Hutton v. West Cork Railway Co

"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.

Facts

(from the law report, (1883) L.R. 23 Ch. D. 654)

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.

ubsequent 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.

ee also

*UK company law

Notes