyeing Industries; Adams v. Tandoh,
but failed to hold that majority rule does not apply to cases where individual or personal rights
are infringed.
 PS Investment v CEREDEC and 13 Ors, the Supreme Court distinguished the case PS
Investment from Pinamang v Abrokwa and held the decision in the latter inapplicable.

UberriAGM
4.0. Statutory inroads to the rule in Foss v Harbottle (the majority rule)

 PS Investments Ltd v CEREDEC and 13 others, the SC held that Act 179 has significantly
chipped away the relevance of the rule in Foss v. Harbotle in Ghanaian corporate governance.
The provisions which the Supreme Court relied on in arriving at its conclusion find expression
in Act 992 as follows;
a) Enforcement of obligations under the Constitution - Section 29 (3) of Act 992

b) Enforcement of an act done in breach of the authority of company with a

registered Constitution. - Section 19(5)
c) Enforcement of Directors liability for breach of duties - sections 200(1) and 200(5),
That member may either bring a derivative action under section 201 or a
representative action under section 205 on behalf of that member and all other
members except members who are defendants to the action and shall join the company
as a defendant.

d) Protection against illegal or irregular actions - Section 218 (1)

e) Remedy against oppression - Section 219 .

 Re West Coast Dyeing Industries: Adams v Tandoh – The applicant must be a member.
 Pinamang v Abrokwa – applicant must show that (i) the matters complained of must
affect the person or persons alleged to have been oppressed in his or their character
as a member or members of the company and not in any other capacity; and (ii) the
applicant must adduce evidence seeking to show a chain of events and occurrences of
harsh and burdensome conduct which continued up to the date of presentation of the
petition.

f) An action to restrain payment of dividend - Section 72(3) and (4)

g) Member requiring company to purchase shares- Section 220

5.0. Procedure for the enforcement of Member’s right

5.1. Representative capacity

The following provisions require a member, officer or debenture holder to sue in a

representative capacity;
1. Section 29(3) – enforcement of obligation under the constitution
2. Section 72(4) – legality of dividend payment

UberriAGM
 3. Section 89(4)– enforcement of security of a series of debentures
4. Section 200(5) – Legal proceedings to enforce directors’ liabilities
5. Section 205 – Provisions on representative action.

5.2. Derivative action and its effect on the Proper plaintiff rule
 section 201 of the Act.
 The case of Wallesteiner v Moir [No.2]

6.0. CONCLUSION

UberriAGM
1.0.THE CASE OF FOSS v HARBOTTLE
1.1.Facts

Two shareholders of an English company sued the directors of the company. They claimed
these directors had fraudulently profited and colluded with others to profit at the company’s
expense. They also alleged that the directors had raised money in an unauthorised manner,
contrary to the company’s regulations. They asked that the guilty parties be held accountable
to the company and that a receiver be appointed. It was argued by the directors that the plaintiffs
lacked capacity to institute the action because the injury complained of was an injury to the
company at large and not an injury to the plaintiffs

1.2.Issue Raised for Determination

Whether or not Shareholders were the proper persons to sue for wrongs done to the company.

1.3.The Court’s ruling per Wigram VC:

Held, dismissing the claim; an individual shareholder cannot sue for wrongs done to a company
or complain of any internal irregularities. ‘The proper plaintiff in an action in respect of a
wrong alleged to be done to a corporation is, prima facie, the corporation.’ A Company is a
separate legal entity from its shareholders and the Courts will not interfere with the internal
management of companies acting within their powers. Therefore, if the majority can ratify an
act, the minority cannot sue.

In Barrett v Duckett [1995] 1 BCLC 243 at 249 -250, it was held that;
“The proper plaintiff is prima facie the company. Where the wrong or irregularity can
be made binding on the company by a simple majority, no individual shareholder is
allowed to maintain an action in respect of that matter.”

2.0.THE EFFECT OF THE RULE

The case of Foss v Harbottle established two key principles or rules, namely, the Proper
Plaintiff rule and the Majority rule.

2.1.The Proper Plaintiff rule

The rule states that, where a wrong is committed against the company either internally by its
directors and officers or externally, the proper person to sue to remedy the alleged wrong for
and on behalf of the company is the company itself. Thus, the proper plaintiff is prima facie

UberriAGM
the Company. The rule also implies that in an action against the Company it is the company
that should be made the defendant but no one else.

The Proper Plaintiff rule finds support in the celebrated case of Salomon v Salomon which
espoused the principle that, a company upon incorporation becomes a juridical person,
separate and distinct from its incorporators, members, directors and persons employed by it.
It acquires a right to hold properties in its own name, enter into business relationships, sue
and be sued.

This principle of law lends credence to the Proper Plaintiff rule which in material respect
reinforces the separate personality principle in Salomon v Salomon.

2.2.The Majority Rule

The Majority Rule or internal management rule states that the courts would not interfere in
the internal management of the company to cure irregularities which can be rectified by an
ordinary resolution of the majority of the company. This is known as the internal management
rule.

This means that where the majority of members or director does an act which is illegal or
irregular such that the said act can be remedied or corrected by the same majority by passing
an ordinary resolution, a minority member cannot sue and the court will not interfere to force
them to do something against their wishes. However, this rule is not without exceptions. Thus,
with time, the courts laid down exceptions to the application of the rule in the case of Edwards
v. Halliwell (1950) 2 All ER 1064.

The majority rule was further illustrated in the case of MACDOUGALL V. GARDINER.
Mellish LJ: “if the thing complained of is a thing which in substance the majority of the
company are entitled to do or if something has been done irregularly which the majority of the
company is entitled to do regularly or if something has been done illegally which the majority
of the company could have done legally there can be no use in bringing a litigation the ultimate
end of which a meeting has to be called and then ultimately the majority gets its wishes.

UberriAGM
 2.2.1. The Exceptions created by Edwards v Halliwell (1950)

Facts

The plaintiffs as members of a trade union sued the union and the members of its executive
committee claiming a declaration that a decision to increase the union dues payable by
members was invalid on the ground that the union’s rules, requiring a two-thirds majority vote
on a ballot of members had not been observed.

Held: The declaration was granted.

This case however is not one which falls within the general ambit of the rule in Foss v
Harbottle. It is not a case where what is complained of is a wrong done to the union, a matter
in respect of which the cause of action would primarily and properly belong to the union. The
gist of this case is that the personal and individual rights of membership of each of them have
been invaded by a purported, but invalid, alteration of the tables of contributions. In those
circumstances, the rule in Foss v. Harbottle has no application at all for all the individual
members who are suing sue, not in the right of the union, but in their own right to protect
from invasion their own individual rights as members.

The courts will not apply the rule.

1. Where there is an irregularity in the passing of a resolution which requires a specified

majority, or
2. where the wrong complained of is an act ultra vires the company, or
3. where a fraud has been committed on the minority, or
4. where the wrong complained of infringes the personal rights of members,

3.0.The application of the rule under the Companies Act 2019, Act 992 in Corporate
Litigation

3.1.The proper Plaintiff Rule

 Section 18 of the Companies Act, 2019 (Act 992) provides that a company shall have
full capacity to carry on or undertake any business or activity, do any act or enter into
any transaction and shall have full rights, powers and privileges in furtherance of its
object.
 Section 144(3) of Act 992 provides that, except as otherwise provided in the
constitution of the company, the business of the company shall be managed by the

UberriAGM
 board of directors who may exercise the powers of the company that are not by the Act
or the constitution required to be exercised by members in general meeting.
 Section 144(5) of Act 992 also permits members to bring an action in the name of the
company only if the Board of Directors have neglected or refused to do, but as
members acting together in a general meeting. This implies that, the power of the
company to sue or institute proceedings shall, first be exercised by the Board of
Directors of the company, even though section 147 acknowledges members in general
meeting or a managing director while carrying on in the usual way the business of the
company, as organs of the company to act on its behalf.
 These provisions reaffirm the Proper Plaintiff rule in Foss v Harbottle. It is directors
who must sue for and on behalf of the company and no one else.

3.1.1. Application of the Proper Plaintiff rule by the Ghanaian Courts

 In Ghana the Proper Plaintiff rule finds expression in the case of Morkor v Kuma. The
case of Morkor v Kuma illustrates the principle that the proper defendant in an action
on a contract was the person who made the promise the breach of which had created
the cause of action. So, where a person, a limited liability company, a corporate being
with a capacity separate, independent and distinct from those constituting it or
employed by it, enters into a contract, it is only the company that has the right to sue
and be sued and not its chief executive Officer, shareholders or directors. A director or
Chief Executive of the company would be a proper party to the suit only if a specific
personal liability were established against her or the veil of incorporation could be
lifted to make her acts synonymous with those of the company.

 Again in Bank of West Africa v Apenteng, a shareholder brought an action against a

bank for negligent advice given to a company which led to the winding down of the
company. It was held that the shareholders cannot sue in respect of a wrong done to the
company, unless it can be shown that the wrong is against the individual rights of the
shareholders as distinct from the corporate rights of the company.

3.2.The internal management or majority rule

Under the internal management rule, if the majority of members does an act which is irregular
or illegal, such an irregularity or illegality could be rectified by an ordinary resolution of the
members in a general meeting, therefore the court will not entertain any action by a minority

UberriAGM
shareholder to challenge such irregularity. The internal management rule or the majority rule
has, since the passage of the repealed Act 179 in 1963, ceased to apply in corporate or company
law in Ghana.

Under Section 218 (1) of Act 992, the Court may on an application by a member restrain the
company by way of injunction from doing an act or entering into a transaction which is illegal
or beyond the powers or capacity of the company or which infringes a provision of the
constitution of the company or from acting on a resolution not properly passed in accordance
with the Act of the Constitution of the Company and declare that act, transaction or resolution
already done, entered into or passed to be void.

The right afforded to members under section 218 of Act 992, previously section 217 of the
repealed Act 179, to bring an action to restrain the company from acting on a resolution not
properly passed or acting beyond the power or capacity of the company or from entering into
a transaction which infringes a provision of the company, has whittled away the second leg of
the rule in Foss v Harbottle, which is the Internal management rule. Professor Gowers’
commentary to section 217 of Act 179 which has been maintained or repeated under section
218 of Act 992, is to the effect that the internal management rule or the majority rule has since
1963, ceased to apply to in Ghana.

3.2.1. Application of the internal management rule by Ghanaian Courts.

Analysis on the application of the internal management rule begins with the case of Pinamang
v Abrokwa [1991]. This was a case of an application for remedy against oppression. In this
case, the respondents as shareholders, claimed that the appellant was conducting the affairs of
the company in a manner oppressive and in disregard of their interests, and by an action
pursuant to section 218 of Act 179 sought that the appellant be made to pay all moneys found
due from him to the company after proper account had been taken of the affairs of the company.
It was held on appeal that “the court was, however, precluded from inquiring into matters of
internal management or, at the instance of a shareholder, interfering with transactions which
though prima facie irregular and detrimental to the company, were capable of being rectified
by an ordinary resolution of the company in general meeting”.

The Court of Appeal in arriving at its conclusion cited the case of In re West Coast Dyeing
Industries; Adams v. Tandoh, but failed to hold that majority rule does not apply to cases
where individual or personal rights are infringed.

UberriAGM
The case of Adams v Tandoh [1984-86] held that if it is a matter of personal right, then the rule
in Foss v Harbottle does not apply. The Court of Appeal cited Professor Gower in his book “
The Principles of Modern Law (3rd ed.) in the following passage

" The petition may be by any member; in other words, the rule in Foss v. Harbottle has no
application, and an individual member has a personal right to institute proceedings in a non-
representative capacity... An oppressed director, or debenture holder or other creditor cannot
obtain an order under section 210 for this is expressly limited to oppression of members, and
this is so even if the director or creditor is a member but is being oppressed only in his capacity
of director or creditor.”

In PS Investment v CEREDEC and 13 Ors, the Supreme Court distinguished the case PS
Investment from Pinamang v Abrokwa and held the decision in the latter inapplicable. The
court explained that the case PS Investment concerned a breach of personal right, i.e pre-
emptive right, under the regulations of TOPP,

4.0.Statutory inroads to the rule in Foss v Harbottle (the majority rule)

The Supreme Court held in PS Investments Ltd v CEREDEC and 13 others, that Act 179
has significantly chipped away the relevance of the rule in Foss v. Harbotle in Ghanaian
corporate governance. The provisions which the Supreme Court relied on in arriving at its
conclusion find expression in Act 992 as follows;

a) Enforcement of obligations under the Constitution

Section 29 (3) entitles a member or an officer to enforce any obligation owed under the
Constitution to him and any other member or officer and such member or officer shall, if any
other member or officer is affected by the alleged breach of such obligation, sue in a
representative capacity on behalf of himself and all other members or officers who may be
affected other than any who are defendants and the provisions of section 205 of this Code shall
apply.

b) Enforcement of an act done in breach of the authority of company with a

registered Constitution.

Section 19(5) further provides that, on application by a member or a holder of debenture

secured by a floating charge, the Court may prohibit, by injunction, the doing of an act or the

UberriAGM
conveyance or transfer of any property in breach of the restriction imposed in the registered
constitution.

c) Enforcement of Directors liability for breach of duties

In relation to directors, sections 200(1) and 200(5), when read together, have the effect of
clothing a shareholder/member with capacity to institute actions for breach of directors’
duties, even if that breach resulted in damage to the company alone. That member may either
bring a derivative action under section 201 or a representative action under section 205 on
behalf of that member and all other members except members who are defendants to the action
and shall join the company as a defendant.

d) Protection against illegal or irregular actions

Under Section 218 (1) the Court may on an application by a member restrain the company by
way of injunction from doing an act or entering into a transaction which is illegal or beyond
the powers or capacity of the company or which infringes a provision of the constitution of
the company or from acting on a resolution not properly passed in accordance with the Act of
the Constitution of the Company and declare that act, transaction or resolution already done,
entered into or passed to be void.

The right afforded to members under section 218 of Act 992, previously section 217 of Act
179, to bring an action to restrain the company from acting on a resolution not properly passed
or acting beyond the power or capacity of the company or from entering into a transaction
which infringes a provision of the company, has whittled away the second leg of the rule in
Foss v Harbottle, which is the Internal management rule. Under that rule, if the majority of
members does an act which is irregular or illegal, such an irregularity or illegality could be
rectified by an ordinary resolution of the members in a general meeting, therefore the court
will not entertain any action by a minority shareholder to challenge such irregularity.
Professor Gowers’ commentary to section 217 of Act 179 which is in material terms the same
as section 218 of Act 992, is to the effect that the internal management rule or the majority rule
has since 1963, ceased to apply to in Ghana.

e) Remedy against oppression

Section 219 provides a remedy for the minority member, where oppressive conduct is alleged.
This remedy extends even to debenture holders. It provides, inter alia, that a member may
apply to the Court for an order on the ground that “the affairs of the company are being
conducted or the powers of the directors are being conducted or the powers of the directors

UberriAGM
are being exercised in a manner oppressive to one or more of the members or debenture
holders or in disregard of his or their proper interests as members, shareholders, officers, or
debenture holders of the company”.

 The case of Re West Coast Dyeing Industries: Adams v Tandoh held that a director
or an officer of the company who was also not a shareholder as well, and
consequently did not qualify to be a member of the company concerned, was not
entitled to seek any remedy under the section.
 Again the case of Pinamang v Abrokwa illustrates the point that in action for remedy
against oppression, (i) the petition must be made with the genuine object of obtaining
the relief claimed and not for exerting pressure in order to achieve a collateral purpose;
(ii) the matters complained of must affect the person or persons alleged to have been
oppressed in his or their character as a member or members of the company and not
in any other capacity; and (iii) the applicant must adduce evidence seeking to show a
chain of events and occurrences of harsh and burdensome conduct which continued up
to the date of presentation of the petition.

f) An action to enforce the legality of dividend payment

Under Section 72(3) and (4), a shareholder, an Officer, or a Creditor may apply to the court
for an injunction restraining the company from paying dividend or from making a return or
distribution in contravention of the distribution test or for an order for restoration. However,
the application by the shareholder or creditor shall be made in a representative capacity on
behalf of the shareholder or the creditor and the other shareholders or creditors of the company
and section 205 shall apply.

g) Member requiring company to purchase shares

Act 992 has introduced under Section 220(1) a right to members to have their shares purchased
by the company under stated grounds. under this section, where the company resolve by a
special resolution to amend the constitution of the company to vary the business activities or
objects or the company, or resolve to approve the variation of class right or a major transaction,
the said member who wholly voted against the resolution is entitled to have the shares bought
by the company or any other member. It is further provided under section 220(5) that if within
one year of the passage of the resolution, the company has been unable to carry out the
proposed business activity or transaction, the member is entitled to apply to have the shares
reinstated.

UberriAGM
5.0.Procedure for the enforcement of Member’s right

5.1.Representative capacity

Act 992 provides that where the alleged breach or act complained of affects any other member
or officer, that person must sue in a representative capacity on behalf of that member or
officer and all other members or officers other than any who are made defendants and the
provisions of section 205 shall apply.
The following provisions require a member, officer or debenture holder to sue in a
representative capacity;
1. Section 29(3) – enforcement of obligation under the constitution
2. Section 72(4) – legality of dividend payment
3. Section 89(4)– enforcement of security of a series of debentures
4. Section 200(5) – Legal proceedings to enforce directors’ liabilities
5. Section 205 – Provisions on representative action.

5.2. Derivative action and its effect on the Proper plaintiff rule
The Companies Act, 2019 (Act 992) has introduced, for the first time, what is known as
derivative action into the company laws of Ghana under section 201 of the Act. Derivative
action, at common law, is an action commenced by member in the name of and on behalf of
the company when the directors or members having the authority to act have refused or failed
to do so. The said member in the action acts as a representative of the Company on whose
behalf he institutes the proceedings. The case of Wallesteiner v Moir [No.2] illustrates this
principle. As an agent initiating proceedings on behalf of the company, he is entitled to be
indemnified for his just and reasonable expense and cost of action.
Under Section 201 of Act 992, a member or a director of a company may, on justifiable
grounds, seek leave of the court to bring proceedings in the name of the company or intervene
in action in which the company or its subsidiary is a party to for the purpose of continuing,
defending or discontinuing the proceedings on behalf of the company. This provision has
paved a leeway for members and directors to institute actions against wrongdoers whether
internal or external when those entitled to act fail or refuse act for the company. This right
never existed under the previous Act 179.

In effect, this operates as an exception to the time-honoured principle that when a wrong is
done to a company only company alone is entitled to sue.

UberriAGM
6.0.CONCLUSION

In PS Investment v CEREDEC and 13 Others, the Supreme Court puts it succinctly that the
overall effect of these statutory provisions is that the proper plaintiff leg of the rule has been
whittled away significantly. A member is allowed to bring an action where it is alleged that
the member’s right has been violated.
The exceptions to the rule have therefore been developed in Edwards v Halliwell in order to
give a remedy for wrongs or infringements which would otherwise go without redress. By the
statutory interventions contained in our Companies Act, 2019 Act 992, the following may be
said to be the statutory provisions, which as we have noted already, has whittled away the scope
of the proper plaintiff rule in Foss v Harbottle rule;
1. Personal rights – if the personal rights of an individual has been invaded the rule will
not apply.
2. Fraud on the minority – by this the minority can bring what is known as a
representative action to control the activities of wrongdoers
3. Special Procedure – If as is stated in regulation 32 (a) of TOPP, the transfer of shares
can only be done in a certain way, then failure to comply will entitle the affected
members to take action as has happened in this case.
4. Ultra Vires Acts – If an act is ultra vires the Companies Act or Constitution, a member
can sue.
Finally, Section 201 provides an avenue for a member and a director to seek leave of the Court
to bring an action in the name and on behalf of the company, even when the act complained of
is not a personal right.

UberriAGM