Parke v Daily News Ltd [1962] Ch 927

Facts

  • Daily News Ltd ceased newspaper publication due to financial difficulties.
  • The directors proposed making large goodwill payments to dismissed workers.
  • The company's rules and founding documents did not authorize such payments to former employees.
  • Shareholders challenged the directors’ authority to approve these payments without proper approval.
  • The payments were intended to support employees leaving the company but were not connected to the company’s core purpose.

Issues

  1. Whether directors could lawfully use company funds to make goodwill payments to former employees when such payments were not authorized by the company’s rules or objectives.
  2. Whether directors, acting with good motives, could justify payments outside the company’s stated goals.
  3. Whether proper approval steps, such as shareholder agreement, were necessary for such payments.

Decision

  • The court held that the payments made by the directors were unlawful.
  • It found that acting with good intentions did not justify actions exceeding the company’s stated objectives.
  • The company’s main purpose was publishing newspapers; the payments did not further this aim.
  • Directors cannot use company funds for purposes unrelated to the company’s operations, regardless of perceived indirect benefits.
  • Reference was made to previous case law affirming the need for directors to act within the company’s rules.

Legal Principles

  • Directors have a duty to act solely in the interests of the company as defined by its founding documents and stated objectives.
  • Expenditure of company funds must be for purposes within the scope of those objectives.
  • Directors cannot make distributions based on personal assessments of fairness if those actions are outside the company’s powers.
  • Proper procedures, including shareholder approval when required, must be followed to make certain payments lawful.
  • The ruling protects shareholder interests by enforcing accountability and limiting directors’ authority over company assets.

Conclusion

Parke v Daily News Ltd established that directors are bound to act strictly within the scope of the company’s objects and follow all procedural requirements, even if motivated by goodwill, reinforcing the necessity for compliance to protect company assets and shareholders.

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