DIRECTORS DUTIES

First, three preliminary observations whereas the Directors’ authority to bind the company
depends on their acting collectively as a Board, their duties to the company are owed by each
Director individually.  These duties are owed to the company and the company alone and not to
individual shareholders.

Percival v. Wright (1902) 2 Ch. 421

Certain Shareholders wrote to the Company’s Secretary asking if he knew anyone willing to buy
their shares.  Negotiations took place and eventually the company chairman and two other
directors bought the Plaintiff Shares at £12 10s per share.  The Plaintiff subsequently discovered
that prior to and during their own negotiations for sale, the Chairman and the Board of Directors
had been approached by 3  Party with a view to the purchase of the entire company’s assets at
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more than the price of 12 pounds 10 shillings per share.

The Plaintiff brought an action to set aside the share sales on the ground that the directors owed
them a duty to disclose the negotiations with the 3  Party.
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It was held that the Directors were not agents for the individual shareholders and did not owe
them any duty to disclose.  Therefore the sale was proper and could not be set aside.  However, if
the Directors are authorized by the members to negotiate on their behalf e.g. with a potential
purchaser then the Directors will be in a position of agents for such members and will owe them
a duty accordingly.

Allen v. Hyatt (1914) 30 T.L.R. 444

These duties except where expressly stipulated in the Companies Act are not restricted to
directors alone but apply equally to any officials of the company who are authorized to act as
agents of the company and in particular to those acting in a managerial capacity.  This is
particularly so as regards fiduciary duties.

DIRECTORS’ DUTIES PROPER

These fall into two broad categories
1.                  duties of care and skill in the conduct of the company’s affairs; and
2.                  Fiduciary duties of loyalty and good faith.

DUTIES OF CARE & SKILL

Duties of care and skill were summed up by Romer J.  In the case of

Re City Equitable Fire Insurance Co. (1925) Ch. D 447

Here the Directors of an insurance company left the management of the company’s affairs almost
entirely to the Managing Director.  Owing to the managing Director’s fraud, a large amount of
the company’s funds disappeared.  Certain items appeared in the balance sheet under the heading
“loans at call or short notice and “Cash in Bank or in Hand”.  The Directors did not inquire how
these items were made up.  If they had inquired they would have found that the loans were
chiefly to the Managing Director himself and to the Company’s General Manager and the cash at
Bank or in hand included some £13,000 in the hands of a firm of stockbrokers at which the
managing director was a partner.

On the company’s winding up, an investigation of its affairs disclosed a shortage in its funds of
more than £1.2 million incurred mainly due to the delinquent fraud of the Managing Director for
which he was convicted and sentenced. The other Directors had all along acted in good faith and
honestly but the liquidator sought to make them liable for the damages.

It was held that the Directors were negligent.  Justice Romer reduced the Directors duties of care
and skill as follows “A Director need not exhibit in the performance of his duties a greater
degree of skill than may reasonably be expected from a person of his knowledge and
experience.”

This proposition prescribes the standard of skill to be exhibited in actions undertaken by

directors.  The test is partly objective and also partly subjective because a reasonable man would
be expected to have the knowledge of a director with his experience.  Refer to

Re Brazilian Rubber & Plantations Estates Ltd. (1911) 1 Ch. 405

In this case a company had five directors and one of them confessed that he was absolutely
ignorant of business.  A second one was 75 years old and very deaf.  A third one said he only
agreed to become a director because he saw one of his friends names on the list of directors.  The
other two were fairly able businessmen.  The directors caused a contract to be entered into
between the company and a certain syndicate for purchase by that company of some rubber
plantation in Brazil.  The prospectus issued by the company contained false statements about the
acreage of the Plantation, the types of trees and so forth.  The information given therein was
given to the Directors by a person who had an original option to purchase that property.  He had
never been to Brazil and the data was based on his own imagination.  The Directors caused the
company to purchase the property.  The question arose, were they negligent in so doing?

The court held that their conduct did not amount to gross negligence.  Neville J. had the
following to say:
“It has been laid down that so long as they act honestly, Directors cannot be made responsible
in damages unless they are guilty of gross negligence.  A Director’s duty requires him to act
with such care as is reasonably expected from his having regard to his knowledge and
experience.   He is not bound to bring any special qualifications to his office.  He may undertake
the Management of a Rubber Company in complete ignorance of anything connected with
Rubber without incurring responsibility for the mistakes which may result from such
ignorance.  While if he is acquainted with the Rubber business, he must give the company the
advantage of his knowledge when transacting the company’s business.  He is not bound to take
any definite part in the conduct of the company’s business but insofar as he undertakes it he
must use reasonable care.  Such reasonable care must be measured by the care an ordinary
man might be expected to take in the same circumstances on his own behalf.”
A director is not bound to give continuous attention to the affairs of his company.  His duties are
of an intermittent nature to be performed at periodical Board Meetings and at meetings of any
committee of the Board on which he is placed.  He is not bound to attend all such meetings
though he ought to attend whenever in the circumstances he is reasonably able to do so.  Refer to
the case of Re Denham & Co. Ltd (1883) 2 Ch. D 752

Here a company was incorporated in 1873.  Under the Articles 3 Directors were appointed
namely, Denham, Taylor and Crook.  A fourth Director was appointed later.  The articles
conferred on Denham supreme control of the company’s affairs.  He was given power to override
decisions of the general meeting and a Board of Directors.  He was responsible for declaring
dividends and he managed the company’s affairs entirely alone and without consulting the other
directors.  Between 1874 and 1877 a dividend of 15% per annum was recommended and paid
and the total amount paid was some £21,600.  In 1880 the company went into liquidation and an
investigation revealed that the money paid as dividends had been paid not out of profits but out
of capital.  Thereafter Denham became bankrupt, Taylor was dead and his estate was worthless
and the third man was a man of straw.  The creditors directed their claims against Crook who had
property.  Crooks argued that since the formation of the company, he had never attended Board
Meetings and therefore could not be accountable for fraudulent statements in the Company’s
Balance Sheets.  He attended one meeting in 1876 where he formally put forth a Resolution for
the payment of a dividend for that year.

The Court held that a Director is not bound to attend every Board meeting and that he is not
liable for misfeasance committed by his co-directors at Board meetings at which he was never
present.

Marquis Of Butes (1892) 2 Ch. 100

Here the Director never attended any Board meetings for 38 years.  It was held that he was not
liable.

In respect of all duties which having regard to all exigencies of business and articles of
association may properly be left to some other official.  A Director in the absence of grounds for
suspicion will not be liable in trusting that other official to perform that other duty honestly.

Dovey v. Cory (1901) A.C. 477

A bank sustained heavy losses by advances made improperly to customers.  The irregular nature
of advances was concealed by means of fraudulent Balance Sheets which were the work of the
General Manager and the Chairman in assenting to the payment of dividends out of capital and
those advances on improper security were done on the advice of the general manager and
chairman.

The court held that the reliance placed by the co-director on the general manager and chairman
was reasonable.  He was not negligent and therefore was not liable for not having discovered the
fraud as he was not in the absence of circumstances of suspicion bound to examine entries in the
Company’s Books to see that the Balance Sheet was correct.
It may be said that the duties of care and skill appear to be negative duties.  What about fiduciary
duties?

FIDUCIARY DUTIES
Basically a Director’s fiduciary duties are divisible into 4 sub categories:

The Directors must always act bona fide in what they consider and not what the courts may
consider to be in the best interest of the company.  In this context, the term company means the
present and future members of the company on the basis that the company will be continued as a
going concern thereby balancing long-term view against short term interests of existing
members.

The directors must always exercise their powers for the particular purpose for which they were
conferred and not for extraneous purposes even if the latter are considered being in the best
interests of the company.  For example the Directors are invariably empowered to issue capital
and this power should be exercised for only raising more funds when the company requires
it.  Hence it will be a breach of the Directors’ duties to issue the company shares for the purpose
of entrenching themselves in the control of the company’s affairs.  Refer to the case of Punt v.
Symons (1903) 2 Ch. 506  in this case the directors issued shares with the object of creating a
sufficient majority to enable them to pass a special resolution depriving the other shareholders of
some special rights conferred upon them by the company’s articles.  It was held that a power of a
kind exercised by the Directors in this case was a power which must be exercised for the benefit
of the company.  Primarily this power is given to them for the purpose of enabling them to raise
capital for the purposes of the company.  Therefore a limited issue of shares to persons who are
obviously meant and intended to secure the necessary statutory majority in a particular interest
was not a fair and bona fide exercise of the power.

Piercy v. Mills & Co. (1920) 1 Ch. 78

A company had two directors.  They fell out of favour with the majority of the shareholders who
were therefore threatened with the election of 3 other directors to the Board.  The directors
issued shares with the object of creating a sufficient majority to enable them to resist the election
of the 3 additional directors whose election would have put the two directors in the minority on
the Board.

The Court held that the Directors were not entitled to use their powers of issuing shares merely
for the purpose of maintaining their control or the control of themselves and their friends over
the affairs of the company or even merely for the purpose of defeating the wishes of the existing
majority of shareholders.  The Plaintiff and his friends held the majority of shares in the
company and as long as that majority remained, they were entitled to have their wishes prevail in
accordance with a company’s regulations.  Therefore it was not open to the directors for the
purpose of converting a minority into a majority and purely for the purpose of defeating the
wishes of the existing majority to issue the shares in dispute.

In those circumstances where the directors have breached their duty to exercise their powers for
the proper purpose, the shareholders may forgive them by ratifying their action
Hogg v. Cramphorn Ltd. (1967) Ch. 254

In this case the company had two classes of shares, ordinary and preference shares.  Each share
carried 1 vote.  The power to issue the company shares was vested in the Directors.  They learnt
that a takeover bid was to be made to the Shareholders.  In the Bona fide belief that the
acquisition of control by the prospective take over bidder will not be the interest of the company
or its staff.  The Directors decided to forestall this move.  They therefore attached 10 votes to
each of the unissued preference shares and allotted to a trust which was controlled by the
Chairman of the Board of Directors and one of his partners in the company’s audit department
and an employee of the company.  To enable the trustees to pay for the shares, the directors
provided them with an interest free loan out of the company’s reserve fund.

An action challenged by the Plaintiff who was an associate of the prospective take-over bidder
and registered holder of 50 ordinary shares in the company was started.  After finding that it was
improper for the directors to attach such special voting rights, the Court stood over the action in
order to enable a general meeting to be held and to debate whether or not to ratify the Director’s
actions.  The general meeting ratified the action.

Bamford v. Bamford (1969) 1 All ER. 969

There were similar facts as in the former case but a meeting was held before proceeding to court
and that general meeting ratified the Director’s action.  The question also arose in this case,
could a decision of the general meeting cure the irregularity?

The court held if the allotment was made in bad faith, it was voidable at the instance of the
company because it was a wrong done to the company and that being so, the company which has
the rights to recall the allotment has also the right to approve it and forgive the breach of duty.

They must not fetter their displeasure to act for the company for example, the directors cannot
contract either among themselves or with third parties as to how they will vote at future Board
meetings.  However, where they have entered into a contract on behalf of the company they may
validly agree to take such further action at Board meetings as maybe necessary to carry out such
a contract.

As fiduciaries the Directors must not place themselves without consent of the company in a
position in which there is a conflict between their duties to the company and their personal
interests.  Good faith must not only be done but it must also manifestly be seen to be done.  The
law will not allow the fiduciary to place him in a position where he will have his judgments to be
biased and then argue that he was not biased.  This principle applies particularly when a Director
enters into a contract with his company or where he makes any secret profit by being a
Director.  As far as contracts are concerned a contract entered into by the Board on behalf of the
company and another Director is governed by the equitable principle which ordains that a
fiduciary relationship between the Director and his company vitiates such contracts.  Such
contract is therefore voidable at the instance of the company.  Reference may be made to the case
of Aberdeen Railway v. Blaikie (1854) 1 Macc. 461
The Defendant company entered into a contract to purchase a quantity of chairs from the
Plaintiff partnership.  At the time that the contract was entered into a Director of the company
was also one of the partners.  The issue was, was the company entitled to avoid the
contract?  The court held that the company was entitled to avoid the contract.  The Judge said
that as a body corporate can only act by agents and it is the duty of those agents so to act as best
to promote the interests of the corporation whose affairs they are conducting.  Such an agent has
a duty of a fiduciary nature to discharge towards his principal.  It is a rule of universal
application that no one having such duties to discharge shall be allowed to enter into or can have
a personal interest conflicting or which may possibly conflict with the interests of those whom he
is bound to protect.  This principle is strictly applied no question is entertained as to the fairness
or unfairness of the contract so entered into.  However, it is possible for such contract to be given
effect by the articles of association.  At their narrowest the Articles might provide that a Director
who is interested in a Company contract should disclose his interests and he will not be counted
to decide that a quorum is raised and his votes will also not be counted on the issue.  At their
widest the articles might allow the director to be counted at Board meeting.

In order to create a balance between these two extremes and ensure that a minimum standard
prevails Section 200 was incorporated into the Companies Act.  Under this Section it is the duty
of a director who is interested in any contract or proposed contract to disclose the nature and
extent of his interest to the Board of Directors when the contract comes up for
discussion.  Failure to do so renders the defaulting director liable to a fine not exceeding 2000
shillings. In addition the failure also brings in the equitable doctrine whereby the contract
becomes voidable at the option of the company and any profit made by the director is
recoverable by the company.

The shortcoming of the Section is that the Director has to disclose to the Board of Directors and
not to the general meeting.  It is not sufficient for a Director to say that he is interested.  He must
specify the nature and extent of his interests.  If the company’s articles take the form of Article
84 of Table ‘A’ then a Director who is so interested is required to abstain from voting at the
Board meeting and his vote will not be taken in determining whether or not there is a quorum on
the Board.  Once the Director has complied with Section 200 and Article 84 then he can escape
liability.

In respect of all other profits which a Director may make are out of his position as a Director the
equitable principle which requires the Directors to account for any such profits is vigorously
enforced.  This is because the Courts have equated Directors to trustees and their duties have also
been equated to those of Trustees.  The question is, are they really trustees?

Selanger United Rubber Estates v. Craddock (1968) 1 All E.R. 567

Re Forest of Dean Coal Mining Company (1879) 10 Ch. D 450

In the latter case, the directors of a company were seen to be trustees only in respect of the
company’s funds or property which was either in their hands or which came under their
control.  But this does not necessarily make directors trustees.  There are two basic differences
between Directors as Trustees and Ordinary Trustees.
(a)     The function of ordinary trustee is to preserve the Trust Property but the role of a director is
to explore possible channels of investment for the benefit of the company and these
necessitates some elements of having to take a risk even at the expense of the company’s
property.
(b)     Whereas trust property is vested in the Trustees, a company’s property is held by the
company itself and is not vested in the trust.

Nevertheless if the directors make any secret profits out of their positions then the effect is
identical to that of ordinary trustees.  They must account for all such profits and refund the
company.

Regal Hastings v. Gulliver (1942) 1 All E.R. 378

Herein the company owned a cinema and the directors decided to acquire two other cinemas with
a view to the sale of the entire undertaking as a going concern.  Therefore they formed a
subsidiary company to invite the capital of 5000 pounds divided into 5000 shares of 1 pound
each.  The owners of the two cinemas offered the directors a lease but required personal
guarantees from the Directors for the payment of rent unless the capital of the subsidiary
company was fully paid up.  The directors did not wish to give personal guarantees.  They made
arrangements whereby the holding company subscribed for 2000 shares and the remaining shares
were taken up by the directors and their friends.  The holding company was unable to subscribe
for more than 2000 shares.  Eventually the company’s undertakings were sold by selling all the
shares in the company and subsidiary and on each share the Directors made a profit of slightly
more than two pounds.  After ownership had changed the new shareholders brought an action
against the directors for the recovery of profits made by them during the sale.

The court held that the company as it was then constituted was entitled to recover the profits
made by the Directors.  Lord Macmillan had the following to say:

            “The directors will be liable to account if it can be shown that what they did is so related
to the affairs of the company that it can properly be said to have been done in the course of their
management and in utilisation of the opportunities and special knowledge and what they did
resulted in a profit to themselves.”

Phipps v. Boardman (1966) 3 All E.R. 721

In this case Boardman was a solicitor to the trust of the Phipps family.  The trust held some
shares in the company.  Boardman and his colleagues were not satisfied with the company’s
accounts and therefore decided to attend the company’s general meeting as representatives of the
Trust.  At the meeting they received information pertaining to the company’s assets and their
value.  Upon receipt of the information, they decided to buy shares in the company with a view
to acquiring the controlling interest.  Their takeover bid was successful and they acquired
control.  Owing to the fact that Boardman was a man of extraordinary ability, the company made
progress and the profits realised by Boardman and his friends on the one hand and the trusts on
the other were quite extensive.  One of the beneficiaries of the Trust brought an action to recover
the profits which were realised by Boardman and his friends.
The court held that in acquiring the shares in the company, Boardman and his friends made use
of information obtained on behalf of the trust and since it was the use of that information which
prompted them to acquire the shares, then the shares were also acquired on behalf of the trust and
thus the solicitors became constructive trustees in respect of those shares and therefore liable to
account for the profits derived therefrom to the trust.

Peso Silver mines v. Cropper (1966) 58 D.L.R. 1

The Defendant was the company’s Managing Director.  The Board of Directors was approached
by a prospector who offered to sell his claims to the company.  The company’s consulting
geologists advised that it was in order for the company to acquire the claims.  The directors
decided that it was inadvisable for the company to acquire the same mainly because of its
strained financial resources.  Subsequently at the suggestion of the geologists, some of the
Directors agreed to purchase the claims at the price at which they had been offered to the
company.  Thereafter they formed a company which took over the claims and a second company
for developing the resources.  After the control of Peso Silver Mines had changed the new
directors brought an action against the Defendant to account to the company for the shares held
by them in the new companies.  But here the court held that since the company could not have
taken over the claims, there was no conflict of interest between the Directors and the Company
and therefore the Defendant was not liable to account for the shares.

Directors may make use of opportunities originally offered to the company and thereby make
profits provided that some 4 conditions are satisfied namely
1.     The opportunity must have been rejected by the company;
2.       If the directors acted in connection with that rejection, they must have acted bona fide in the
best interests of the company.
3.     The information about that opportunity should not have been given to them confidentially on
behalf of the company.
4.      Their subsequent use of that information must not relate to them as directors but as any other
ordinary person.

Industrial Development Consultants v.  Cooley (1972) 2 All E.R. 162

The Defendant who was an architect was appointed the company’s Managing Director.  The
company’s business was to offer design and construction services to industrial enterprises.  One
of the defendant’s duties was to obtain new business for the company particularly from the gas
companies where he had worked before joining the Plaintiff.  While the Defendant was still so
employed by the Plaintiff a representative of one gas company came to seek his advice on some
personal matters.  In the course of their conversation the Defendant learnt that the gas company
in question had various projects all requiring design and construction services of the type offered
by the Plaintiff.  Upon acquiring this information and without disclosing it to the company, the
Defendant feigned illness as a result of which he was relieved by the company from his
duties.  Thereafter, he joined the gas company and got the contract to do the work.  Two years
previously, the Plaintiff had unsuccessfully tried to obtain that work.  After the Defendant
acquiring the contract, the company sued him alleging that he obtained the information as a
fiduciary of the company and he should therefore account to the company for all the
remuneration fees and all dues obtained.

The court held that until the Defendant left the Plaintiff, he stood in a fiduciary relationship to
them and by failing to disclose the information to the company, his conduct was such as to put
his personal interests as a potential contracting party to the gas company in conflict with the
existing and continuing duty as the Plaintiff’s Managing Director.
Roskill J.
“It is an overriding principle of equity that a man must not be allowed to put himself in a position
where his fiduciary duty and interest conflict.  It was the defendant’s duty to disclose to the
plaintiff the information he had obtained from the Gas Board and he had to account to them for
the profits he made and will continue to make as a result of allowing his interests and duty to
conflict.  It makes no difference that a profit is one which the company itself could not have
obtained.  The question being not whether the company could have acquired it but whether the
defendant acquired it while acting for the company.”

CONTROLLING SHARE HOLDERS

By controlling share holders is meant those who hold the majority of the voting rights in the
company.  Such share holders can always ensure control of the company’s business by virtue of
their voting power to ensure that the controlling shareholders do not use their voting power for
exclusively selfish ends; the Law requires that in exercise of their voting power, these
shareholders must not defraud a minority.  For example by endeavouring directly or indirectly to
appropriate to them any money property or advantage which either belong to the company or in
which the minority shareholders are entitled to participate.

Brown v. British Abrasive Wheel Co. (1919) 1 Ch. 290

Menier v. Hoopers Telegraphy Works (1874) L.R. Ch. A 350

In the latter case the company brought action against its former Managing Director for a
declaration that the concessions for laying down a telegraph cable from Portugal to Brazil was
held by that former Director as a trustee for the company. While this action was still pending, the
Defendants who were the majority shareholders in the company approached that former
Managing Director with a view to striking a compromise.  It was agreed between the parties that
if that director surrendered the concessions to the Defendants then the Defendants would use
their voting power to ensure that the action was discontinued.  At a subsequent general meeting
of the company, by virtue of the defendant’s voting power, a resolution was passed that the
company should be wound up.

The court said that the resolution was invalid since the defendants had used their voting power in
such a way as to appropriate to themselves the concessions which  if the earlier action had
succeeded should have belonged to the whole body of shareholders and not merely to the
majority.  Lord Justice Mellish stated as follows:
            “Although the shareholders of the company may vote as they please and for the purpose
of their own interest, yet the majority of the shareholders cannot sell the assets of the company
itself and give the consideration but must allow the minority to have their share of any
consideration which may come to them.”

Cook v. Deeks (1916) 1 A.C. 554

The Toronto Construction Company carried on business as Railway Construction

contractors.  The Shares in the company were held equally among Cook, G S Deeks and G M
Deeks.  And another party called Hinds.  The company carried out several large construction
contracts for the Canadian Pacific Railway.  When the two Deeks and Hinds learnt that a new
contract was coming up, they obtained this contract in their own names to the exclusion of the
company and then formed a new company to carry out the work.  At a general meeting of the
shareholders of Toronto Construction company a resolution was passed owing to the two powers
of Deeks and Mr. Hinds declaring that the company was not interested in the new contract of the
Canadian Pacific Railway.  Cook brought an action and the court held:  that the benefit of the
contract belonged properly to the Company and therefore the Directors could not validly use
their voting power as shareholders to vest it in themselves.

ENFORCEMENT OF DIRECTORS DUTIES

As the company is a distinct entity from the members and since directors owed their duties to the
company and not to individual shareholders, in the event of breach of those duties any action for
remedies should be brought by the company itself and not by any individual shareholder?  The
company and the company alone is the proper Plaintiff.  This is generally referred to as the rule
in Foss V. Harbottle (1843) 2 Hare 461

In this case the Directors who were also the company’s promoters sold the company’s property
at an undisclosed profit.  Two shareholders brought action against them alleging that in so doing,
that the directors had breached their duties to the company.  It was held that if there was any
breach of duty, it was a breach of duty owed to the company and therefore the Plaintiffs had no
locus standi for the company was the proper plaintiff.  This rule has two practical advantages
namely:
1.     Insistence on an action by the company avoids multiplicity of actions;
2.    If the irregularity complained of is one which could have been effectively ratified by the
company in general meeting, then it is pointless to commence any litigation except with the
consent of the general meeting. 

However there are four exceptions to this rule in which an individual member may bring action
against the directors namely:
(a)    Where it is complained that the company through the directors is acting or proposing to act
ultra vires;
(b)   Where the act complained of even though not ultra vires, the company can effectively be
done by a special resolution;
(c)   Where it is alleged that the personal rights of the Plaintiff have been infringed and/or are
about to be infringed;
(d)   Where those who control the company are perpetuating the fraud on the minority;
The problem likely to arise is that if the directors themselves are also controlling shareholders,
the rule in Foss v. Harbottle if strictly applied in exercise of their voting powers, the Directors
may easily block any attempt to bring an action against themselves.  In such cases a shareholder
will be allowed to bring an action in his own name against the directors even if the wrong
complained of has been done to the company.  Such an action is called a derivative action.

In order to be entitled to commence a Derivative Action, it must be shown that

1.    The wrong complained of was such as to involve a fraud on the minority which is not
ratifiable by the company in general meeting;
2.    It must be shown that the wrong doers hold the controlling interests
3.    The company must be joined as a nominal defendant;
4.     The action must be brought in a representative capacity on behalf of the plaintiff and all other
shareholders except the Defendant.

The question is these exceptions effective?

There are situations where the rule does not apply. 

Another remedy against directors for breach is found in Section 324 of the statute which
provides as follows:
            “If in the course of the winding up of the company it appears that any person who has
taken part in the formation or promotion of the company or any past or present director has
misapplied or retained any money or property of the company, or been guilty of any breach of
trust in relation to the company on the application of the liquidator, a creditor or member or a
court may compel such person to restore the money or property to the company or to pay
damages instead.”

This section is designed to deal with actual breaches of trust which come to light in the winding
up proceedings or during the winding up proceedings but winding up itself may be used as a
means of ending a course of oppression by those formally in control.  Among the grounds for the
winding up is one which is particularly appropriate for such circumstances.

Under Section 219 (f) of the Companies Act the court may order a company to be wound up if it
is of the opinion that it is “just unequitable” the courts have so ordered when satisfied that it is
essential to protect the members or any of them from oppression in particular they have done so
when the conduct of those in control suggests that they are trying to make intolerable the position
of the minority so as to be able to acquire the shares held by the minority on terms favourable
only to the majority.  But a member cannot petition under this section if the company is
insolvent.  If the company is solvent to wind it up, contrary to the majority wishes will only be
granted where a very strong case against the majority is established.

Winding up a company merely to end oppression appears rather awkward as it may not be of any
benefit to the petitioners themselves.  Owing to these shortcomings, Section 211 was
incorporated into the Companies Act as an alternative remedy for the minority of the
shareholders.  Section 211 provides that any member who complains that the affairs of a
company are being conducted in a manner oppressive to some part of the members including
himself may petition the court which if satisfied that the facts will justify a winding up order but
that this will unduly prejudice that part of the members, may make such order as it thinks
fit.  Such an order may regulate the conduct of the company’s affairs in the future or may order
the purchase of member shares by others or by the Company itself.  This remedy is available
only to the members.  An oppressed director or creditor cannot obtain any remedy under Section
211 of the Companies Act for this is expressly restricted to oppression of the members even if a
director or creditor also happens to be a member.

Elder V. Elder & Watson (1952) AC 49

The two Plaintiffs were the company director and secretary and factory manager
respectfully.  As this was a small family concern, serious differences arose between the plaintiffs
and the beneficial owners of the undertaking.  Consequently the Plaintiff brought action under
Section 211 alleging oppression.  It was held that if there was any oppression of the Plaintiffs, it
related to them as directors and the remedy under Section 211 is only available to members.  The
suit was dismissed.

WHAT IS OPPRESSION
This term has been defined to mean something burdensome, harsh or wrongful.

Scottish Cooperative Wholesale Society v. Meyer (1959) AC 324

Here the Society wished to enter into the retail business.  For this purpose a subsidiary company
was formed in which the two Respondents and 3 Nominees of the Society were the
directors.  The society had majority shareholders and the Respondents were the minority.  The
Company required 3 things namely;
1. Sources of supplies of raw material;
2. A licence from a regulatory organisation called cotton control
3. Weaving Mills.
The Respondents provided the first two but weaving Mills belonged to the society.  For several
years, the business prospered because of mainly the knowhow provided by the Respondent.  The
company paid large dividends and accumulated substantial results.  Due to the prosperity, the
society decided to acquire more shares and through its nominee directors offered to buy some of
the shares of the Respondent at their nominal value which was one pound per share but their
worth was actually 6 pounds per share.  When the Respondents declined to sell their shares to the
society, the society threatened to cause the liquidation of the company.  About 5 years later,
Cotton control was abolished which meant that the society would obtain the raw materials and
weave cloth without a licence.  It accordingly started to do the same and also started starving the
subsidiary by refusing to manufacture for it except for  an economic crisis. As all the other Mills
were fully occupied, the subsidiary company was being starved to death and when it was nearly
dead the Respondent brought the petition claiming that the affairs of the company were being
conducted in an oppressive manner.

It was held that by subordinating the interests of the company to those of the society, the
nominee directors of the society had thereby conducted the affairs of the company in a manner
oppressive to the other shareholders.  The fact that they were perhaps guilty of inaction was
irrelevant.  The affairs of the company can be conducted oppressively by the Directors doing
nothing to protect its interests when they ought to do so.

Re Hammer(1959) 1 WL.R. 6
In this case Mr. Hammer senior was a Philatelist (stamp collector) dealer and incorporated
business in 1947 forming a company with two types of ordinary shares class A shares which
were entitled to a residue of profit and Class B Shares carrying all the votes.  He gave out the
shares to his two sons and at the time of the petition each son held 4000 Class A shares and the
father owned 1000 shares.  Of the Class B Shares, the father and his wife held nearly 800 to the
100 held by each son.  Under the Company’s articles of association, the father and two sons were
appointed directors for life and the father was further appointed chairman of the Board with a
casting vote.  The father assumed powers he did not possess ignored decisions of the Board and
even in court, during the hearing asserted that he had full power to do as he pleased while he had
voting control.  He dismissed employees using his casting vote to co-opt self directors, he
prohibited board meetings, engaged detectives to watch the staff and secured payment of his
wife’s expenses out of the company’s funds.  He negotiated sales and vetoed leases all contrary
to the decisions and wishes of the other directors.

The sons filed an action claiming that the father had run the affairs of the company in a manner
oppressive to them.  The father was 88 years.

The court held that by assuming powers which he did not possess and exercising them against
the wishes of those who had the major beneficial interests, Mr. Hammer senior had conducted
the company’s affairs in an oppressive manner.

These two cases are among the few where an application under Section 211 has succeeded.  This
is because section 211 has been subjected to a very restrictive meaning.  To succeed under
Section 211, one must establish a case of oppression.

There is no clear definition of the term and therefore it is not easy to tell when a company’s
affairs are being conducted oppressively.  For example in the case of Re  Five Minute Car Wash
Ltd (1966) 1 W.L.R. 745
The petitioner alleged oppression on grounds that the company’s Managing Director was
extremely incompetent.  The court ruled that even though the allegation suggested that the
Managing Director was unwise inefficient and careless in the performance of his duties, this did
not mean that he had at any time acted unscrupulously, unfairly or with any lack of probity
towards the petitioner or to other members of the company.  Therefore his conduct was not
oppressive.
1. The conduct which is complained of must relate to the affairs of the company and must also
relate to the petitioner in his capacity as a member.  Personal representatives cannot petition
nor can trustees in bankruptcy petition.

2. the wording of the section suggests that there must be a continuous cause of conduct and not
merely isolated acts of impropriety.
3. The conduct must be such as to make it just and equitable to wind up the company.  In other
words, the members must be entitled to a winding up order.

Re Bella Dor Sick Ltd (1965) 1 All E.R. 667

In a small family concern, there developed two factions among shareholders.  Owing to these
personal differences the petitioner filed a petition under Section 211 complaining inter alia that
the distribution of profits had not been fairly made.  That he had been excluded from the Board
of Directors and that the affairs of the company were being conducted irregularly. In particular,
he alleged that the company had failed to repay its debts to another company in which he had
some interests.

It was held that the petitioner had not made a case of oppression and the petition must be
dismissed.
Three reasons were given
(a) This petition had been brought for the collateral purpose of enforcing repayment of debts
to some third party;
(b) The conduct complained of and particularly the removal of the petitioner from the Board
related to him as a director not as a member;
(c) That the circumstances were not such as to justify a winding up order at the instance of
the petitioner because the company was insolvent and therefore the shareholders had no
tangible interests.
(d) It is an unfortunate mistake to link up Section 211 with winding up.  The courts are
construing the Section very restrictively.  Section 211 has therefore failed to live up to
expectations.  It is no real remedy.