DR. MD.

ABDUL JALIL, COMPANY LAW, Chapter 4, 2013

CHAPTER FOUR
PROPER PLAINTIFF RULE AND ITS EXCEPTIONS
Contents of this chapter
- WHAT IS PROPER PLAINTIFF RULE
- RATIONALE FOR PROPER PLAINTIFF RULE
- DEFECTS IN PROPER PLAINTIFF RULE
- EXCEPTIONS TO PROPER PLAINTIFF RULE
- MAJORITY RULE
- INTERNAL MANAGEMENT RULE
- DERIVATIVE ACTIONS ON BEHALF OF THE COMPANY

WHAT IS PROPER PLAINTIFF RULE?

Proper plaintiff rule means if any wrong done to the company or
the company suffers any loss due to negligent or fraudulent acts
of directors or outsiders do not want to pay the debts due to the
company, only the company can sue the directors or the outsiders
to enforce the company rights. It is said that members of a
company cannot sue on behalf of the company to enforce the

DR. MD. ABDUL JALIL, COMPANY LAW, Chapter 4, 2013

company rights, because of the separate legal entity principle.

The separate legal entity principle states that the company is
separate from all members in the company. It is a legal person
which can sue or be sued in its own name.1
If any wrong is done to the company or it suffers any loss due to
the fraud or negligent acts of the board of the directors or
outsiders, only the company can institute legal proceedings in the
court to remedy the loss suffered by it, the members are not
allowed in company law to bring a legal action on behalf of the
company to remedy the loss suffered by the company. An
individual member of a company can bring legal action against the
wrong-doers on behalf of the company if only he is authorized to
do so by the board of directors or by an ordinary resolution
passed in the general meeting.2

Foss v. Harbottle (1843) 2 Hare 461; 67 ER 189; Prudential Assurance Co. Ltd. v.
Newman Industries Ltd. (No. 2) [1982] Ch. 204, 224; [1982] All ER 354. In these
cases the court held that the members cannot sue on behalf of the company to
enforce its rights.

Chan, Koh & Ling, Malaysian Company Law Principles and Practice,
Malaysia: Sweet & Max-Well Asia, Second Edition 2006 at page 476; See
also Fong Poh Yoke v. The Central Construction Co. (Malaysia) Sdn. Bhd.
[1998] 4 CLJ Supp. 112, 127; AIC Dotcom Sdn. Bhd. v. MTEX Corp Sdn Bhd
[2003] 4 MLJ 324. In this case AIC Dotcom Sdn Bhd. sued the dependents in
a representative capacity for MTEX Corp. Sdn Bhd.
2

DR. MD. ABDUL JALIL, COMPANY LAW, Chapter 4, 2013

The proper plaintiff rule originated from the decision of Foss v.

Harbottle3. In this case two shareholders of the company brought
an action on behalf of all shareholders except five directors and
some other shareholders. The plaintiff alleged that the directors
sold their own land to the company for a price which was higher
than the market price. As a result the company suffered loss. The
plaintiff contended that the directors must make good the loss
incurred by the company due to buying the land.
The issue was whether the shareholders could bring the legal
action on behalf of the company. The court held that because of
the separate legal entity principle, the shareholders were
incompetent to bring such an action on behalf of the company. In
this situation only the company could bring an action against the
directors. Wigram V.C. in this case observed that:
It was not, nor could it successfully be argued that it was a
matter of course for any individual members of a corporation
thus to assume to themselves the right of suing in the name
of the corporation. In law the corporation and the aggregate
members of the corporation are not the same thing for
purposes like this; and the only question can be whether the
facts alleged in this case justify a departure from the rule
which, prima facie, would require that the corporation should
3

Foss v. Harbottle (1843) 2 Hare 461; 67 ER 189.

DR. MD. ABDUL JALIL, COMPANY LAW, Chapter 4, 2013

sue in its own name and in its corporate character, or in the

name of someone whom the law has appointed to be its
representative.
If a member of a company is affected by the decision of the board
of directors or by majority decision of the shareholders, that
member cannot bring an action against the board of directors or
against the majority shareholders4 unless he is so authorized by
the board of directors. Usually the board of directors are
authorized to bring such an action on behalf of the company. 5 The
articles of association of the company provide provisions
regarding who can bring an action on behalf of the company. If
the articles provide that the board of the directors will initiate legal
proceedings on behalf of the company for any wrong done to it,
the members cannot interfere with this power. 6 The articles may
also provide power to the members in a general meeting to
nominate a representative to bring legal action on behalf of the
company.7
RATIONALE FOR PROPER PLAINTIFF RULE
Stein v. Blake[1998] 1 All ER 724, 730, CA.
Foss v. Harbottle [1843] 2 Hare 461; 67 ER 189.
6
Fong Poh Yoke v. The Central Construction Co. (Malaysia) Sdn Bhd [1998]
4 CLJ Supp 112, at 126.
4
5

See Automatic Self-cleaning Filter Syndicate Co. Ltd. v. Cuningham [1906]

2 Ch. 34, CA; Gramophone and Typewriters Ltd. v. Stanley [1908] 2 KB 89;
Salmon v. Quin & Axtens Ltd. [1908] 100 LT 161; [1909] 1 Ch 311; John
Shaw & Sons (Salford) Ltd v. Shaw [1935] 2 KB 113.
7

DR. MD. ABDUL JALIL, COMPANY LAW, Chapter 4, 2013

The rationale for proper plaintiff rule is to avoid multiplicity of suits

against the company and its directors by its members. 8 Such
multiplicity of suits by the members for frivolous and vexatious
matters, may cause a lot of legal fees which may affect the
companys financial strength seriously. There may have some
troublesome minority members in the company who may like to
harass or embarrass the board of directors. They may institute
frivolous and vexation litigations against the directors with mala
fide intention. Proper plaintiff rule may eliminate such frequent
frivolous and oppressive litigations against the directors by the
trouble making members in the company.
The proper plaintiff rule propagated in Foss v. Harbottle, has been
accepted and applied in Malaysia by the court. The rule forms an
important part of the company law in Malaysia. 9 In Paidiah
Genganaidu v. The Lower Perak Syndicate Sdn Bhd & Others, 10
the appellant on behalf of the minority members of the company
brought an action in the court for a declaration that a resolution
passed by the company in an extraordinary general meeting was
null and void because it was ultra vires, illegal and a fraud on the
minority shareholders. The Federal Court of Malaysia referred to
Chan, Koh & Ling, Malaysian Company Law: Principles and Practice,
Malaysia: Sweet & Max-Well Asia, Second Edition, 2006 at p. 478.
8

Ibid, at p. 479.

10

1974] 1 MLJ 220, FC.

DR. MD. ABDUL JALIL, COMPANY LAW, Chapter 4, 2013

the proper plaintiff rule provided in Foss v. Harbottle and

dismissed the appeal as the claim of the appellant did not fall
under any of the exceptions to the general rule in Foss v.
Harbottle. There are many other cases in Malaysia and Singapore
which considered and applied the proper plaintiff rule developed
in Foss v. Harbottle along with its exceptions.11
In Gray v. Lewis,12 a member of a company filed a bill against the
officers of the company for misapplication of assets. The court
held that the member had no authority to file the bill under proper
plaintiff rule. The company itself could file the bill to recover
property from its directors or officers or any other person.
In Pavlides v. Jensen,13 a minority shareholder brought an action
claiming damages on behalf of all shareholders of the company
against three directors who had been negligent in selling an
asbestos mine owned by the company for less than its market
value. It was alleged by the shareholder that the company had
suffered loss by selling the mine for lower price than the market
price. The court held that the shareholder was not eligible to bring
See Ting Chong Maa @ Tun Mun Seng v. Chor Sek Choon [1989] 1 MLJ
477; Ling Beng Hui & Others v. Ling Beng Sung [1990] 1 CLJ 512; Abdul
Rahim bin Aki v. Krubong Industries Park (Melaka) Sdn. Bhd & others [1995]
3 AMR 3050; [1995] 3 MLJ 417, CA; Owen Sim Liang Khui v. Piasau Jaya
Sdn Bhd & Anor [1996] 2 AMR 2477; [1996] 1 MLJ 113, FC.
11

12

(1873) 8 Ch App 1035. [1956] Ch. 565; [1956] 2 All ER 518.

13

[1956] Ch. 565; [1956] 2 All ER 518.

DR. MD. ABDUL JALIL, COMPANY LAW, Chapter 4, 2013

such an action on behalf the company because the selling of the

asbestos mine was intra vires and the minority shareholder could
not prove any fraud on minority shareholders on the part of the
directors. So, the plaintiff could not maintain the action on the
ground of proper plaintiff rule. In this case, Danckwerts J.
observed in his judgment that:
It was open to the company, on the resolution of a majority
of the shareholders to sell the mine at a price decided by the
company in that manner, and it was open to the company by
a vote of the majority to decide that, if the directors by their
negligence or error of judgment had sold the companys
mine at an undervalue, proceedings should not taken by the
company against the directors.14
DEFECTS IN PROPER PLAINTIFF RULE
There are some defects and weaknesses of proper plaintiff rule.
In many occasions it has been found that the directors of the
company were negligent in doing business. As a result, the
company suffered loss. In some occasions the directors bought
some goods or real property belonged to them for the company
with higher price than the market price. 15 As a result, the company
suffered loss and the directors gained personal profit. In some
14
15

[1956] Ch 565 567.

Pavlides v. Jensen [1956] 2 All ER 518.

DR. MD. ABDUL JALIL, COMPANY LAW, Chapter 4, 2013

occasion it is found that the directors sold company assets in

lower price than market price and got some commission from the
buyer. In some occasions it is found that the company made
some resolution which went against the interest of minority
shareholders.16
In the above situations, the minority members in a company
cannot bring action against the directors because of the existence
of infamous proper plaintiff rule originated in the case of Foss v.
Harbottle in 1843. This rule caused a lot of dissatisfaction for the
minority shareholders as they were unable to bring legal action
against dishonest and negligent directors.
The rule requires that the company itself will bring legal action
against the negligent or dishonest directors of a company but the
directors will not allow the company to bring such action against
them in the name of the company. As the directors are wrongdowers, they will not bring an action in the court against them. It is
normal.
In the hypothetical situations mentioned above, the directors are
ethically liable to the company as well as to the minority
shareholders for their negligent or fraudulent acts. Therefore, they
will not bring any action against them in the name of the company.
Paidiah Genganaidu v. The Lower Perak Syndicate Sdn Bhd & Others
[1974] 1 MLJ 220, FC.
16

DR. MD. ABDUL JALIL, COMPANY LAW, Chapter 4, 2013

As a result, other shareholders are prejudiced and suffer loss, as

they are not allowed to bring action against the directors due to
the existence of proper plaintiff rule. Hence, the efficiency of the
rule is questionable and it does not protect the interest of the
minority shareholders.
As minority shareholders are affected by the proper plaintiff rule
and it cannot protect their rights, they were dissatisfied with this
rule. As a result, the court from time to time made some
exceptions to the proper plaintiff rule. Under those exceptions any
member of a company can bring legal action against the directors
for damages for negligent or intentional loss caused to the
company.
EXCEPTIONS TO THE PROPER PLAINTIFF RULE.
Over the time, courts have invented certain exceptions to the
Foss v. Harbottle rule. Those exceptions are:
i)

Ultra vires or prohibited acts;

ii)

Fraud on minority shareholders;

iii)

Not complying with special majority vote requirement;

iv)

Invasion on personal rights;

v)

Service of notice improperly;

DR. MD. ABDUL JALIL, COMPANY LAW, Chapter 4, 2013

vi)

When wrongdoers are in control of the company;

vii)

If justice of the case so requires.

10

Note: Students are required to explain the above exceptions with

the help of relevant decided cases. Refer to chapter 12 of the
textbook.
MAJORITY RULE
INTERNAL MANAGEMENT RULE
DERIVATIVE ACTION
Note: For explanation on the above three points, please refer to
the text book, Chapter 12
SAMPLE QUESTIONS:
1. Explain the proper plaintiff rule provided in Foss v.
Harbottle. Is there any exception to this rule? Explain the
exceptions with examples.
2. Explain the following with examples and decided cases:
a) Majority rule; b) Internal management rule.

10

DR. MD. ABDUL JALIL, COMPANY LAW, Chapter 4, 2013

11

3. What is derivative action? In what circumstances a member

is allowed to take derivative action? Write the procedure of
derivative action.

11