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Getting money off ex-Directors

Wye Valley Railway v Hawes

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At the time of writing this article the media are going through all the convulsions of moaning about some fat cat who took early retirement and is being paid £650,000 per year pension. Some might say it's worth it if he never touches banking again. While this director may be getting rather more money out of his former company than the ones mentioned here, the principal of being blamed for all the current woes of your company is the same.

The Wye Valley Railway never made a profit during 88 years of serving Monmouth. Consequently it might be thought that the people who invested money in the company never actually got anything back. Actually, they did, when the original Board of Directors decided to pay a few dividends to their shareholders when things weren't quite as bad as they were the rest of the time. Not very long after the railway opened it found itself in dire financial straits and the original Board of Directors, chaired by William Hawes, was sacked. The new board decided that they wanted the money back and sued the original Board on the basis that the payments had been improper and the Board should be held personally liable for this.

The original Board naturally had an opinion on being ordered to repay all dividends to the Railway which had just sacked them and said that it wasn't their job to pay up. Instead, they argued that they were indemnified against such claims by the shareholders to whom the dividends were paid - and so the Railway should send out demands to all 450 shareholders insisting that they refund the dividends. The main basis for this argument was that the shareholders knew on what basis the dividends had been paid. The fact that the shareholders could be liable was agreed. So the directors asked to be allowed to issue a notice ordering the past and present shareholders to cough up.

There was some issue over whether the shareholders would dispute that the company in which they held shares should be allowed to have its money back. While the counsel for the former Board said that the shareholders wouldn't, it was argued by the counsel for the Railway that if they did then it would cause substantial irritation and so the Railway should be allowed to object as much as possible. The irritation would be caused by 450 shareholders turning up to sue everyone in sight and resist the move as much as possible, each with their own counsel and set of witnesses - which would naturally delay proceedings considerably (by several years) and prevent the Railway from getting its money. Counsel for the Board said that this could easily be solved by consolidating the shareholders' action and having one shareholder, one counsel and one set of witnesses bringing a case for all of them.

The Court said that however it was worked out it would stop the Railway from getting the money it was owed and told the former Board to sort the matter out later.

The Board appealled. The next court up duly looked at the case and made a few cheery points. It was pointed out that the right to demand that the shareholders pay up was not an automatic right. Then there was the issue of the cost and inconvenience to the shareholders. They could only protest about the claim by coming to court and fighting the Railway. Appeal judgements have a habit of being repetitive things and this one again drew up the question of the court being stuffed with counsel for up to 450 shareholders - even 45 would be a substantial delay (not to mention a Health and Safety risk). The general view was that getting the shareholders in would be impractical at best and a delaying tactic at worst. So the idea was thrown out.

The original Board was duly left facing paying the Railway the money. What happened next is not recorded. History suggests that, whatever the result, it didn't manage to keep the Railway afloat. History does record that this case is now of merely academic interest, as all the rules referred to and debated in the process were torn up and replaced with new ones a few years later.

References - First instance [1879 W. 319.]; Appeal (1880-81) L.R. 16 Ch. D. 489. Written using information from online legal database "Westlaw".

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Last modified 15/04/11

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