Hutton v. West Cork Railway Co
Encyclopedia
Hutton v West Cork Railway Co (1883) 23 Ch D 654 is a UK company law case, which concerns the limits of a director's discretion to spend company funds for the benefit of non-shareholders. It was decided in relation to employees in the context of a company's insolvency
proceedings.
The case's practical significance was limited by cases and statute as in Re Horsley & Weight Ltd, where the Court of Appeal held that a company's substantive object may include making gifts, and under CA 2006 section 172 which entitles and obliges directors to regard interests other than shareholders as a proper exercise of their power.
So according to Bowen LJ, directors can only spend,
The upshot for a company in insolvency was that directors were not free to make payments to employees, because payments could only be made which were incidental to the business, and an insolvent business had no further business. In English law, the position has been altered by the Insolvency Act 1986, s.187 and the Companies Act 2006, s.247, which allow directors to consider employees directly when a company has gone insolvent.
s, but only insofar as that will in the end, albeit indirectly, be in the shareholders' interest. See now, section 172 Companies Act 2006
.
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
proceedings.
The case's practical significance was limited by cases and statute as in Re Horsley & Weight Ltd, where the Court of Appeal held that a company's substantive object may include making gifts, and under CA 2006 section 172 which entitles and obliges directors to regard interests other than shareholders as a proper exercise of their power.
Facts
According to the law report,Judgment
Cotton LJ and Bowen LJ held that the money payment was invalid. Baggallay LJ dissented. In the course of his dicta, Bowen LJ held that there is..So according to Bowen LJ, directors can only spend,
The upshot for a company in insolvency was that directors were not free to make payments to employees, because payments could only be made which were incidental to the business, and an insolvent business had no further business. In English law, the position has been altered by the Insolvency Act 1986, s.187 and the Companies Act 2006, s.247, which allow directors to consider employees directly when a company has gone insolvent.
Significance
The value of the judgment today lies in the general doctrine that during the life of the company, it may conduct itself in a way which benefits stakeholders other than shareholderShareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
s, but only insofar as that will in the end, albeit indirectly, be in the shareholders' interest. See now, section 172 Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
.
Subsequent case law
- Miles v Sydney Meat-Preserving Co (1912) 16 Commonwealth Law Review 50, 19 Argus Law Review 70; affirmed on other grounds in the Privy CouncilPrivy councilA privy council is a body that advises the head of state of a nation, typically, but not always, in the context of a monarchic government. The word "privy" means "private" or "secret"; thus, a privy council was originally a committee of the monarch's closest advisors to give confidential advice on...
(1913) 17 Commonwealth Law Review 639; this held that a company could be run with strict adherence to serving only the shareholders.
- Evans v Brunner, Mond and Co Ltd [1921] 1 Ch 359, a chemical company’s general meeting approved directors donating £100,000 to universities for scienceScienceScience is a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe...
. A shareholder challenged the resolution. He argued any benefit (a better pool of potential employees) was too remote. But he lost.
- AP Smith Manufacturing Co v Barlow, 39 ALR 2d 1179 (1953) the court applauded a gift to Princeton UniversityPrinceton UniversityPrinceton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution....
as ‘long visioned… action in recognising and voluntarily discharging its high obligations as a constituent of our modern society.’
- Regentcrest plc v Cohen [2001] 2 BCLC 80, per Jonathan Parker LJ, at para 120, "No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company's interest; but that does not detract from the subjective nature of the test." But also, at para 153, "Thus, the need to avoid litigation against two of Regentcrest's directors was, I find, a weighty consideration, and one which could reasonably have led a businessman in the position of the Richardson brothers on 5 September 1990 to conclude that the waiver of the claim on the terms proposed was in the interests of Regentcrest, notwithstanding that the information before the board as to the vendors' ability to meet any judgment was far from complete. As to that, it is in my judgment wholly unrealistic to have expected Mr Roy Richardson at that stage to have initiated a detailed investigation into the personal financial circumstances of the vendors."