3PLR – ESTMANCO (KILNER HOUSE) LTD V. GREATER LONDON COUNCIL
POLICY, PRACTICE AND PUBLISHING, LAW REPORTS 3PLR
[PDF copy of this judgment can be sent to your email for N300 only. Just order through lawnigeria@gmail.com and info@lawnigeria.com or text 07067102097]
ESTMANCO (KILNER HOUSE) LTD
V.
GREATER LONDON COUNCIL
CHANCERY DIVISION
18 SEPTEMBER 1981
3PLR/1981/13 (CA-E)
OTHER CITATIONS
[1982] 1 ALL ER 437
BEFORE HIS LORDSHIP: LORD SIR ROBERT MEGARRY V-C
REPRESENTATION
Solicitors: Woodroffes (for the applicant);
R A Lanham (for the council);
Bartlett & Gregory, Bromley (for the company).
Azza M Abdallah Barrister.
MAIN ISSUES
COMPANY LAW:- Minority shareholder – Right of minority shareholder to maintain representative action – Fraud on minority – Action against majority shareholder – Company bringing action against majority shareholder for breach of contract – Majority shareholder having 100% of voting rights – Majority shareholder using voting power to force company to discontinue action – Majority shareholder not a director and owing no fiduciary duty to company – Whether majority shareholder entitled to vote according to its own interest – Whether majority shareholder’s vote an abuse or misuse of power – Whether a fraud on minority.
REAL ESTATE LAW:- Vested interest in property – Publicly owned flats sold on long leases and managed through independent nonprofit company – Purchaser of – Right to maintain action to defend nature of interest in/character of property
NONPROFIT LAW:- Estate holding and management – Use of nonprofit structure to hold and manage public assets – Issues arising therefrom
CHILDREN AND WOMEN LAW:- Women and Real Estate – Defence of interests in property – Minority shareholding rights – When can give right to sue in representative action regardless of the wish of majority
Cases referred to in judgment
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, [1900–3] All ER Rep 746, CA, 9 Digest (Reissue) 624, 3716.
Clemens v Clemens Bros Ltd [1976] 2 All ER 268, Digest (Cont Vol E) 59, 4083a.
Daniels v Daniels [1978] 2 All ER 89, [1978] Ch 406, [1978] 2 WLR 73, Digest (Cont Vol E) 60, 4483a.
Derry v Peek (1889) 14 App Cas 337, [1886–90] All ER Rep 1, HL, 9 Digest (Reissue) 123, 650.
East Pant Du United Lead Mining Co Ltd v Merryweather (1864) 2 Hem & M 254, 71 ER 460, 9 Digest (Reissue) 628, 3750.
Edwards v Halliwell [1950] 2 All ER 1064, CA, 45 Digest (Repl) 545, 1231.
Foss v Harbottle (1843) 2 Hare 461, 67 ER 189, 9 Digest (Reissue) 689, 4094.
Greenhalgh v Arderne Cinemas Ltd [1950] 2 All ER 1120, [1951] Ch 286, CA, 9 Digest (Reissue) 611, 3639.
North-West Transportation Co Ltd v Beatty (1877) 12 App Cas 589, PC, 9 Digest (Reissue) 629, 3753.
Pavlides v Jensen [1956] 2 All ER 518, [1956] Ch 565, [1956] 3 WLR 224, 9 Digest (Reissue) 755, 4485.
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER 354, [1982] 2 WLR 31, CA; rvsg in part [1980] 2 All ER 841, [1981] Ch 257, [1980] 3 WLR 543.
Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1929] 2 KB 9, [1926] All ER Rep 498, CA, 9 Digest (Reissue) 612, 3643.
Sidebottom v Kershaw, Leese & Co Ltd [1920] 1 Ch 154, CA, 9 Digest (Reissue) 612, 3642.
Cases also cited
Atwool v Merryweather (1867) LR 5 Eq 464.
Bamford v Bamford [1969] 1 All ER 969, [1970] Ch 212, CA.
Beswick v Beswick [1967] 2 All ER 1197, [1968] AC 58, HL.
Dowty Boulton Paul Ltd v Wolverhampton Corp [1971] 2 All ER 277, [1971] 1 WLR 204.
Hogg v Cramphorn Ltd [1966] 3 All ER 420, [1967] Ch 254.
Lloyd’s v Harper (1880) 16 Ch D 290, CA.
Menier v Hooper’s Telegraph Works (1874) 9 Ch App 350, LJJ.
Smith (Howard) Ltd v Ampol Petroleum Ltd [1974] 1 All ER 1126, [1974] AC 821, PC.
Wallersteiner v Moir (No 2) [1975] 1 All ER 849, [1975] QB 508, CA.
Windsor and Maidenhead Royal Borough v Brandrose Investments Ltd [1981] 3 All ER 38, [1981] 1 WLR 1083.
Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 All ER 571, [1980] 1 WLR 277, HL.
Alan Steinfeld for the applicant.
CA Brodie QC and W Hicks for the council.
MR King for the company.
HISTORY AND SUMMARY OF FACTS
A local authority (the council) owned a block of 60 flats which it decided to sell on long leases. In anticipation of the sales the council formed a non-profit-making company for the management of the flats, when sold, in accordance with an agreement made with the council. The agreement provided that the council was to use its best endeavours to dispose of the flats on long leases, that the 60 shares in the company were to vest initially in the council but that one share was to be allocated to each flat, and that when a flat was sold the appropriate share was to be transferred to the purchaser of the flat. Each share was to have voting rights in the company when all 60 flats had been sold but until that time all voting rights vested in the council. After 12 flats had been sold, the council changed its policy and decided that the remaining flats should be let to council tenants instead of being sold on long leases. The company issued a writ against the council seeking, inter alia, an injunction restraining the council from disposing of the unsold flats except by long leases in accordance with the agreement made with the company. At an extraordinary general meeting of the company, at which only the council was entitled to exercise voting rights, a resolution was passed instructing the directors of the company to withdraw the action. The applicant, who was the purchaser of one of the 12 flats already sold on a long lease and who had thus been allotted one share in the company, sought leave to intervene to prosecute the action. The applicant moved for an order that she should be substituted as the plaintiff in the action, suing on behalf of herself and all other shareholders in the company other than the council, that the company should be joined as an additional defendant and that the action should be permitted to continue in her name as a derivative action. The council contended (i) that the applicant had no right of action against the council because the agreement was made not with her but with the company, and (ii) that the applicant, although a minority shareholder, did not come within any of the exceptions to the rule preventing a member of a company from maintaining an action on behalf of the company for a wrong done to the company because the council was not a director of the company and owed it no fiduciary duty and had merely exercised its voting powers in its own interest as it was entitled to do.
Held –
(1) The exception to the rule that a member of a company could not maintain an action on behalf of the company for a wrong done to the company which permitted a member to sue where there was a fraud on a minority of shareholders extended beyond fraud at common law and included an abuse or misuse of power by the majority, whether acting as directors or shareholders. Thus, although a majority shareholder, unlike a director, owed no fiduciary duty to the company and was entitled to vote in his own interest, that did not give him an unrestricted right to pass a resolution depriving a minority shareholder of his rights or property merely because the majority shareholder reasonably believed that his actions were in the best interests of the company (see p 444 h j and p 445 b to f, post); Daniels v Daniels [1978] 2 All ER 89 applied; Foss v Harbottle (1843) 2 Hare 461 considered.
(2) Since it had not been established that it was for the benefit of the company that its action should be discontinued or that the council in exercising its majority vote at the extraordinary general meeting had ever adequately considered what was for the company’s benefit or the effect of its vote on the rights of existing purchasers as shareholders (who would consequently be deprived of their future voting rights and with them the right to share in the management of the company and the block of flats), and since the council’s vote would enable it to implement its new policy regardless of the breaches of contract and injuries to existing purchasers that ensued, the council’s vote amounted to a fraud on the minority shareholders or an abuse of power. Accordingly, the action would be allowed to proceed with the applicant substituted as plaintiff and the company added as a defendant
MAIN JUDGMENT
Cur adv vult
18 September 1981. The following judgment was delivered.
SIR ROBERT MEGARRY V-C, (read the following judgment):
In this motion the main point concerns the application of the rule in Foss v Harbottle (1843) 2 Hare 461, 67 ER 189 to a non-profit-making company controlled by a local authority. Put shortly, the applicant, who is one of the shareholders in the company who has no voting rights, seeks to take over and proceed with an action which the company has brought to enforce a covenant with it made by the local authority. The applicant wishes to do this even though the local authority, which has all the voting rights in the company, has caused the company to apply to discontinue the action. After various preliminary skirmishes, I heard the motion for four days during the present Long Vacation. Mr Steinfeld appears for the applicant, the shareholder, and Mr Brodie appears for the local authority, the Greater London Council: I shall call it ‘the council’. Mr King appeared for the company, Estmanco (Kilner House) Ltd (which I shall call ‘the company’), though for reasons which will appear he was released from further attendance until the fate of the application had been determined. The matter was obviously one of some urgency because until it is decided it cannot be determined whether the council is at liberty to let a number of flats in the manner that it wishes.
The facts, though not concise, are neither complicated nor for the most part in dispute. The council owns a rehabilitated block of 60 flats in Lambeth called Kilner House. In June 1980 the council began to market the flats under arrangements whereby a lease of each flat for 135 years, expiring in 2115, would be sold. The flats are relatively small and inexpensive, and there was considerable demand for them, especially from young first-time buyers. However, squatters moved in, and after they had been evicted in January 1981 repairs were needed, though some of the repairs to the individual flats were left undone, and an allowance in the price was made. Before the council halted any further sales, the sales of 12 of the 60 flats had been completed, and these flats are now occupied by the purchasers. In addition, deposits had been paid on a ‘subject to contract’ basis for a number of unsold flats.
Kilner House is only one of a number of blocks of flats which are all in much the same position. Each has its own separate management company. In this case, the company was formed on 28 October 1980 for the purpose of managing the Kilner House flats in accordance with an agreement intended to be made with the council. It has an authorised and issued share capital of £3,000, divided into 60 shares of £50 each. Under the articles, one share was allocated to each flat. Initially, all the shares were to be allotted to the council or its nominees; but as each flat was sold, the share allocated to it was to be transferred to the purchaser. This has been done for each of the 12 flats sold; and the applicant, as the purchaser of one of these flats, holds one share in the company. Each shareholder has a right to attend and address general meetings of the company, but the only shares which carry any vote at such meetings are those vested in the council. However, when all 60 flats have been sold, all the shares would then carry the right to vote at general meetings. Under the memorandum of association, the first two objects were to enter into the intended agreement with the council and to manage the flats; and cl 4 requires the income and property of the company to be applied solely to promoting its objects, and prohibits any portion thereof being paid to members. Clause 5 provides that on a winding up any surplus is to go not to the members but to a company or companies with similar objects, and in default to some charitable object.
The three directors of the company are all employees of the council. As events have fallen out, they have been put in a position of some difficulty, notwithstanding the letter which each of them received from the council on appointment. This letter gave them liberty of action as directors despite employment by the council, provided they acted in good faith; and there was an indemnity by the council for such acts. Nothing directly depends on the position of the directors, and I can turn to the management agreement, which is important.
This agreement is dated 18 March 1981, and it was made under seal between the council and the company. It recites the proposed dispositions by long leases (a copy of such a lease being annexed to the agreement), and it states that the company has been incorporated so as to provide for the effective maintenance and management of the block of flats and the provision of services for each and every part of it. It then provides for the company to provide and maintain specified services as from 25 March 1981. The council is to pay to the company a management contribution in respect of the unsold flats, and the company is to collect service charges from the purchasers of the flats that have been sold. After various provisions of some elaboration dealing with the computation of these payments, there is cl 3(1), which is at the heart of the matter.
Clause 3(1) of the agreement runs:
‘The Council shall use its best endeavours to dispose of all the dwellings [on] long leases which shall be in the form of the Form of Lease or as near thereto as the circumstances may admit or require and if any such long lease shall cease to subsist before the grant of the Superior Lease hereinafter described to grant another long lease in lieu thereof.’
Clause 3(2) provides that on the grant of each such long lease the council is to transfer to the purchaser the share in the company allocated to the flat that has been leased; and then cl 3(3) provides that when long leases of all the flats have been granted, the council will grant the company a superior lease for the whole block in the form annexed to the agreement. The superior lease will give the company a reversion of three days on the leases of the flats; and it will enable the company to enforce the terms of the leases against the owners of the flats.
Now no doubt there are details in this scheme on which problems may arise. One may, for instance, question whether the draftsman of cl 3(3) of the agreement had the rule against perpetuities firmly in mind at the time. But by and large the scheme seems clear enough. Until all the flats were sold, the council is to remain in control. Once all the flats were sold, the council would drop out of the picture, and the company, controlled by the owners of the flats, would run the block as landlord. The leases of the flats reserved no rent in the ordinary sense of the word, the lessees merely covenanting to pay the service charges ‘by way of rent’; and the superior lease reserved no rent at all. Once all the flats were sold, the council would have received the whole purchase price for the leases, and the tenants would be left to run the company as they thought best.
That was the basis on which the applicant and the purchasers of the other 11 flats bought their long leases. In each long lease there are in cl 2 various covenants by the lessee with the council and the company, mostly of a positive nature. In cl 3 the lessee enters into a series of restrictive covenants of an estate management nature; and these covenants are expressed to be covenants with the lessor and separate covenants severally with the company and the relevant lessees. This appears to make these restrictive covenants mutually enforceable between the lessees, the council and the company as part of a leasehold scheme of development. There is, however, no covenant by the council with each lessee that the council will sell the remaining flats on long leases. Instead, there is a recital, in which the council is called ‘the Lessor’, the agreement of 18 March 1981 is called ‘the Agreement’, the company is called ‘the Management Company’ and the block of flats is called ‘the Estate’. The recital, numbered (4), runs:
‘The Lessor intends and has by Clause 3 of the Agreement agreed with the Management Company to dispose of all the dwellings within the Estate by means of leases in the form substantially of this Lease or as near thereto as the circumstances may admit or require to the intent that covenants in the form of those contained in Clause 3 of this Lease shall so far as the law may allow be mutually enforceable between the lessees from time to time of those dwellings.’
I now come to the council’s change of policy. Early last May there were elections for membership of the council; and as a result there was a political change in the control of the council. In June, I was told, the council decided on a change in its housing policy which affected this and many other blocks of flats; I have not seen a copy of any resolution. Instead of selling the flats on long leases, the council took the view that the flats should be let to applicants on their housing list and to families in need of accommodation. Let me say at once that nothing whatever arises for decision in this motion about whether the new policy or the old policy was the better policy. Provided a local authority complies with the law, matters of policy on housing, as on other things, are matters for decision by that authority, and not by the courts.
The change of policy was not put into force precipitately or without a proper exploration of the problems involved. There is in evidence an impressive volume of documents, including a long opinion by leading counsel (not leading counsel who has appeared before me on behalf of the council) in which the council’s officers explore the various problems, and painstakingly set out the pros and cons of what throughout has been recognised would be a considered and deliberate breach of contract by the council. Much of the emphasis was on whether the courts would be likely to restrain such a breach by injunction instead of merely awarding damages. The attitude of the council throughout was that it was ready and willing to pay damages but that it wished above all things to avoid being compelled to perform the covenant. Possibilities of the surcharge and disqualification of councillors were also present. At this stage there was nothing to suggest that the rule in Foss v Harbottle, or, indeed, any element of company law, was in mind.
I have referred to the council’s attitude, though on the documents before me it appears that the attitude was that of the council’s housing committee and its finance and general purposes committee, rather than the full council. No doubt those committees have authority to speak for the council on these matters. At all events, no point on this has arisen. After considering all the material before them the committees reached their conclusion.
On 30 July the housing committee decided that all the unsold flats in Kilner House should be let to high priority applicants, and that the decision made on 7 July 1980 to sell these flats should not be acted on. This decision was not to be acted on for three weeks so that the 12 purchasers of the flats should have an opportunity of giving up their flats in return for the council paying them compensation for the resulting diminution in value of their flats (if any) as determined by arbitration, and, presumably, returning their purchase price. The resolution is not very clear, but the offer was not accepted, and I need not pursue the point. It was also resolved that no such proposal was to be put forward on the basis of honouring the 35 cases in which there had been an offer and acceptance; no doubt this refers to the ‘subject to contract’ cases.
The committee also gave their officers certain authority to act on these decisions and to contest any litigation. This authority appeared to include authority to secure the winding up of the company and the return of the flats to direct management by the council, though again the wording is not very clear. The resolution also expressed the council’s willingness to make certain payments by way of compensation, and so on. Some of these resolutions applied to other flats as well, and some were specific to Kilner House. On the next day, 31 July, the resolutions were confirmed by the finance and general purposes committee.
In those circumstances the directors of the company not surprisingly took the view that the company ought to seek to enforce the agreement with the council dated 18 March 1981; and on 3 August the company issued a writ against the council. This sought an injunction against disposing of any of the flats save by long leases, or doing or permitting anything which would be a breach of cl 3(1) of the agreement. The writ also sought a mandatory injunction requiring the council to use its best endeavours to dispose of the flats on long leases, and damages in addition to or in lieu of an injunction. An amendment made on 11 August added a claim for specific performance of the agreement, and damages in addition to or in lieu thereof.
The matter first came before me on 17 August. There had been previous proceedings before Glidewell J on 6 August, and the present proceedings were entangled with other proceedings concerning blocks of flats known as St Paul’s Court and Elgin Avenue. Mr Brodie, then as now, appeared for the council, and withdrew certain concessions which had been made before Glidewell J by other counsel. In the end, on 18 August, arrangements were made for the early trial of the St Paul’s Court and Elgin Avenue cases, on certain terms and subject to certain undertakings, and I need say no more about these cases; but the Kilner House proceedings were in very different case. One object of this motion is to resolve the Foss v Harbottle point so that it can be seen whether this action can go to join the others.
On 17 August Mr Steinfeld had been appearing on behalf of the company, and was contending that the agreement should be enforced against the council. On 18 August he found himself in a very different position. Five days earlier the directors had caused a notice of an extraordinary general meeting of the company at 10.30 am on 18 August to be sent by hand to all shareholders. Five special resolutions were put before the meeting; and of course at that meeting no shareholder save the council had any votes. The first resolution, accepting shorter notice of the meeting than the articles required, was carried. The second and third resolutions were alternatives. The second instructed the directors to continue the action against the council, and the third instructed the directors to withdraw the action, and inform the court of the reasons for doing so. The second resolution was defeated and the third carried. The remaining two resolutions, relating to how the costs of the proceedings should be borne, were both defeated.
As a result of these resolutions, by the time that Mr Steinfeld was able to address me on the morning of 18 August, his instructions had been drastically altered. Instead of seeking to enforce the agreement, he had been instructed to seek leave to discontinue the action; and he applied accordingly. He also appeared on behalf of the applicant, and sought leave for her to intervene and prosecute the action under one of the exceptions from the rule in Foss v Harbottle. In addition, he wished to seek an order under the Companies Act 1980, s 75; but it was pointed out to him that such an application should be made by petition to the Companies Court rather than by motion to the Chancery Division in its ordinary jurisdiction, and so he proceeded with his application to take over the existing proceedings. It seemed plain to me that it was highly desirable on many counts that there should be an opportunity for all concerned to consider the effect of counsel’s compulsory volte face that morning. In particular, the company and the applicant ought to be separately represented, and the applicant ought to serve a notice of motion which would enable all concerned to know exactly what she was seeking. Accordingly, counsel’s two applications on behalf of his disparate clients were both adjourned for six days to allow the proper steps to be taken.
By a notice of motion which appears to have escaped dating, the applicant seeks an order that she, suing on behalf of herself and all other shareholders in the company (other than the council), should be substituted as plaintiff in the action, that the company should be joined as an additional defendant, and that the action should continue in the applicant’s name as a derivative action. ‘Derivative action’, I may say, is the convenient name to apply to an action by a member of a company who sues on behalf of the company to enforce rights derived from that company. At any rate at present, I need say nothing about the precise form in which the relief is sought; the question is whether or not the applicant is entitled to any relief of this nature.
When the case came back before me on 24 August, Mr Steinfeld no longer appeared for the company, but for the applicant alone. Mr King appeared for the company, and renewed the application for leave to discontinue the action. The company could discontinue the action without leave, but in that case the company would have to pay all the costs of the proceedings: see RSC Ord 21, r 2; Ord 62, r 10. As the company was not willing to do this, said counsel, he sought leave to discontinue under Ord 21, r 3, so as to invoke the court’s discretion as to the payment of costs. As I have indicated, it was agreed that there was little point in counsel for the company remaining while counsel for the applicant and counsel for the council argued the major point, and so he departed, leaving his application to be dealt with after that point had been decided.
The position of counsel for the council is relatively simple. The action was brought by the company. The company now wishes to discontinue it, and should be allowed to do so. The applicant has no cause of action since the agreement was made not with her but with the company. She therefore has no right of action against the council. As for suing in the name of the company, the rule in Foss v Harbottle stands in her path, and she can bring herself within none of the exceptions from that rule.
When Sir James Wigram V-C decided Foss v Harbottle it may be doubted whether he foresaw the vigorous and active life which his decision would lead, or the many controversial obscurities that would arise about actual or possible exceptions from the rule that he was laying down. In its essence, the basis of the rule is simple enough. If a wrong is done to a company, then it is the company alone which can decide whether or not to sue in respect of that wrong; and that decision, like all company decisions, must be made by the appropriate body, either the directors or the company in general meeting, acting by a majority if necessary. Even if the minority is profoundly convinced that a decision not to sue is wrong, the minority is a minority and not the majority. In the present case, not a single vote was cast against discontinuing the action, and that is that.
If the rule in Foss v Harbottle had remained unqualified, the way would have been open for the majority to stultify any proceedings which were for the benefit of the minority and to the disadvantage of the majority. Accordingly, a number of exceptions from the rule have been established; and it is here that the difficulties begin. (For convenience, I use the word ‘exceptions’ to embrace cases which are outside the true scope of the rule.) It is far from clear just what the exceptions are, or what is the ambit of some of them.
I do not think that it can simply be said that there is an exception from the rule whenever the justice of the case requires it. There are some dicta which support such a view (see eg Edwards v Halliwell [1950] 2 All ER 1064 at 1067 per Jenkins LJ), and this seems to have been part of the ratio in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1980] 2 All ER 841 at 877, [1981] Ch 257 at 327. But in the Court of Appeal in the latter case, the court observed that this was ‘not a practical test’ (see [1982] 1 All ER 354 at 366, [1982] 2 WLR 31 at 47); and I would respectfully concur. If it were the test, 1 feel no doubt that in this case the applicant would succeed.
Although the concept of injustice is not the test, I think that it is nevertheless a reason, and an important reason, for making exceptions from the rule; yet the reasons for an exception must not be confused with the exception itself. If the test were simply justice or injustice, this would mean different things to different men; and the courts have in fact proceeded by way of formulating, not always with great clarity, a number of individual exceptions. The subject has, indeed, been gradually developing; and unless the remedy introduced by the Companies Act 1980, s 75 inhibits that development, no doubt one day the courts will distil from the exceptions some guiding principle that is wide enough to comprehend them all and yet narrow enough to be practicable and workable. It may be that the test may come to be whether an ordinary resolution of the shareholders could validly carry out or ratify the act in question; but I do not think that a motion in the Long Vacation is the time or place for a judge to attempt any far-reaching analysis of the exceptions, or any distillation of a guiding principle to be found in them.
Counsel’s basic contention for the council was founded on the distinction between directors and shareholders. Directors of a company admittedly owe a fiduciary duty to the company, whereas shareholders do not. In this case the council owns shares in the company but is not a director of the company, and so owes no fiduciary duty to it. When voting, a shareholder may consult his own interests, and may use his voting power to protect himself from being sued by the company. Where the majority shareholders genuinely believe that it is in the best interests of the company as a whole that an action by the company should not be brought, that is decisive, unless no reasonable shareholder in their position could hold this belief. The self-interest of the council, though relevant, was not a determinative factor; and there was no separate category for the ‘expropriation’ cases, ie where the company was being deprived of some of its property, whether a right of action or anything else. In support of these propositions counsel for the council relied on a variety of authorities, including North-West Transportation Co Ltd v Beatty (1877) 12 App Cas 589, Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, Sidebottom v Kershaw Leese & Co Ltd [1920] 1 Ch 154, Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9, [1926] All ER Rep 498, Greenhalgh v Arderne Cinemas Ltd [1950] 2 All ER 1120, [1951] Ch 286, Pavlides v Jensen [1956] 2 All ER 818, [1956] Ch 565 and Clemens v Clemens Bros Ltd [1976] 2 All ER 268.
Now the question is how far authorities such as these on the validity of making alterations in the articles fit in with the rule in Foss v Harbottle (1843) 2 Hare 461, 67 ER 189, and its exceptions; for counsel for the council accepted, as he had to, that the line of authority on altering the articles has not yet been applied to the rule in Foss v Harbottle and its exceptions. I do not think that counsel ever succeeded in answering that question satisfactorily. Plainly there must be some limit to the power of the majority to pass resolutions which they believe to be in the best interests of the company and yet remain immune from interference by the courts. It may be in the best interests of the company to deprive the minority of some of their rights or some of their property, yet I do not think that this gives the majority an unrestricted right to do this, however unjust it may be, and however much it may harm shareholders whose rights as a class differ from those of the majority. If a case falls within one of the exceptions from Foss v Harbottle, I cannot see why the right of the minority to sue under that exception should be taken away from them merely because the majority of the company reasonably believe it to be in the best interests of the company that this should be done. This is particularly so if the exception from the rule falls under the rubric of ‘fraud on a minority’. I accept, of course, that there are circumstances in which a shareholder may properly vote in favour of the company discontinuing an action by the company against himself, as in East Pant Du United Lead Mining Co Ltd v Merryweather (1864) 2 Hem & M 254, 71 ER 460; but in that case there was no question of the discontinuance injuring one category of shareholders to the benefit of another.
It was on the firmly established exception of ‘fraud on a minority’ that counsel for the applicant mainly relied. It does not seem to have yet become very clear exactly what the word ‘fraud’ means in this context; but I think it is plainly wider than fraud at common law, in the sense of Derry v Peek (1889) 14 App Cas 337, [1886–90] All ER Rep 1. In a valuable survey of the authorities, Templeman J recently came to the conclusion that this head permitted the minority to sue even though there had not been even an allegation of fraud: see Daniels v Daniels [1978] 2 All ER 89, [1978] Ch 406. That was a case in which a husband and wife were the two directors of a company and also the majority shareholders. They caused the company to sell to the wife land owned by the company; and four years later she sold the land for over 28 times what she had paid for it. The judge refused to strike out the statement of claim of minority shareholders in Foss v Harbottle proceedings against the two directors and the company. The principle which he derived from the cases was that ‘a minority shareholder who has no other remedy may sue where directors use their powers, intentionally or unintentionally, fraudulently or negligently, in a manner which benefits themselves at the expense of the company’ (see [1978] 2 All ER 89 at 96, [1978] Ch 406 at 414). Apart from the benefit to themselves at the company’s expense, the essence of the matter seems to be an abuse or misuse of power. ‘Fraud’ in the phrase ‘fraud on a minority’ seems to be being used as comprising not only fraud at common law but also fraud in the wider equitable sense of that term, as in the equitable concept of a fraud on a power.
Now of course Daniels v Daniels was a case on acts by directors as such, rather than by shareholders, and I do not forget this. At the same time it seems to me to be useful as preventing ‘fraud’ from being read too narrowly. Suppose, too, the decision to sell the land had been made not by the husband and wife qua directors, but by a resolution of the company carried by their votes: could it then be said that the minority could not sue? Is this exception from the rule in Foss v Harbottle open to easy evasion by directors who hold the majority of votes in general meeting if they take care to reach their decisions not by voting as directors but by voting as shareholders? I think not.
In considering whether there is a fraud on a minority in this case in the sense which this phrase has acquired, and whether counsel for the council has made good his main contention, certain matters seem plain enough. First, I do not think that it can reasonably be said to have been established that it is, or could reasonably be thought to be, for the benefit of the company that the action should be discontinued. This is not a case of a trading company, seeking to make a profit. The company is a non-profit-making company, and so the test cannot be the financial benefit of the company. The company was formed for a particular purpose, namely, to manage the block of flats under the control of the purchasers of the flats; and the covenant by the council with the company was part of the mechanism for securing this result. On the face of it I do not think that it can readily be said to be for the benefit of a company to stultify a substantial part of the purpose for which it was formed. Of course, there may be difficulties about obtaining the necessary funds to support the litigation, and if these difficulties are not overcome it will be impossible to carry out the company’s purpose: but it is one thing to say that it is not for the company’s benefit for it to attempt to carry out its purpose, and another thing to say that although it is for the company’s benefit to do this, unfortunately it has become impossible. Further, where, as here, a member of a minority seeks to litigate on the company’s behalf, the question ceases to be merely one of the adequacy of the company’s funds.
Second, it is very far from clear that the council, or any properly authorised organ of the council, ever adequately considered and decided what was for the company’s benefit before voting at the extraordinary general meeting. The only evidence on the point is an affidavit by Mr Gee, an assistant solicitor with the council, sworn on 21 August. This was eight days after the notice of the meeting had been given and three days after the meeting had been held. This affidavit sets out a variety of matters which it is said that the council considered. The council, it is said, doubted whether the company’s interests were best served by the prosecution of the action, for certain reasons. One was that even if cl 3(1) of the agreement was not specifically enforced against the council, the scheme for the administration of the block of flats would still be carried out under the obligations contained in the long leases, including the scheme of development, or building scheme. There were also the financial problems involved in litigating (with various ramifications), and doubts about the specific enforceability of cl 3(1) of the agreement. The financial position of the company would not be affected if no further long leases were granted, and nobody except the purchasers of flats could benefit from the litigation. The affidavit referred to advice given to the council that at the meeting the council could vote as it wished, subject to the obligation to vote in what the council bona fide considered to be in the best interests of the company. The council’s conclusion was that it was not in the interests of the company that cl 3(1) should be enforced against the council, and concern was expressed that the council would have to finance both sides of the litigation. The council therefore voted against continuing the action. Finally, the affidavit states that the council ‘believes for the reasons stated above that it has acted in the best interests of the Company though it readily concedes that its own interests as the housing authority are also best served if these proceedings are not prosecuted’.
Two features of this affidavit stand out. First, there is nothing to match the elaborate comparisons of the pros and cons that had preceded the decisions of the committees on 30 and 31 July. There are many pros and no cons: all is one-sided. Second, there is not a word to indicate what bodies or persons carried out this process of considering what was for the benefit of the company: all is expressed in terms of ‘the defendant’, ie the council. Instead of a balanced consideration by a committee or committees (or, indeed, a chairman of a committee under emergency powers), there is a one-sided argument considered anonymously. I found this an unimpressive demonstration of a proper consideration of what was in the best interests of the company as a whole; and the fact that the suppression of the action was so plainly in the interests of the council made it obvious that it was important to demonstrate that this was not the real reason for the decision.
Third, the council does not appear to have considered the effect of its vote on the rights of purchasers qua shareholders. Counsel for the council emphasised more than once that the applicant’s real complaint was not as a shareholder but as a purchaser of a flat. Instead of having as her neighbours the occupants of 59 other flats which had all been purchased on long leases, she would have only 11 flats occupied thus, and 48 occupied by tenants who would not have the stake in the block of flats which the purchase of long leases would have obtained. That, of course, is so; but it is not all. What she bought, inter alia, was a share which had no voting rights, but would have voting rights as a future point of time, namely, when all the other flats had been sold; and the due arrival of that time was secured, so it seemed, by cl 3(1) of the agreement, and recognised by recital (4) of the lease. Furthermore, when she obtained her voting rights, she and all the other purchasers of flats would be in control of the company, which would not only manage the block of flats as they collectively wished, but would also, as landlord, be able to enforce the terms of the leases against all the purchasers. The council’s conclusion that it is in the best interests of the company that cl 3(1) of the agreement should not be enforced is a conclusion that it is in the best interests of the company (including the applicant as one of the corporators) that this state of affairs, so plainly intended by the documents, should never be reached; and there is not a shred of evidence to suggest that this was ever considered by the council.
On day 4 of the hearing counsel for the council attempted to repair this omission. It was never the intention of the council, he said, to deprive the purchasers of their votes, and the council was willing to arrange that the 12 purchasers should be given immediate voting rights. Counsel for the applicant did not think much of that offer; nor do I. It falls far short of what was intended when the purchasers acquired their shares; and to have 12 votes against the council’s 48, all in one hand, would not enable them to defeat even an extraordinary or special resolution. The making of the offer at that stage merely reinforced the plain conclusion that the council had not previously considered this when purporting to decide what was in the best interests of the company.
It accordingly seems to me that even if counsel for the council were right in his main submissions of law (and I do not think that he is), as the evidence stands he has not got the necessary facts to support them. This is, of course, only a motion, and there has been no viva voce evidence or cross-examination on affidavits. It is clear from the decision of the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER 354, [1982] 2 WLR 31 that it is right that a Foss v Harbottle point should where possible be decided as a preliminary issue and not left for determination at the trial. On such an application the court has to do the best it can on the evidence and other material which the parties have chosen to put before it, even though further evidence and other material may well be put forward later, and perhaps lead to other conclusions. I may add that if counsel for the council were right, and the test was whether the majority genuinely believed that their action was in the best interests of the company, the genuineness of the belief would often be difficult to decide as a preliminary issue without virtually a full trial of the point.
As matters appear to me now, it seems clear enough that the council has throughout been actuated by its desire to put into effect its new housing policy, even though that plainly and admittedly involves the council in a breach of contract, in depriving the purchasers of flats of their rights as shareholders, and in destroying the scheme under which they were induced to buy their flats. That new housing policy may well be an entirely right and proper policy for the council to adopt for any block of flats where that can be done without committing flagrant breaches of contract; but it is a different matter where, as for this block, the policy cannot be carried out without committing such breaches. Furthermore, I find it impossible to give any real credence to the contention that the reason why the council voted in favour of discontinuing the action was that the council considered this to be in the best interests of the company. The council did this in order to suppress proceedings which stood in the way of carrying out their new housing policy regardless of breaches of contract and injuries to the existing purchasers of flats. As for whether it was reasonable to believe that it was in the best interests of the company not to sue, it must be remembered that the directors, who had been appointed by the council, had decided to sue.
At one stage counsel for the council urged that the purchasers of flats had been legally advised in their purchases, so that in effect they had only themselves to blame for not perceiving that there was no direct covenant with them to carry out the scheme and that they would have to rely on the company enforcing the covenant by the council. What in fact the purchasers and their solicitors perceived I do not know. Plainly, those who know that they are dealing with a trickster who will seek to escape by any loophole, however dishonest, must seek to tie him up so tightly that escape is impossible. But these purchasers and their solicitors were dealing with the Greater London Council, and doubtless they considered that they were dealing with a great body which would honourably carry out its agreements. It ill becomes a council intent on not performing its contract to taunt the victims with their failure to foresee its untrustworthiness. This is a shabby contention.
As I have indicated, I do not consider that this is a suitable occasion on which to probe the intricacies of the rule in Foss v Harbottle and its exceptions, or to attempt to discover and expound the principles to be found in the exceptions. All that I need say is that in my judgment the exception usually known as ‘fraud on a minority’ is wide enough to cover the present case, and that if it is not, it should now be made wide enough. There can be no doubt about the 12 voteless purchasers being a minority; there can be no doubt about the advantage to the council of having the action discontinued; there can be no doubt about the injury to the applicant and the rest of the minority, both as shareholders and as purchasers, of that discontinuance; and I feel little doubt that the council has used its voting power not in order to promote the best interests of the company but in order to bring advantage to itself and disadvantage to the minority. Furthermore, that disadvantage is no trivial matter, but represents a radical alteration in the basis on which the council sold the flats to the minority. It seems to me that the sum total represents a fraud on the minority in the sense in which ‘fraud’ is used in that phrase, or alternatively represents such an abuse of power as to have the same effect.
I appreciate, of course, that there is a difference between the applicant’s rights as a shareholder and her rights as a purchaser of a flat; but I think, first, that the injury to her rights as a shareholder suffices in itself, and, second, that her rights as a shareholder form such an integral part of the scheme as a whole as to make it unreal to consider those rights independently of her rights as a purchaser. No right of a shareholder to vote in his own selfish interests or to ignore the interests of the company entitle him with impunity to injure his voteless fellow shareholders by depriving the company of a cause of action and stultifying the purpose for which the company was formed.
Many other matters were touched on in argument, but I do not think that I need explore them. One such matter that I should perhaps mention was whether the scheme for selling the flats was ultra vires. Counsel for the council has a contention that the council had lacked the power to fetter its future action by entering into the arrangements for selling long leases that were made in this case. That seems to depend mainly on the meaning of an undefined phrase in the new version of s 104(2) of the Housing Act 1957 (inserted by the Housing Act 1980, s 91), which provides that a ‘disposal’ of housing ‘may be effected in any manner’. It is possible, I suppose, that any house or flat disposed of under this provision must be dealt with independently, and that no scheme of disposition which affects houses or flats remaining undisposed of can be valid; but I find that improbable. However, I do not have to decide anything on this point, and so I leave it for resolution later, if need be.
Questions were also raised whether specific performance of the covenant would be decreed. Again, it is not for me to decide this. I only observe that with many prospective purchasers who had concluded bargains subject to contract it does not look as if it would be very burdensome or difficult for the council to use its best endeavours to sell the remaining flats on long leases; and to establish that damages would be an adequate remedy would be no small task.
In the end, my conclusion is that this motion should succeed. I do not think that the council can in this way wriggle out of the proceedings against it to enforce its contract. Subject to any question that there may be on the wording, I would propose to make an order in terms of para 1 of the notice of motion. By all means let the council carry out its new housing policy by all honourable and proper methods at its disposal; but the applicant must be allowed to test whether this can be done in the case of Kilner House, and is not to be muzzled by the council’s resort to Foss v Harbottle. I need only add that, as arranged when I reserved judgment, all matters of the terms of the order, costs, and the application of counsel for the company for leave to discontinue, and, indeed, any other incidental matters, will stand over until all the counsel concerned are available, the date to be arranged through the usual channels.
Order accordingly.
ESTMANCO (KILNER HOUSE) LTD
GREATER LONDON COUNCIL
CHANCERY DIVISION
18 SEPTEMBER 1981
LN-e-LR/1981/13 (CA-E)
OTHER CITATIONS
[1982] 1 ALL ER 437
BEFORE HIS LORDSHIP: LORD SIR ROBERT MEGARRY V-C
REPRESENTATION
Solicitors: Woodroffes (for the applicant);
R A Lanham (for the council);
Bartlett & Gregory, Bromley (for the company).
Azza M Abdallah Barrister.
MAIN ISSUES
COMPANY LAW:- Minority shareholder – Right of minority shareholder to maintain representative action – Fraud on minority – Action against majority shareholder – Company bringing action against majority shareholder for breach of contract – Majority shareholder having 100% of voting rights – Majority shareholder using voting power to force company to discontinue action – Majority shareholder not a director and owing no fiduciary duty to company – Whether majority shareholder entitled to vote according to its own interest – Whether majority shareholder’s vote an abuse or misuse of power – Whether a fraud on minority.
REAL ESTATE LAW:- Vested interest in property – Publicly owned flats sold on long leases and managed through independent nonprofit company – Purchaser of – Right to maintain action to defend nature of interest in/character of property
NONPROFIT LAW:- Estate holding and management – Use of nonprofit structure to hold and manage public assets – Issues arising therefrom
CHILDREN AND WOMEN LAW:- Women and Real Estate – Defence of interests in property – Minority shareholding rights – When can give right to sue in representative action regardless of the wish of majority
Cases referred to in judgment
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, [1900–3] All ER Rep 746, CA, 9 Digest (Reissue) 624, 3716.
Clemens v Clemens Bros Ltd [1976] 2 All ER 268, Digest (Cont Vol E) 59, 4083a.
Daniels v Daniels [1978] 2 All ER 89, [1978] Ch 406, [1978] 2 WLR 73, Digest (Cont Vol E) 60, 4483a.
Derry v Peek (1889) 14 App Cas 337, [1886–90] All ER Rep 1, HL, 9 Digest (Reissue) 123, 650.
East Pant Du United Lead Mining Co Ltd v Merryweather (1864) 2 Hem & M 254, 71 ER 460, 9 Digest (Reissue) 628, 3750.
Edwards v Halliwell [1950] 2 All ER 1064, CA, 45 Digest (Repl) 545, 1231.
Foss v Harbottle (1843) 2 Hare 461, 67 ER 189, 9 Digest (Reissue) 689, 4094.
Greenhalgh v Arderne Cinemas Ltd [1950] 2 All ER 1120, [1951] Ch 286, CA, 9 Digest (Reissue) 611, 3639.
North-West Transportation Co Ltd v Beatty (1877) 12 App Cas 589, PC, 9 Digest (Reissue) 629, 3753.
Pavlides v Jensen [1956] 2 All ER 518, [1956] Ch 565, [1956] 3 WLR 224, 9 Digest (Reissue) 755, 4485.
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER 354, [1982] 2 WLR 31, CA; rvsg in part [1980] 2 All ER 841, [1981] Ch 257, [1980] 3 WLR 543.
Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1929] 2 KB 9, [1926] All ER Rep 498, CA, 9 Digest (Reissue) 612, 3643.
Sidebottom v Kershaw, Leese & Co Ltd [1920] 1 Ch 154, CA, 9 Digest (Reissue) 612, 3642.
Cases also cited
Atwool v Merryweather (1867) LR 5 Eq 464.
Bamford v Bamford [1969] 1 All ER 969, [1970] Ch 212, CA.
Beswick v Beswick [1967] 2 All ER 1197, [1968] AC 58, HL.
Dowty Boulton Paul Ltd v Wolverhampton Corp [1971] 2 All ER 277, [1971] 1 WLR 204.
Hogg v Cramphorn Ltd [1966] 3 All ER 420, [1967] Ch 254.
Lloyd’s v Harper (1880) 16 Ch D 290, CA.
Menier v Hooper’s Telegraph Works (1874) 9 Ch App 350, LJJ.
Smith (Howard) Ltd v Ampol Petroleum Ltd [1974] 1 All ER 1126, [1974] AC 821, PC.
Wallersteiner v Moir (No 2) [1975] 1 All ER 849, [1975] QB 508, CA.
Windsor and Maidenhead Royal Borough v Brandrose Investments Ltd [1981] 3 All ER 38, [1981] 1 WLR 1083.
Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 All ER 571, [1980] 1 WLR 277, HL.
Alan Steinfeld for the applicant.
CA Brodie QC and W Hicks for the council.
MR King for the company.
HISTORY AND SUMMARY OF FACTS
A local authority (the council) owned a block of 60 flats which it decided to sell on long leases. In anticipation of the sales the council formed a non-profit-making company for the management of the flats, when sold, in accordance with an agreement made with the council. The agreement provided that the council was to use its best endeavours to dispose of the flats on long leases, that the 60 shares in the company were to vest initially in the council but that one share was to be allocated to each flat, and that when a flat was sold the appropriate share was to be transferred to the purchaser of the flat. Each share was to have voting rights in the company when all 60 flats had been sold but until that time all voting rights vested in the council. After 12 flats had been sold, the council changed its policy and decided that the remaining flats should be let to council tenants instead of being sold on long leases. The company issued a writ against the council seeking, inter alia, an injunction restraining the council from disposing of the unsold flats except by long leases in accordance with the agreement made with the company. At an extraordinary general meeting of the company, at which only the council was entitled to exercise voting rights, a resolution was passed instructing the directors of the company to withdraw the action. The applicant, who was the purchaser of one of the 12 flats already sold on a long lease and who had thus been allotted one share in the company, sought leave to intervene to prosecute the action. The applicant moved for an order that she should be substituted as the plaintiff in the action, suing on behalf of herself and all other shareholders in the company other than the council, that the company should be joined as an additional defendant and that the action should be permitted to continue in her name as a derivative action. The council contended (i) that the applicant had no right of action against the council because the agreement was made not with her but with the company, and (ii) that the applicant, although a minority shareholder, did not come within any of the exceptions to the rule preventing a member of a company from maintaining an action on behalf of the company for a wrong done to the company because the council was not a director of the company and owed it no fiduciary duty and had merely exercised its voting powers in its own interest as it was entitled to do.
Held –
(1) The exception to the rule that a member of a company could not maintain an action on behalf of the company for a wrong done to the company which permitted a member to sue where there was a fraud on a minority of shareholders extended beyond fraud at common law and included an abuse or misuse of power by the majority, whether acting as directors or shareholders. Thus, although a majority shareholder, unlike a director, owed no fiduciary duty to the company and was entitled to vote in his own interest, that did not give him an unrestricted right to pass a resolution depriving a minority shareholder of his rights or property merely because the majority shareholder reasonably believed that his actions were in the best interests of the company (see p 444 h j and p 445 b to f, post); Daniels v Daniels [1978] 2 All ER 89 applied; Foss v Harbottle (1843) 2 Hare 461 considered.
(2) Since it had not been established that it was for the benefit of the company that its action should be discontinued or that the council in exercising its majority vote at the extraordinary general meeting had ever adequately considered what was for the company’s benefit or the effect of its vote on the rights of existing purchasers as shareholders (who would consequently be deprived of their future voting rights and with them the right to share in the management of the company and the block of flats), and since the council’s vote would enable it to implement its new policy regardless of the breaches of contract and injuries to existing purchasers that ensued, the council’s vote amounted to a fraud on the minority shareholders or an abuse of power. Accordingly, the action would be allowed to proceed with the applicant substituted as plaintiff and the company added as a defendant
MAIN JUDGMENT
Cur adv vult
18 September 1981. The following judgment was delivered.
SIR ROBERT MEGARRY V-C, (read the following judgment):
In this motion the main point concerns the application of the rule in Foss v Harbottle (1843) 2 Hare 461, 67 ER 189 to a non-profit-making company controlled by a local authority. Put shortly, the applicant, who is one of the shareholders in the company who has no voting rights, seeks to take over and proceed with an action which the company has brought to enforce a covenant with it made by the local authority. The applicant wishes to do this even though the local authority, which has all the voting rights in the company, has caused the company to apply to discontinue the action. After various preliminary skirmishes, I heard the motion for four days during the present Long Vacation. Mr Steinfeld appears for the applicant, the shareholder, and Mr Brodie appears for the local authority, the Greater London Council: I shall call it ‘the council’. Mr King appeared for the company, Estmanco (Kilner House) Ltd (which I shall call ‘the company’), though for reasons which will appear he was released from further attendance until the fate of the application had been determined. The matter was obviously one of some urgency because until it is decided it cannot be determined whether the council is at liberty to let a number of flats in the manner that it wishes.
The facts, though not concise, are neither complicated nor for the most part in dispute. The council owns a rehabilitated block of 60 flats in Lambeth called Kilner House. In June 1980 the council began to market the flats under arrangements whereby a lease of each flat for 135 years, expiring in 2115, would be sold. The flats are relatively small and inexpensive, and there was considerable demand for them, especially from young first-time buyers. However, squatters moved in, and after they had been evicted in January 1981 repairs were needed, though some of the repairs to the individual flats were left undone, and an allowance in the price was made. Before the council halted any further sales, the sales of 12 of the 60 flats had been completed, and these flats are now occupied by the purchasers. In addition, deposits had been paid on a ‘subject to contract’ basis for a number of unsold flats.
Kilner House is only one of a number of blocks of flats which are all in much the same position. Each has its own separate management company. In this case, the company was formed on 28 October 1980 for the purpose of managing the Kilner House flats in accordance with an agreement intended to be made with the council. It has an authorised and issued share capital of £3,000, divided into 60 shares of £50 each. Under the articles, one share was allocated to each flat. Initially, all the shares were to be allotted to the council or its nominees; but as each flat was sold, the share allocated to it was to be transferred to the purchaser. This has been done for each of the 12 flats sold; and the applicant, as the purchaser of one of these flats, holds one share in the company. Each shareholder has a right to attend and address general meetings of the company, but the only shares which carry any vote at such meetings are those vested in the council. However, when all 60 flats have been sold, all the shares would then carry the right to vote at general meetings. Under the memorandum of association, the first two objects were to enter into the intended agreement with the council and to manage the flats; and cl 4 requires the income and property of the company to be applied solely to promoting its objects, and prohibits any portion thereof being paid to members. Clause 5 provides that on a winding up any surplus is to go not to the members but to a company or companies with similar objects, and in default to some charitable object.
The three directors of the company are all employees of the council. As events have fallen out, they have been put in a position of some difficulty, notwithstanding the letter which each of them received from the council on appointment. This letter gave them liberty of action as directors despite employment by the council, provided they acted in good faith; and there was an indemnity by the council for such acts. Nothing directly depends on the position of the directors, and I can turn to the management agreement, which is important.
This agreement is dated 18 March 1981, and it was made under seal between the council and the company. It recites the proposed dispositions by long leases (a copy of such a lease being annexed to the agreement), and it states that the company has been incorporated so as to provide for the effective maintenance and management of the block of flats and the provision of services for each and every part of it. It then provides for the company to provide and maintain specified services as from 25 March 1981. The council is to pay to the company a management contribution in respect of the unsold flats, and the company is to collect service charges from the purchasers of the flats that have been sold. After various provisions of some elaboration dealing with the computation of these payments, there is cl 3(1), which is at the heart of the matter.
Clause 3(1) of the agreement runs:
‘The Council shall use its best endeavours to dispose of all the dwellings [on] long leases which shall be in the form of the Form of Lease or as near thereto as the circumstances may admit or require and if any such long lease shall cease to subsist before the grant of the Superior Lease hereinafter described to grant another long lease in lieu thereof.’
Clause 3(2) provides that on the grant of each such long lease the council is to transfer to the purchaser the share in the company allocated to the flat that has been leased; and then cl 3(3) provides that when long leases of all the flats have been granted, the council will grant the company a superior lease for the whole block in the form annexed to the agreement. The superior lease will give the company a reversion of three days on the leases of the flats; and it will enable the company to enforce the terms of the leases against the owners of the flats.
Now no doubt there are details in this scheme on which problems may arise. One may, for instance, question whether the draftsman of cl 3(3) of the agreement had the rule against perpetuities firmly in mind at the time. But by and large the scheme seems clear enough. Until all the flats were sold, the council is to remain in control. Once all the flats were sold, the council would drop out of the picture, and the company, controlled by the owners of the flats, would run the block as landlord. The leases of the flats reserved no rent in the ordinary sense of the word, the lessees merely covenanting to pay the service charges ‘by way of rent’; and the superior lease reserved no rent at all. Once all the flats were sold, the council would have received the whole purchase price for the leases, and the tenants would be left to run the company as they thought best.
That was the basis on which the applicant and the purchasers of the other 11 flats bought their long leases. In each long lease there are in cl 2 various covenants by the lessee with the council and the company, mostly of a positive nature. In cl 3 the lessee enters into a series of restrictive covenants of an estate management nature; and these covenants are expressed to be covenants with the lessor and separate covenants severally with the company and the relevant lessees. This appears to make these restrictive covenants mutually enforceable between the lessees, the council and the company as part of a leasehold scheme of development. There is, however, no covenant by the council with each lessee that the council will sell the remaining flats on long leases. Instead, there is a recital, in which the council is called ‘the Lessor’, the agreement of 18 March 1981 is called ‘the Agreement’, the company is called ‘the Management Company’ and the block of flats is called ‘the Estate’. The recital, numbered (4), runs:
‘The Lessor intends and has by Clause 3 of the Agreement agreed with the Management Company to dispose of all the dwellings within the Estate by means of leases in the form substantially of this Lease or as near thereto as the circumstances may admit or require to the intent that covenants in the form of those contained in Clause 3 of this Lease shall so far as the law may allow be mutually enforceable between the lessees from time to time of those dwellings.’
I now come to the council’s change of policy. Early last May there were elections for membership of the council; and as a result there was a political change in the control of the council. In June, I was told, the council decided on a change in its housing policy which affected this and many other blocks of flats; I have not seen a copy of any resolution. Instead of selling the flats on long leases, the council took the view that the flats should be let to applicants on their housing list and to families in need of accommodation. Let me say at once that nothing whatever arises for decision in this motion about whether the new policy or the old policy was the better policy. Provided a local authority complies with the law, matters of policy on housing, as on other things, are matters for decision by that authority, and not by the courts.
The change of policy was not put into force precipitately or without a proper exploration of the problems involved. There is in evidence an impressive volume of documents, including a long opinion by leading counsel (not leading counsel who has appeared before me on behalf of the council) in which the council’s officers explore the various problems, and painstakingly set out the pros and cons of what throughout has been recognised would be a considered and deliberate breach of contract by the council. Much of the emphasis was on whether the courts would be likely to restrain such a breach by injunction instead of merely awarding damages. The attitude of the council throughout was that it was ready and willing to pay damages but that it wished above all things to avoid being compelled to perform the covenant. Possibilities of the surcharge and disqualification of councillors were also present. At this stage there was nothing to suggest that the rule in Foss v Harbottle, or, indeed, any element of company law, was in mind.
I have referred to the council’s attitude, though on the documents before me it appears that the attitude was that of the council’s housing committee and its finance and general purposes committee, rather than the full council. No doubt those committees have authority to speak for the council on these matters. At all events, no point on this has arisen. After considering all the material before them the committees reached their conclusion.
On 30 July the housing committee decided that all the unsold flats in Kilner House should be let to high priority applicants, and that the decision made on 7 July 1980 to sell these flats should not be acted on. This decision was not to be acted on for three weeks so that the 12 purchasers of the flats should have an opportunity of giving up their flats in return for the council paying them compensation for the resulting diminution in value of their flats (if any) as determined by arbitration, and, presumably, returning their purchase price. The resolution is not very clear, but the offer was not accepted, and I need not pursue the point. It was also resolved that no such proposal was to be put forward on the basis of honouring the 35 cases in which there had been an offer and acceptance; no doubt this refers to the ‘subject to contract’ cases.
The committee also gave their officers certain authority to act on these decisions and to contest any litigation. This authority appeared to include authority to secure the winding up of the company and the return of the flats to direct management by the council, though again the wording is not very clear. The resolution also expressed the council’s willingness to make certain payments by way of compensation, and so on. Some of these resolutions applied to other flats as well, and some were specific to Kilner House. On the next day, 31 July, the resolutions were confirmed by the finance and general purposes committee.
In those circumstances the directors of the company not surprisingly took the view that the company ought to seek to enforce the agreement with the council dated 18 March 1981; and on 3 August the company issued a writ against the council. This sought an injunction against disposing of any of the flats save by long leases, or doing or permitting anything which would be a breach of cl 3(1) of the agreement. The writ also sought a mandatory injunction requiring the council to use its best endeavours to dispose of the flats on long leases, and damages in addition to or in lieu of an injunction. An amendment made on 11 August added a claim for specific performance of the agreement, and damages in addition to or in lieu thereof.
The matter first came before me on 17 August. There had been previous proceedings before Glidewell J on 6 August, and the present proceedings were entangled with other proceedings concerning blocks of flats known as St Paul’s Court and Elgin Avenue. Mr Brodie, then as now, appeared for the council, and withdrew certain concessions which had been made before Glidewell J by other counsel. In the end, on 18 August, arrangements were made for the early trial of the St Paul’s Court and Elgin Avenue cases, on certain terms and subject to certain undertakings, and I need say no more about these cases; but the Kilner House proceedings were in very different case. One object of this motion is to resolve the Foss v Harbottle point so that it can be seen whether this action can go to join the others.
On 17 August Mr Steinfeld had been appearing on behalf of the company, and was contending that the agreement should be enforced against the council. On 18 August he found himself in a very different position. Five days earlier the directors had caused a notice of an extraordinary general meeting of the company at 10.30 am on 18 August to be sent by hand to all shareholders. Five special resolutions were put before the meeting; and of course at that meeting no shareholder save the council had any votes. The first resolution, accepting shorter notice of the meeting than the articles required, was carried. The second and third resolutions were alternatives. The second instructed the directors to continue the action against the council, and the third instructed the directors to withdraw the action, and inform the court of the reasons for doing so. The second resolution was defeated and the third carried. The remaining two resolutions, relating to how the costs of the proceedings should be borne, were both defeated.
As a result of these resolutions, by the time that Mr Steinfeld was able to address me on the morning of 18 August, his instructions had been drastically altered. Instead of seeking to enforce the agreement, he had been instructed to seek leave to discontinue the action; and he applied accordingly. He also appeared on behalf of the applicant, and sought leave for her to intervene and prosecute the action under one of the exceptions from the rule in Foss v Harbottle. In addition, he wished to seek an order under the Companies Act 1980, s 75; but it was pointed out to him that such an application should be made by petition to the Companies Court rather than by motion to the Chancery Division in its ordinary jurisdiction, and so he proceeded with his application to take over the existing proceedings. It seemed plain to me that it was highly desirable on many counts that there should be an opportunity for all concerned to consider the effect of counsel’s compulsory volte face that morning. In particular, the company and the applicant ought to be separately represented, and the applicant ought to serve a notice of motion which would enable all concerned to know exactly what she was seeking. Accordingly, counsel’s two applications on behalf of his disparate clients were both adjourned for six days to allow the proper steps to be taken.
By a notice of motion which appears to have escaped dating, the applicant seeks an order that she, suing on behalf of herself and all other shareholders in the company (other than the council), should be substituted as plaintiff in the action, that the company should be joined as an additional defendant, and that the action should continue in the applicant’s name as a derivative action. ‘Derivative action’, I may say, is the convenient name to apply to an action by a member of a company who sues on behalf of the company to enforce rights derived from that company. At any rate at present, I need say nothing about the precise form in which the relief is sought; the question is whether or not the applicant is entitled to any relief of this nature.
When the case came back before me on 24 August, Mr Steinfeld no longer appeared for the company, but for the applicant alone. Mr King appeared for the company, and renewed the application for leave to discontinue the action. The company could discontinue the action without leave, but in that case the company would have to pay all the costs of the proceedings: see RSC Ord 21, r 2; Ord 62, r 10. As the company was not willing to do this, said counsel, he sought leave to discontinue under Ord 21, r 3, so as to invoke the court’s discretion as to the payment of costs. As I have indicated, it was agreed that there was little point in counsel for the company remaining while counsel for the applicant and counsel for the council argued the major point, and so he departed, leaving his application to be dealt with after that point had been decided.
The position of counsel for the council is relatively simple. The action was brought by the company. The company now wishes to discontinue it, and should be allowed to do so. The applicant has no cause of action since the agreement was made not with her but with the company. She therefore has no right of action against the council. As for suing in the name of the company, the rule in Foss v Harbottle stands in her path, and she can bring herself within none of the exceptions from that rule.
When Sir James Wigram V-C decided Foss v Harbottle it may be doubted whether he foresaw the vigorous and active life which his decision would lead, or the many controversial obscurities that would arise about actual or possible exceptions from the rule that he was laying down. In its essence, the basis of the rule is simple enough. If a wrong is done to a company, then it is the company alone which can decide whether or not to sue in respect of that wrong; and that decision, like all company decisions, must be made by the appropriate body, either the directors or the company in general meeting, acting by a majority if necessary. Even if the minority is profoundly convinced that a decision not to sue is wrong, the minority is a minority and not the majority. In the present case, not a single vote was cast against discontinuing the action, and that is that.
If the rule in Foss v Harbottle had remained unqualified, the way would have been open for the majority to stultify any proceedings which were for the benefit of the minority and to the disadvantage of the majority. Accordingly, a number of exceptions from the rule have been established; and it is here that the difficulties begin. (For convenience, I use the word ‘exceptions’ to embrace cases which are outside the true scope of the rule.) It is far from clear just what the exceptions are, or what is the ambit of some of them.
I do not think that it can simply be said that there is an exception from the rule whenever the justice of the case requires it. There are some dicta which support such a view (see eg Edwards v Halliwell [1950] 2 All ER 1064 at 1067 per Jenkins LJ), and this seems to have been part of the ratio in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1980] 2 All ER 841 at 877, [1981] Ch 257 at 327. But in the Court of Appeal in the latter case, the court observed that this was ‘not a practical test’ (see [1982] 1 All ER 354 at 366, [1982] 2 WLR 31 at 47); and I would respectfully concur. If it were the test, 1 feel no doubt that in this case the applicant would succeed.
Although the concept of injustice is not the test, I think that it is nevertheless a reason, and an important reason, for making exceptions from the rule; yet the reasons for an exception must not be confused with the exception itself. If the test were simply justice or injustice, this would mean different things to different men; and the courts have in fact proceeded by way of formulating, not always with great clarity, a number of individual exceptions. The subject has, indeed, been gradually developing; and unless the remedy introduced by the Companies Act 1980, s 75 inhibits that development, no doubt one day the courts will distil from the exceptions some guiding principle that is wide enough to comprehend them all and yet narrow enough to be practicable and workable. It may be that the test may come to be whether an ordinary resolution of the shareholders could validly carry out or ratify the act in question; but I do not think that a motion in the Long Vacation is the time or place for a judge to attempt any far-reaching analysis of the exceptions, or any distillation of a guiding principle to be found in them.
Counsel’s basic contention for the council was founded on the distinction between directors and shareholders. Directors of a company admittedly owe a fiduciary duty to the company, whereas shareholders do not. In this case the council owns shares in the company but is not a director of the company, and so owes no fiduciary duty to it. When voting, a shareholder may consult his own interests, and may use his voting power to protect himself from being sued by the company. Where the majority shareholders genuinely believe that it is in the best interests of the company as a whole that an action by the company should not be brought, that is decisive, unless no reasonable shareholder in their position could hold this belief. The self-interest of the council, though relevant, was not a determinative factor; and there was no separate category for the ‘expropriation’ cases, ie where the company was being deprived of some of its property, whether a right of action or anything else. In support of these propositions counsel for the council relied on a variety of authorities, including North-West Transportation Co Ltd v Beatty (1877) 12 App Cas 589, Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, Sidebottom v Kershaw Leese & Co Ltd [1920] 1 Ch 154, Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9, [1926] All ER Rep 498, Greenhalgh v Arderne Cinemas Ltd [1950] 2 All ER 1120, [1951] Ch 286, Pavlides v Jensen [1956] 2 All ER 818, [1956] Ch 565 and Clemens v Clemens Bros Ltd [1976] 2 All ER 268.
Now the question is how far authorities such as these on the validity of making alterations in the articles fit in with the rule in Foss v Harbottle (1843) 2 Hare 461, 67 ER 189, and its exceptions; for counsel for the council accepted, as he had to, that the line of authority on altering the articles has not yet been applied to the rule in Foss v Harbottle and its exceptions. I do not think that counsel ever succeeded in answering that question satisfactorily. Plainly there must be some limit to the power of the majority to pass resolutions which they believe to be in the best interests of the company and yet remain immune from interference by the courts. It may be in the best interests of the company to deprive the minority of some of their rights or some of their property, yet I do not think that this gives the majority an unrestricted right to do this, however unjust it may be, and however much it may harm shareholders whose rights as a class differ from those of the majority. If a case falls within one of the exceptions from Foss v Harbottle, I cannot see why the right of the minority to sue under that exception should be taken away from them merely because the majority of the company reasonably believe it to be in the best interests of the company that this should be done. This is particularly so if the exception from the rule falls under the rubric of ‘fraud on a minority’. I accept, of course, that there are circumstances in which a shareholder may properly vote in favour of the company discontinuing an action by the company against himself, as in East Pant Du United Lead Mining Co Ltd v Merryweather (1864) 2 Hem & M 254, 71 ER 460; but in that case there was no question of the discontinuance injuring one category of shareholders to the benefit of another.
It was on the firmly established exception of ‘fraud on a minority’ that counsel for the applicant mainly relied. It does not seem to have yet become very clear exactly what the word ‘fraud’ means in this context; but I think it is plainly wider than fraud at common law, in the sense of Derry v Peek (1889) 14 App Cas 337, [1886–90] All ER Rep 1. In a valuable survey of the authorities, Templeman J recently came to the conclusion that this head permitted the minority to sue even though there had not been even an allegation of fraud: see Daniels v Daniels [1978] 2 All ER 89, [1978] Ch 406. That was a case in which a husband and wife were the two directors of a company and also the majority shareholders. They caused the company to sell to the wife land owned by the company; and four years later she sold the land for over 28 times what she had paid for it. The judge refused to strike out the statement of claim of minority shareholders in Foss v Harbottle proceedings against the two directors and the company. The principle which he derived from the cases was that ‘a minority shareholder who has no other remedy may sue where directors use their powers, intentionally or unintentionally, fraudulently or negligently, in a manner which benefits themselves at the expense of the company’ (see [1978] 2 All ER 89 at 96, [1978] Ch 406 at 414). Apart from the benefit to themselves at the company’s expense, the essence of the matter seems to be an abuse or misuse of power. ‘Fraud’ in the phrase ‘fraud on a minority’ seems to be being used as comprising not only fraud at common law but also fraud in the wider equitable sense of that term, as in the equitable concept of a fraud on a power.
Now of course Daniels v Daniels was a case on acts by directors as such, rather than by shareholders, and I do not forget this. At the same time it seems to me to be useful as preventing ‘fraud’ from being read too narrowly. Suppose, too, the decision to sell the land had been made not by the husband and wife qua directors, but by a resolution of the company carried by their votes: could it then be said that the minority could not sue? Is this exception from the rule in Foss v Harbottle open to easy evasion by directors who hold the majority of votes in general meeting if they take care to reach their decisions not by voting as directors but by voting as shareholders? I think not.
In considering whether there is a fraud on a minority in this case in the sense which this phrase has acquired, and whether counsel for the council has made good his main contention, certain matters seem plain enough. First, I do not think that it can reasonably be said to have been established that it is, or could reasonably be thought to be, for the benefit of the company that the action should be discontinued. This is not a case of a trading company, seeking to make a profit. The company is a non-profit-making company, and so the test cannot be the financial benefit of the company. The company was formed for a particular purpose, namely, to manage the block of flats under the control of the purchasers of the flats; and the covenant by the council with the company was part of the mechanism for securing this result. On the face of it I do not think that it can readily be said to be for the benefit of a company to stultify a substantial part of the purpose for which it was formed. Of course, there may be difficulties about obtaining the necessary funds to support the litigation, and if these difficulties are not overcome it will be impossible to carry out the company’s purpose: but it is one thing to say that it is not for the company’s benefit for it to attempt to carry out its purpose, and another thing to say that although it is for the company’s benefit to do this, unfortunately it has become impossible. Further, where, as here, a member of a minority seeks to litigate on the company’s behalf, the question ceases to be merely one of the adequacy of the company’s funds.
Second, it is very far from clear that the council, or any properly authorised organ of the council, ever adequately considered and decided what was for the company’s benefit before voting at the extraordinary general meeting. The only evidence on the point is an affidavit by Mr Gee, an assistant solicitor with the council, sworn on 21 August. This was eight days after the notice of the meeting had been given and three days after the meeting had been held. This affidavit sets out a variety of matters which it is said that the council considered. The council, it is said, doubted whether the company’s interests were best served by the prosecution of the action, for certain reasons. One was that even if cl 3(1) of the agreement was not specifically enforced against the council, the scheme for the administration of the block of flats would still be carried out under the obligations contained in the long leases, including the scheme of development, or building scheme. There were also the financial problems involved in litigating (with various ramifications), and doubts about the specific enforceability of cl 3(1) of the agreement. The financial position of the company would not be affected if no further long leases were granted, and nobody except the purchasers of flats could benefit from the litigation. The affidavit referred to advice given to the council that at the meeting the council could vote as it wished, subject to the obligation to vote in what the council bona fide considered to be in the best interests of the company. The council’s conclusion was that it was not in the interests of the company that cl 3(1) should be enforced against the council, and concern was expressed that the council would have to finance both sides of the litigation. The council therefore voted against continuing the action. Finally, the affidavit states that the council ‘believes for the reasons stated above that it has acted in the best interests of the Company though it readily concedes that its own interests as the housing authority are also best served if these proceedings are not prosecuted’.
Two features of this affidavit stand out. First, there is nothing to match the elaborate comparisons of the pros and cons that had preceded the decisions of the committees on 30 and 31 July. There are many pros and no cons: all is one-sided. Second, there is not a word to indicate what bodies or persons carried out this process of considering what was for the benefit of the company: all is expressed in terms of ‘the defendant’, ie the council. Instead of a balanced consideration by a committee or committees (or, indeed, a chairman of a committee under emergency powers), there is a one-sided argument considered anonymously. I found this an unimpressive demonstration of a proper consideration of what was in the best interests of the company as a whole; and the fact that the suppression of the action was so plainly in the interests of the council made it obvious that it was important to demonstrate that this was not the real reason for the decision.
Third, the council does not appear to have considered the effect of its vote on the rights of purchasers qua shareholders. Counsel for the council emphasised more than once that the applicant’s real complaint was not as a shareholder but as a purchaser of a flat. Instead of having as her neighbours the occupants of 59 other flats which had all been purchased on long leases, she would have only 11 flats occupied thus, and 48 occupied by tenants who would not have the stake in the block of flats which the purchase of long leases would have obtained. That, of course, is so; but it is not all. What she bought, inter alia, was a share which had no voting rights, but would have voting rights as a future point of time, namely, when all the other flats had been sold; and the due arrival of that time was secured, so it seemed, by cl 3(1) of the agreement, and recognised by recital (4) of the lease. Furthermore, when she obtained her voting rights, she and all the other purchasers of flats would be in control of the company, which would not only manage the block of flats as they collectively wished, but would also, as landlord, be able to enforce the terms of the leases against all the purchasers. The council’s conclusion that it is in the best interests of the company that cl 3(1) of the agreement should not be enforced is a conclusion that it is in the best interests of the company (including the applicant as one of the corporators) that this state of affairs, so plainly intended by the documents, should never be reached; and there is not a shred of evidence to suggest that this was ever considered by the council.
On day 4 of the hearing counsel for the council attempted to repair this omission. It was never the intention of the council, he said, to deprive the purchasers of their votes, and the council was willing to arrange that the 12 purchasers should be given immediate voting rights. Counsel for the applicant did not think much of that offer; nor do I. It falls far short of what was intended when the purchasers acquired their shares; and to have 12 votes against the council’s 48, all in one hand, would not enable them to defeat even an extraordinary or special resolution. The making of the offer at that stage merely reinforced the plain conclusion that the council had not previously considered this when purporting to decide what was in the best interests of the company.
It accordingly seems to me that even if counsel for the council were right in his main submissions of law (and I do not think that he is), as the evidence stands he has not got the necessary facts to support them. This is, of course, only a motion, and there has been no viva voce evidence or cross-examination on affidavits. It is clear from the decision of the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER 354, [1982] 2 WLR 31 that it is right that a Foss v Harbottle point should where possible be decided as a preliminary issue and not left for determination at the trial. On such an application the court has to do the best it can on the evidence and other material which the parties have chosen to put before it, even though further evidence and other material may well be put forward later, and perhaps lead to other conclusions. I may add that if counsel for the council were right, and the test was whether the majority genuinely believed that their action was in the best interests of the company, the genuineness of the belief would often be difficult to decide as a preliminary issue without virtually a full trial of the point.
As matters appear to me now, it seems clear enough that the council has throughout been actuated by its desire to put into effect its new housing policy, even though that plainly and admittedly involves the council in a breach of contract, in depriving the purchasers of flats of their rights as shareholders, and in destroying the scheme under which they were induced to buy their flats. That new housing policy may well be an entirely right and proper policy for the council to adopt for any block of flats where that can be done without committing flagrant breaches of contract; but it is a different matter where, as for this block, the policy cannot be carried out without committing such breaches. Furthermore, I find it impossible to give any real credence to the contention that the reason why the council voted in favour of discontinuing the action was that the council considered this to be in the best interests of the company. The council did this in order to suppress proceedings which stood in the way of carrying out their new housing policy regardless of breaches of contract and injuries to the existing purchasers of flats. As for whether it was reasonable to believe that it was in the best interests of the company not to sue, it must be remembered that the directors, who had been appointed by the council, had decided to sue.
At one stage counsel for the council urged that the purchasers of flats had been legally advised in their purchases, so that in effect they had only themselves to blame for not perceiving that there was no direct covenant with them to carry out the scheme and that they would have to rely on the company enforcing the covenant by the council. What in fact the purchasers and their solicitors perceived I do not know. Plainly, those who know that they are dealing with a trickster who will seek to escape by any loophole, however dishonest, must seek to tie him up so tightly that escape is impossible. But these purchasers and their solicitors were dealing with the Greater London Council, and doubtless they considered that they were dealing with a great body which would honourably carry out its agreements. It ill becomes a council intent on not performing its contract to taunt the victims with their failure to foresee its untrustworthiness. This is a shabby contention.
As I have indicated, I do not consider that this is a suitable occasion on which to probe the intricacies of the rule in Foss v Harbottle and its exceptions, or to attempt to discover and expound the principles to be found in the exceptions. All that I need say is that in my judgment the exception usually known as ‘fraud on a minority’ is wide enough to cover the present case, and that if it is not, it should now be made wide enough. There can be no doubt about the 12 voteless purchasers being a minority; there can be no doubt about the advantage to the council of having the action discontinued; there can be no doubt about the injury to the applicant and the rest of the minority, both as shareholders and as purchasers, of that discontinuance; and I feel little doubt that the council has used its voting power not in order to promote the best interests of the company but in order to bring advantage to itself and disadvantage to the minority. Furthermore, that disadvantage is no trivial matter, but represents a radical alteration in the basis on which the council sold the flats to the minority. It seems to me that the sum total represents a fraud on the minority in the sense in which ‘fraud’ is used in that phrase, or alternatively represents such an abuse of power as to have the same effect.
I appreciate, of course, that there is a difference between the applicant’s rights as a shareholder and her rights as a purchaser of a flat; but I think, first, that the injury to her rights as a shareholder suffices in itself, and, second, that her rights as a shareholder form such an integral part of the scheme as a whole as to make it unreal to consider those rights independently of her rights as a purchaser. No right of a shareholder to vote in his own selfish interests or to ignore the interests of the company entitle him with impunity to injure his voteless fellow shareholders by depriving the company of a cause of action and stultifying the purpose for which the company was formed.
Many other matters were touched on in argument, but I do not think that I need explore them. One such matter that I should perhaps mention was whether the scheme for selling the flats was ultra vires. Counsel for the council has a contention that the council had lacked the power to fetter its future action by entering into the arrangements for selling long leases that were made in this case. That seems to depend mainly on the meaning of an undefined phrase in the new version of s 104(2) of the Housing Act 1957 (inserted by the Housing Act 1980, s 91), which provides that a ‘disposal’ of housing ‘may be effected in any manner’. It is possible, I suppose, that any house or flat disposed of under this provision must be dealt with independently, and that no scheme of disposition which affects houses or flats remaining undisposed of can be valid; but I find that improbable. However, I do not have to decide anything on this point, and so I leave it for resolution later, if need be.
Questions were also raised whether specific performance of the covenant would be decreed. Again, it is not for me to decide this. I only observe that with many prospective purchasers who had concluded bargains subject to contract it does not look as if it would be very burdensome or difficult for the council to use its best endeavours to sell the remaining flats on long leases; and to establish that damages would be an adequate remedy would be no small task.
In the end, my conclusion is that this motion should succeed. I do not think that the council can in this way wriggle out of the proceedings against it to enforce its contract. Subject to any question that there may be on the wording, I would propose to make an order in terms of para 1 of the notice of motion. By all means let the council carry out its new housing policy by all honourable and proper methods at its disposal; but the applicant must be allowed to test whether this can be done in the case of Kilner House, and is not to be muzzled by the council’s resort to Foss v Harbottle. I need only add that, as arranged when I reserved judgment, all matters of the terms of the order, costs, and the application of counsel for the company for leave to discontinue, and, indeed, any other incidental matters, will stand over until all the counsel concerned are available, the date to be arranged through the usual channels.
Order accordingly.
