Page 214 - DCOM106_COMPANY_LAW

Unit 13: Borrowing and Debentures

F and T brought an action on behalf of themselves and all other shareholders against the Notes
defendants who consisted of 5 directors, a solicitor and an architect of the company alleging that
by concerted and illegal transactions they had caused the company’s property to be lost to the
company. It was also alleged that there was no qualified Board. F and T claimed damages from
the defendants to be paid to the company. The Court held, that the action could not be brought
by the minority shareholders. The wrong done to the company was one which could be ratified
by the majority of members. The company was the proper plaintiff for wrongs done to the
company and the company can act only through its majority shareholders. The majority of the
members should be left to decide whether to commence proceedings against the directors. The
principle of majority rule has since then been applied to a number of cases.
In Rajahmundry Electric Supply Co. v. Nageshwara Rao, AIR (1956) S. C. 213, the Supreme Court
observed that: The Courts will not, in general, intervene at the instance of shareholders in
matters of internal administration and will not interface with the management of the company
by its directors so long as they are acting within the powers conferred on them under articles of
the company. Moreover, if the directors are supported by the majority shareholders in what
they do, the minority shareholders can, in general, do nothing about it.
One may notice that the aforesaid decisions are essentially a logical extension of the principle
that a company is a separate legal person from the members who compose it. Once it is admitted
that a company is a separate legal person, it follows that ‘if a wrong is done to it, the company
is the proper person to bring an action. This is a simple rule of procedure which applies to all
wrongs, viz., only the injured party may sue. If, for instance, X intentionally pushes Y down the
stairs and Y breaks his leg in consequence, C, who has seen the whole incident can not bring an
action against X. C has not been hurt; he is not the injured party; he is the wrong plaintiff. The
right plaintiff is Y.
The rule, as applied to companies, however, appears a little more complicated. After all, the
directors who have been fraudulent have injured the company. The company is composed of
members. Losses to the company affect all the members, not simply the majority or the minority
or any particular member. Why then, should an individual member not sue, since he has been
injured?
The answer is that injury is not enough. The plaintiff must show that the injury has been caused
by a breach of duty to him. In the course of existence a person suffers many injuries for which no
action can be brought, for no duty owned to him has been broken. The individual shareholders
or even the minority shareholders who try to show that the directors owe a duty to them
personally in their management of the company’s assets will definitely fail. The directors own
no duty to the individual members, but only to the company as a whole. A company is a person
and if it suffers injury through breach of duty owed to it, then the only possible plaintiff is the
company itself acting, as it must always act, through its majority.
It should, however, be noted that the aforesaid principle of Foss v. Harbottle applies only where
a corporate right of a member is infringed. The rule doesn’t apply where an individual right of
a member is denied. The shareholder, by his contract with company undertakes with respect to
his rights which his membership carries to accept as binding upon him the decisions of the
majority of shareholders, if arrived at in accordance with the law and the articles; these
membership rights are referred to as corporate membership rights. Other rights of the shareholder,
such as right to vote, or right to receive dividend are his personal or individual rights and
cannot be taken away by the majority and if the company refuses to record his vote or pay him
the dividend, he can sue in his own name and this right of action is unaffected by any decision of
the majority.

The BOD of a Pvt. Co. has borrowed money for long-term purposes in excess of the aggregate of
the paid-up capital and free reserves. Is it binding on the company?

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