Hutton v. West Cork Railway Co
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Hutton v. West Cork Railway Co (1883) 23 Ch D 654 is an English 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.
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[edit] Facts
(from the law report, (1883) L.R. 23 Ch. D. 654)
| “ | "A railway company which had no provision in its articles for paying remuneration to directors, and had never paid any, sold its undertaking to another company at a price to be determined by an arbitrator. By the Act authorizing the transfer it was provided that on the completion of the transfer the company should be dissolved except for the purpose of regulating their internal affairs and winding up the same and of dividing the purchase-money. The purchase-money was to be applied in paying the costs of the arbitration and in paying off any revenue debts or charges of the company, and the residue was to be divided among the debenture holders and shareholders. After the completion of the transfer a general meeting of the company was held at which a resolution was passed to apply £1050 of the purchase-money in compensating the paid officials of the company for their loss of employment, although they had no legal claim for any compensation, and £1500 in remuneration to the directors for their past services. | ” |
[edit] 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..
"...a kind of charitable dealing which is for the interest of those who practise it, and to that extent and in that garb (I admit not a very philanthropic garb) charity may sit at the board, but for no other purpose."
So according to Bowen LJ, directors can only spend,
"money which is not theirs but the company’s, if they are spending it for the purposes which are reasonably incidental to the carrying on of the business of the company. That is the general doctrine. Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational… It is for the directors to judge, provided it is a matter which is reasonably incidental to the carrying on of the business of the company… The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company."
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.
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 shareholders, but only insofar as that will in the end, albeit indirectly, be in the shareholders' interest. See now, s.172 Companies Act 2006.
[edit] Subsequent case law
- 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 science. 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 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 J. On this case, two of the leading commentators differ. Prof. Len Sealy holds that it establishes the first example of an irrationality test to director's discretion since Hutton (akin to Wednesdbury unreasonableness), while Prof. Paul Davies holds that there is an inherently subjective nature to any irrationality test that this lays down. Jonathan Parker LJ's judgment says both.
[edit] See also
[edit] Notes
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