Southern Foundries (1926) Ltd v Shirlaw
A company cannot be prevented from altering its articles, but if it does so in breach of a contract with a third party, it is liable in damages.
Facts
Mr Shirlaw was appointed managing director of Southern Foundries for ten years. The company was later taken over by a group, which altered the company's articles to give the group power to remove any director. The group then removed Mr Shirlaw as a director, which automatically ended his appointment as managing director. He sued for damages for breach of his service contract.
Legal principle
The House of Lords held, by a majority, that the company was liable in damages. Lord Porter said that a company cannot be precluded from altering its articles, thereby giving itself power to act on the provisions of the altered articles, but so to act may nevertheless be a breach of contract, if it is contrary to a stipulation in a contract validly made before the alteration. The company had impliedly agreed not to remove Mr Shirlaw from his directorship during his term as managing director, and its removal of him was a breach of that contract.
Related cases on the company's constitution and decision making
- Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656
- Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653
- Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988
- Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch 290
- Bushell v Faith [1970] AC 1099
- Cane v Jones [1980] 1 WLR 1451
- Re Duomatic Ltd [1969] 2 Ch 365
- Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88
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