There are 2 elements present for this rule to happen. They are found in the case of Edwards v/s Halliwell.
• It is the proper plaintiff in an action in respect of a wrong done to a company is prima facia the company itself.
• Where the alleged wrong is a transaction which might be made binding on a company and all its members. No individual member is allowed to maintain an action in respect of that matter. This means that whenever there is a transaction within the company and there has been a decision by the board (I.e. the majority), any individual member alone will not be able to go to court.
In the case of Foss v/s Harbottle:
There were 2 members (shareholders) of the Victoria Park Company who brought an action against the company’s 5 directors and promoters alleging that they had misapplied the company’s assets and had improperly mortgaged its properties.
The shareholders wanted the directors to make good the losses sustained by the company.
The court stated that:
The injury was against the whole company and the company was the proper person to sue and not the individual members.
The second proposition came from this case called the majority rule: Mozley v/s Alston
2 shareholders tried unsuccessfully to restrain 4 directors of the company from acting as such when they should have retired under the articles.
The court refused to permit the shareholder to bring their action.
The court had in mind that if the thing that one is complaining about is the thing in a company that a majority is entitled to do, then there is no need for litigation.
Advantages to this rule:
1. It is more convenient that a company should sue in respect of a wrong done.
2. It eliminates wasteful litigation because there is a process of passing resolution in a company. If there is a problem that can be resolved by majority, there is no need to go to the court.
3. It prevents vexatious actions started by troublesome minority trying... [continues]
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