Derivative Action (How to answer)
INTRODUCTION
1. Generally as a consequence of incorporation and the application of the
doctrine of separate legal entity, a company has the power to sue in its
own name for any wrong against the company.
2. No other person can enforce the company's rights. This is known as the
proper plaintiff rule which was laid down in Foss v Harbottle.
3. The proper plaintiff or the person having locus standi to enforce any
obligation owed to the company is the company itself and not any
individual member even if the member is a majority shareholder.
4. Furthermore, no group of shareholders has the right to bring the legal
action unless they have the majority votes at the general meeting
resolving to commence legal action.
5. Foss v Harbottle
Two shareholders brought an action against five directors and other
person.
They alleged that the directors had misapplied the company property
and had caused certain transaction to be entered improperly.
Held: dismissed the claim. During general meeting, the majority voted
that no action should be taken against them.
The proper plaintiff rule is that a wrong done to the company may be
vindicated by the company alone (separate legal entity) and
The majority rule principle applied. If the alleged wrong can be
confirmed or ratified by a simple majority of members in a general
meeting, then the court will not interfere.
6. Court will not interfere unless the directors are themselves the
wrongdoer.
7. Due to this, the common law recognises an exception commonly known as
common law derivative action.
8. There are a few grounds under the common law derivative action which are
fraud on minority, an infringement of a members' personal right, ultra
vires act and etc.
9. This exception essentially allows the minority shareholder to commence
an action (in a representative capacity) for and on behalf of the
company.
10. The derivative action acts as deterrent against misconduct as it warn
the potential wrongdoer that there is a remedy available for the minority
shareholders to seek redress through the court despite the wrongdoer
being able to prevent litigation to be brought against him or to
influence the company to ratify the wrongdoing.
11. Common law derivative action was expressly preserved under Section 181A
of Companies Act 1965.
12. However, under Companies Act 2016 (CA 2016), by virtue of Section
347(3), common law derivative action is no more applicable and has been
abrogated. The common law derivative action can no longer be relied on.
It would naturally means that litigants are now only left with statutory
derivative action.
13. This statutory derivative action bypasses the narrow Foss v Harbottle
rule.
14. Pursuant to Section 347(1) of CA 2016, a complainant may, with the
leave of the court initiate, intervene in or defend a proceeding on
behalf of the company.
ISSUE ON LOCUS STANDI
1. Statutory derivative action enables wide category of persons to apply
for the leave of court to commence the derivative action.
2. The question of what constitutes sufficient locus standi for different
classes of person to invoke the section of the act has been expressly
mentioned in the act itself.
3. Section 347(1) of CA 2016, a complainant may, with the leave of the
court initiate, intervene in or defend a proceeding on behalf of the
company.
4. Section 347 of CA 2016 only mentions the word 'a complainant' without
giving a definition of it.
5. However, Section 345 of CA 2016 provides that the complainant means:
a) Member of a company or a person who is entitled to be registered as a
member of a company or
b) Former member of a company if the applicant relates to the
circumstances in which the member ceased to be a member or
c) Any director of a company
d) Registrar in the case of a company declared under Section 590 for the
investigation of affairs of company at the direction of the ministers.
6. On the other hand, pursuant to Section 2 of CA 2016, the word member
means inter alia in the case of a company limited by shares is a person
whose name is entered in the register of members at the holder for the
time being of one or more shares in the company
7. Section 347 of CA 2016 goes further than the common law derivative
action as they allow a complainant to intervene in or to defend an
existing action.
ISSUE ON MINORITY SHAREHOLDER
1. CA 2016 does not expressly mentions that the minority shareholder also
entitled to bring the derivative action.
2. However, it has been well accepted that the derivative action is used
more often by the minority shareholder.
3. United Engineers (Malaysia) Bhd (suing on behalf of UEM Genisys Sdn Bhd)
v Seow Boon Cheng,
The High Court decided that the plaintiff being a majority shareholder
by virtue of having control over more than 51% shares in the company
cannot take action on behalf of the company as only the minority
shareholders can bring a derivative action.
It was held that the proper plaintiff in this case was the company
itself and that it is the company that must decide on its course of
conduct against the director.
Nevertheless, it is unfortunate if we read United Engineers as laying
down an absolute rule that only a minority shareholder can apply for a
derivative action.
While the decision states so, the reasoning was the fact that the
plaintiff had the ability, through him possessing the necessary voting
power to decide whether or not the company should litigate.
THE BOARD REFUSE To ADOPT THE PROCEEDING (SUE THE WRONGDOER
1. The constitution of modern companies often confers on the board the
power to decide whether or not to litigate for the company. The court
will not normally interfere with the division of power as stipulated by
the company's constitution.
2. A decision made by an independent group of directors at the board of
directors meeting not to commence legal action against the wrongdoer will
usually be upheld and respected by the courts unless there is conflict of
interest because the directors are themselves the wrongdoer. In this
situation, the decision of the board not to sue will not be upheld.
3. The situation become worst if the wrongdoer to the company was also a
majority shareholder and is able to control the general meeting and the
board.
4. Pursuant to Section 348(2) of the CA 2016, the complainant shall give
thirty days notice in writing to the directors of his intention to apply
for the leave of court to commence the proceedings.
5. When there is no response from the directors, or when the directors have
indicated their refusal to bring the proceedings enforcing the company's
right, the applicant may file the leave application at the expiration of
the 30 days.
6. This shows that the Section 348(2) of the CA 2016 does not require that
the applicant obtain the directors' consent.
7. Ting Sing Ning (Alias Malcolm Ding) v Ting Check Swee (Alias Ting Chick
Sui) and others
Havilland is a company incorporated under the laws of Hong Kong and
having its principal place of business in Singapore.
The appellant in this case commenced an action in 2000 on behalf of
the Havilland claiming inter alia that the respondent, being the
directors of Havilland, were in breach of their fiduciary duties
against Havilland.
After that, the appellant wrote to Havilland's board of director and
enquired whether the board wished to adopt the action commenced by the
appellant however, the board refused to adopt the proceeding after got
the indication from all the shareholders.
However, the board of Havilland directors later claimed that the
appellant did not put the matter into the hands of the board or
shareholders before commencing the action.
The court found that the appellant had, indeed, raised the allegations
of wrongdoing at several meetings (on 17 May 1999, 16 February 2000
and 10 March 2000) and, having received no response or clarification,
was compelled to take out an action on 20 March 2000.
In this regard, the court held that there is no requirement in law for
the appellant to specifically propose to the Board or shareholders at
a general meeting that an action be brought against the errant
directors on behalf of the company.
Even though this case is brought under common law derivative action,
this common law derivative action has been adopted in the statutory
derivative action. The decision made by the court showed that the
consent from the board of directors is not required.
8. Swansson v R A Pratt Properties Pty Ltd.
Palmer J held that "If a wrong appears to have been done to a company
and those in control refuse to take proceedings to redress it, the
Court should permit a derivative action to be instituted only by those
within the categories allowed by Section 236(1) who would suffer a
real and substantive injury if the action were not permitted.
The injury must be necessarily dependent upon or connected with the
applicant's status as a current or former shareholder or director and
the remedy afforded by the derivative action must be reasonably
capable of redressing the injury."
PERMISSION OR LEAVE TO INTERVENE OR DEFEND A COMPANY
1. Apart from being relied on by a member to sue on behalf the company,
Section 347 also enables a member to obtain court's permission to
intervene or defend a company.
2. Metyor v Queensland Electronic Switching
Company is not doing diligently.
3. Lembaga Tabung Angkatan Tentera v Prime Utilities Berhad
The company has initiated legal proceedings where the cause of action
involves breach of director's duties but the company then did not
pursue the proceedings diligently.
4. Hawksford v hawksford
The complainant will be able to apply for leave and leave should be
granted if the lack of diligence in pursuing the proceedings or delay
was to frustrate the enforcement of the company's rights.
APPEAL WHEN THE LEAVE HAS NOT BEEN GRANTED
1. It is not clear from the section.
2. The better view is that the leave does not extend to appeal against the
rejection
COMPANY IN LIQUIDATION
1. Some decision from Australia allows the statutory derivative action to
be brought when a company is in liquidation.
WHAT KIND OF WRONGDOING CAN BE RELIED FOR COMMENCING THE DERIVATIVE
ACTION
1. The Companies Act 2016 does not specify the types of actions in respect
of which a statutory derivative action may be brought.
2. Basically, a derivative action is an action taken by a member on behalf
of a company to remedy a wrong done against the company and is brought
because the company would otherwise not do so.
3. Since any breach of director's duty is infringement of the company's
right, this can be basis of the statutory derivative action.
4. Under Companies Act 2016, the director's fiduciary duties among others
are to act in the best interests of the company, exercise powers for a
proper purpose, duty to avoid conflict of interest and director's duty of
care, skill and diligence.
5. Tam Tak Chuen v Eden Aesthetics Pte Ltd
The plaintiff, Dr Tam and Dr. Khairul were medical practitioners in
partnership under the style of Eden Family Clinic.
Subsequently they incorporated Eden Aesthetics Pte Ltd and Eden
Healthcare Pte Ltd under which the income of Eden Family Clinic was
booked.
Dr Tam and Dr Khairul were equal shareholders and the directors of
both in Eden Aesthetics and Eden Healthcare.
Later, Dr Khairul suspected Dr. Tam having an illicit affair with one
of the nurses. Dr Khairul installed a closed circuit camera in the
clinic and as a result he obtained evidence of Dr Tam's activities.
In the meantime, Dr Khairul incorporated KAR Pte Ltd with himself as
its sole shareholder and director.
Dr Khairul has confronted Dr Tam with the video footage and threatened
him with public disclosure.
He then demanded that Dr Tam's shares in both company be sold to him
at gross undervalue.
Dr Tam acceded to this demand but shortly thereafter, Dr Tam decided
to rescind the transaction.
Subsequently Dr Tam discovered that Dr Khairul had in sometime
transferred the business of Eden Family Clinic from Eden Anaesthetics
and Eden Healthcare to KAR resulting KAR receiving more than 1 million
for 2007 and 2008 respectively.
Dr Tam applied for the leave to commence derivative proceedings on
behalf of Eden Anaesthetics and Eden Healthcare in respect of the
alleged breach of fiduciary duties by Dr Khairul as a director in both
company.
The court had granted the leave to commence derivative proceedings.
6. In Lembaga Tabung Angkatan Tentera v Prime Utilities Berhad
The plaintiff (LTAT) held 10% shares in prime, the defendant company.
The action was brought to obtain leave to sue the directors of Prime
on the basis that of their failure to exercise due care, skill and
diligence in recovering investments made by Prime in Boston Asset
Management Ltd.
Prime was actually filed a suit against Boston but since no further
action was taken, the suit was struck out.
Subsequently, another action was filed but no action was taken to
serve the writ out of jurisdiction.
LTAT had applied for leave to sue Boston on behalf of the company but
this was withdrawn as Boston was then already wound up.
Held: the leave to sue on behalf the company was granted.
The directors had failed to diligently pursue the recovery of the
amount due from Boston by the series of legal action that were not
followed through and by their failure to file proof of debt in
Boston's winding up.
SUE A THIRD PARTY
NOTICE REQUIREMENT
1. Pursuant to Section 348(2) of the CA 2016, the complainant shall give
thirty days notice in writing to the directors of his intention to apply
for the leave of court to commence the proceeding on behalf of the
company.
2. This procedure and the time frame are intended to give the directors the
opportunity to decide whether or not to commence the action.
3. It also operates to inform other directors of allegation of breach of
duty by any of the director.
4. Where the directors decide to adopt the proceedings, then there would be
no need for the applicant to apply for leave as the application will be
redundant.
5. The notice requirement is a mandatory requirement. Section 347 and
Section 348 of CA 2016 do not contain a provision that allows the court
to waive the compliance with the notice period.
6. However the ability of the Malaysian courts to waive statutory notice
was dealt with in the decided case which was related to an application
for leave to defend on behalf of the company where the court relied on
Section 582(4) of CA 2016, irregularities in proceedings (Section 355(4)
CA 1965), to enable a waiver of the statutory notice.
7. Nevertheless, the issue about whether statutory notice may be waived in
an application for leave to sue on behalf of the company in Malaysia is
not so clear.
8. Most of the cases were solely confined exclusively on their fact.
9. Ng Hoy Keong v Chua Choon yang & Ors
the nine days notice to the directors informing them of the
applicant's intention to apply for leave to intervene in or defend the
company in some legal proceedings was held rationale by the court due
to the necessity to act expeditiously, particularly in view of a
judgment in default if the company failed to file a statement of
defence when the company is being sued.
Section 355(4) CA 1965 applied in this case. (Section 582(4) CA 2016).
The case is at best, persuasive.
10. In Singapore case Fong Wai Lyn Carolyn v Airtrust (Singapore) Pte Ltd.
The applicant had filed a leave application to sue the defendants on
behalf of the company.
However, no advance notice was given to the company as required by
Singapore Companies Act which provides 14 days advance notice to be
given.
Instead, the notice was given seven days after the leave application
was made.
The applicant reason that she feared that the defendant would
instigate the alleged wrongdoers to destroy, conceal or forge evidence
and to move funds out of AT and into companies she controlled to
frustrate the company's effort to seek recovery.
The court held that the court has the power to dispense with notice or
to make such orders as the court though fit for the giving of notice
it was not expedient to give notice prior to the commencement of the
action under Section 216A(4).
The court stated that the 14 days notice was not practicable depends
on the facts of the case and court is entitled to look at the totality
of circumstances to determine whether impracticality existed.
The court held than it was impracticable in the present case
particularly since after notice was given the company did not proceed
with any meaningful exercise that amounted to a bona fide and
determined effort to investigate. As such the notice has been futile.
11. Similarly In Ting Sing Ning (Alias Malcolm Ding) v Ting Check Swee
(Alias Ting Chik Sui) and others
Where the fact has been discussed earlier. The allegation was brought
to the company's notice at several meeting prior to the filling of the
petition.
Section 348(2) CA does not require the applicant obtain the director's
consent.
12. Alan K Koh, "excusing Notice Under Singapore's Statutory Derivative
Action" Austarlian Journal of Asian Law, Vol 14, No 2, Article 3, 2013
Two situation where waiver of advance notice could be given
i) Where the is wrongdoer control i.e if all the directors of the
corporation or its subsidiary are defendants in the action or
ii) Where there is real risk of dissipation of assets or destruction
of evidence.
13. Lee Seng Eder v Wee Kim Chwee & Ors:
The Singapore Court held that to minimize the possibility of tampering
with evidence, the applicant could apply for an Anton piller order
while applying for leave to commence a derivative action.
Unfortunately, because advance notice is required to be given to the
directors who are usually the person being sued, the wrongdoer will be
put on notice of an impending action and could dissipate assets or
destroy evidence prior to filing the leave application.
14. Swanson v R A Pratt Properties Pty Ltd
there could be situation where the directors could do not clearly
unequivocally state what is their stand, for example, the directors
could state that they are initiating investigations to decide whether
or not to take action.
In this situation, it has been held that the complainant must prove
that there is actual or probable inaction.
15. Tam Tak Chuen v Eden Aesthetics Pte Ltd
The director or the company is not required to obtain independent
legal advice first before deciding whether or not to commence legal
proceedings.
Nonetheless, the fact that the company had obtained independent legal
advice where the legal advice did not recommend any legal proceedings
is one of factors relevant for the court in exercising its discretion
to grant leave.
16. Teo Seng Ho v IDV Concepts Pte Ltd:
The notice need not list down all the allegation being made against
the defendants, it must be sufficient to inform the directors of the
intention to bring the action on behalf of the company.
17. If the criteria for the court to grant the leave are met, the court
will make an order, allowing the applicant to bring the action on behalf
of the company.
18. Once leave has been granted, the complainant must bring the action
within 30 days. (Section 348(3) of CA 2016).
19. This is a mandatory requirement unless Section 582(4) of CA 2016 is
applicable.
20. The applicant's failure to do so means that the applicant right lapses
and he will have to file afresh.
21. Since the derivative action is an equitable remedy, this delay could
defeat any future application.
22. When the circumstances that underpin the application for leave has
changed, the court has granted an application to strike out the leave.
23. Shamsul bin Saad (suing as minority shareholder of Petra Perdana Berhad
and bringing this action for the interest of Petra Perdana Berhad) v
Tengku Dato' Ibrahim Petra bin Tengku Indra Petra
In an earlier application, by the same petitioner, the court had
granted leave. Subsequently, the case was brought to court.
The defendant sought to set aside the leave and for the court to
determine the appropriates of leave when circumstances subsequent to
filing of the petition for leave indicated that there was no longer
any wrongdoer control.
The petition to strike out was granted as the directors against whom
the suit was brought had been removed by the EGM and the plaintiff was
effectively in control of the company.
CRITERIA FOR LEAVE
1. The court has discretion to allow a person (complainant) to bring a
statutory derivative action.
2. The discretion must be exercised based on the guideline laid down in
Section 348(4) of CA 2016.
3. Section 348(4) of CA 2016: in deciding whether or not the leave shall be
granted, the court shall take into account whether:
a) The complainant is acting in good faith and
b) It appears prima facie to be in the best interest of the company that
the application for leave be granted.
4. The court will assume that the plaintiff who comes to court with
reasonable and legitimate claim is acting in good faith until proven
otherwise.
5. In assessing good faith, the court will scrutinise with particular care
the purpose for which the derivative action is said to be brought.
6. Section 348 of the CA 2016 was explained in detail by the Malaysian
Court of Appeal in the case of Celcom (M) Bhd v Mohd Shuaib Ishak.
The plaintiff, a former member of the defendant company (Celcom)
applied for leave to bring a statutory derivative action in respect of
certain business decisions taken by the directors of Celcom.
At the High Court, the main issue was whether or not the requirements
of Section 181B(4) (under CA 1965) were satisfied; namely, that the
plaintiff was acting in good faith and it appears prima facie to be in
the best interest of the company that the application for leave be
granted.
Ramli J was of the view that for Section 181B (4) to be satisfied the
complainant had to demonstrate 'that there was a reasonable basis for
the complaint and that the proposed action was legitimate and
arguable, in that it had some semblance of merit.
The learned judge said that at the leave stage, which is the threshold
stage, the court is not to go into substantial issues on merits. All
the applicant had to do was to show a prima facie case and that there
was some substance in the grounds supporting the application that is
the low threshold test.
The Court of Appeal overturned the High Court decision. The Court of
Appeal said the intention of the statutory derivative procedure is to
enable a member, present or past, to seek leave to bring an action in
the name of the company to recover losses sustained by that company.
As such, leave to bring a derivative action must not be given lightly.
Abdul Hamid Embong JCA, delivering the judgment of the appellate
court, went on to say that the High Court judge was wrong in stating
that the matter before him was 'only an application for leave' and
relying on the low threshold test used under Order 53 of the Rules of
the High Court.
On the requirement of good faith, the Court of Appeal said the
complainant must show he or she was acting in good faith in making the
application. The onus of proof is on the complainant on the balance of
probabilities.
The Court of Appeal followed the decision in the Australian case of
Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583 and said that
the test of good faith is two-fold:
i) the complainant must have an honest belief that a good cause of action
exists and has a reasonable prospect of success, and
ii) The application is not brought up for a collateral purpose.
The Court of Appeal said the High Court judge had completely failed to
take the two-fold test into consideration.
In this case, the complainant had commenced a personal action which
was virtually identical to the derivative action and with identical
reliefs sought.
The Court of Appeal found there was an inconsistency as in the
personal action.
The complainant was suing Celcom for damages while in the derivative
action he was purportedly trying to recover damages on behalf of the
company.
This raised a suspicion on the complainant's true motive in bringing
the derivative action.
The Court of Appeal concluded that the complainant did not have the
interest of the company at heart but was merely advancing his own
interest.
In these circumstances, the complainant was not acting in good faith
and leave should not have been granted.
In addition, leave should not be granted as there was no reasonable
commercial sense of the derivative action and it would be
counterproductive to the company's interests.
In determining whether the derivative action was in the interest of
the company, the Court of Appeal applied and followed the tests set
out in the Singapore case of Pang Yong Hock v PKS Contracts Services
Pte Ltd [2004] 3 SLR, and in the Canadian case of Ontario Ltd v
Bernstein (2000 OTC 758).
In Pang Yong Hock's case, the court referred to the passage stating
that "an applicant is acting in good faith and that a claim appears
genuine, the court must nevertheless weigh all the circumstances and
decide whether the claim ought to be pursued.
Whether the company stands 'to gain substantially in money or in
money's worth' (per Choo JC in Agus Irawan's case) relates more to the
issue of whether it is in the interests of the company to pursue the
claim rather than whether the claim is meritorious or not.
A $100 claim may be meritorious but it may not be expedient to
commence an action for it.
The company may have genuine commercial consideration for not wanting
to pursue certain claims.
Perhaps it does not want to damage a good, long-term, profitable
relationship.
It could also be that it does not wish to generate bad publicity for
itself because of some important negotiations which are underway.
while in Ontario Ltd's case, the passage referred was Whether or not a
corporation shall seek to enforce in the courts a course of action for
damages is, like other business questions, ordinarily a matter of
internal management and is left to the discretion of the directors, in
the absence of instruction by vote of the stockholders.
Courts interfere seldom to control such discretion intra vires the
corporation, except where the directors are guilty of misconduct
equivalent to a breach of trust, or where they stand in a dual
relation which prevents an unprejudiced exercise of judgment.
From this two cases referred, the court has considered and looked into
a company's genuine commercial reasons for not to proceed with any
litigation.
7. Therefore, to ascertain whether it is in the best interest of the
company for leave to be granted, a company's genuine commercial reasons
not to proceed with any litigation must be considered
8. The test used by the court in deciding what is in the best interest of
the company is whether an intelligent and honest person in the position
of the director could have reasonably believed that the decision was for
the benefit of the company.
9. When directors want to consider whether any legal proceedings should be
commenced, they would have to assess the benefit and cost of the
litigation.
10. Some commercial reasons for deciding whether or not to litigate may be:
the financial advantage or disadvantage and capabilities of the
company,
how the litigation could affect the reputation of the company and
in some instances the business relationship with the alleged
wrongdoer.
11. Swanson v Pratt
he Australian court made the following observation, linking how the
status of the complainant could have some bearing on ascertaining his
intention i.e acting in good faith to apply for leave:
i. Current shareholder of a company who has more than a token
shareholding and the derivative action seeks recovery of property so
that the value of the applicant's shares would be increased, good
faith will be relatively easy for the applicant to demonstrate to the
court satisfaction.
ii. Current director or officer, it will generally be easy to show that
such an application has a legitimate interest in the welfare and good
management of the company itself, warranting action recover property
or to ensure that the majority of the shareholders or of the board do
not act unlawfully to the detriment of the company as a whole.
iii. Applicant is former shareholder with nothing obvious to gain directly
by the success of the derivative action, the court will scrutinise
with particular care, the purpose which the derivative action is said
to be brought.
12. The fact that the petitioner would have benefitted personally from the
derivative action does not necessarily indicate that he lacks good faith.
13. The value of his shareholdings will increase when the applicant is
successful. The indirect benefit is in line with the increase in the
company's asset because of successful recovery of the company's fund.
14. The existence of hostility, dislike, ill feeling or other personal
reasons does not necessarily mean that the court will not grant leave.
(Pang Yong Hock v PKS Contracts Services Pte Ltd)
15. If there is a history of grievances against the current majority of
shareholders or the current board, this could influence the court to
refuse (Swanson v Pratt)
16. Tam Tak Chuen v Eden Aesthetics Pte Ltd
The plaintiff and the defendants were partners in a medical practise
which were later incorporated.
As a result of the plaintiff's extra marital affair with one of the
nurses, the defendant convinced the plaintiff to sells his shares to
the defendant at below market value.
The plaintiff later successfully brought a court proceeding rescinding
the sale and his removal as director.
Subsequent investigation unearthed the fact that there has been breach
of fiduciary duties where the defendant had diverted the company's
business.
The defendant raised the point that the action was motivated by
personal hostilities due to the defendant's knowledge of the
plaintiff's adultery.
The court held: the main motivation of the plaintiff was financial,
not personal as there were real concerns about the company's loss of
income arising from a breach of a director's fiduciary duty.
The company benefits financially when the company receives substantial
amount of cash if the allegation of breach is proven, or where the
company is able to recover its assets.
17. In some instances, the defendant had tried to use the availability of
an alternative remedy such as an oppression provision or a winding up
order to argue that leave should not be given.
18. The court also will consider the availability of alternative remedy is
deciding whether it is in the best interest of the company for the leave
to be given. (Vinciguerra v MG Corrosion Consultants Pty Ltd)
19. Gooze v Graphic world Group Holdings Pty Ltd
The Austarlian court found that the purpose of the action being
brought was to persuade other shareholders to concur in and procure
the payment of dividends by the company or to buy the applicant's
shares in the company.
This was held to be a collateral purpose amounting to abuse of
process. The leave will not be granted where the main reason for the
plaintiff is primarily to obtain a better price for the shares.
20. To ascertain whether it is in the best interest of the company for
leave to be granted, a company's genuine commercial reasons not to
proceed with any litigation must also be considered. (Celcom (M) Bhd v
Mohd Shuaib Ishak)
21. When directors want to consider whether any legal proceedings should be
commenced, they would have to assess the benefit and cost of the
litigation.
22. Some commercial reasons for deciding whether or not to litigate may be
The financial advantage or disadvantage of the company.
Capabilities of the company.
How the litigation could affect the reputation of the company and in
some instances the business relationship with the alleged wrongdoer
(Pang Yong Hock v PKS Contracts Services Pte Ltd)
23. Where the company argued that that it is in the company's commercial
benefit not to pursue litigation against wrongdoer, provided that there
is no conflict of interest, the court will have to rely on the
director's decision on this point and make an assessment about their
decision.
24. A decision by an applicant in applying leave where leaved was refused
due to conflict of interest can be seen in Mcevoy v Caplan:
In this case where there was a pending litigation between two
companies where the applicant in the present case, Mcevoy, was a
director of both these companies.
Mcevoy applied for leave under Section 237 of the Corporation Act
2001 to bring a cross-claim as a derivative action on behalf the
defendants companies.
The trial judge refused lease as there was a clear conflict on
Mcevoy's part.
he judge felt that the roles he played in these two companies in
relation to the legal proceedings between these companies meant that
it would not be in the best interest of the defendant companies for
leaved to be granted.
WRONGDOER CONTROL
1. Shamsul bin Saad (suing as minority shareholder of Petra Perdana Berhad
and bringing this action for the interest of Petra Perdana Berhad) v
Tengku Dato' Ibrahim Petra bin Tengku Indra Petra
The applicant for leave was refused as the plaintiff was already in
control of the company via an interlocutory injunction and because the
alleged wrongdoer has already been removed by the general meeting. It
seems that the requirement for wrongdoer control as laid down under
the common law is subsumed within the statutory derivative action.
2. Suhaimi bin Ibrahim v Hi Summit Construction Sdn Bhd
The fact that the appellant still retained control of the board
indicated that they have control of the company despite not being a
majority shareholder and this influenced the court to refuse leave.
EFFECT OF RATIFICATION
1. Section 349 of CA 2016 provides that if members of a company, ratify or
approve the conduct of the subject matter of the action:
a) The ratification or approval does not prevent any person from
bringing, intervening in or defending proceedings with the leave of
the court.
b) The application for leave or action brought or intervened in shall not
be stayed or dismissed by reason only of the ratification or approval
and
c) The court may take into account the ratification or approval in
determining what order to make.
2. Thus the fact that the general meeting has ratified the transaction is
not a bar to the grant of the leave.
3. It is possible that the ratification is not valid due to the involvement
of the wrongdoer in the voting.
4. Even if the wrongdoer has not voted on the resolution ratifying the
wrongdoer's misconduct, the ratification is invalid if it is by votes of
the shareholders over whom the wrongdoer exercise control.
5. It is also possible that the ratification was not properly made as the
independent shareholders were not given relevant and adequate information
to make an informed decision (Ting Sing Ning v Ting Chek Swee)
6. In fact, the ratification itself may be the subject of contention, for
example where the validity of the meeting purporting to ratify the breach
was itself questionable (Parry v Bartlett).
POWER OF THE COURT
1. Where leave is granted, the obvious order is for the complainant to be
allowed to bring the action of behalf of the company or to control the
proceedings.
2. It is also possible for the court to order that another person take over
the action or make an order for the original complainant to be replaced
by another person. This could be an appropriate order where the
complainant may not be entirely blameless, for example, if there were
some concerns about the innocence of the plaintiff.
3. Section 350 of CA 2016: In granting leave under this section and
sections 347 and 348, the Court may make such other orders as the Court
thinks appropriate including an order:
a) Authorizing the complainant or any other person to control the conduct
of the proceedings;
b) giving directions for the conduct of the proceedings;
c) for any person to provide assistance and information to the
complainant, including to allow inspection of the company's books;
d) requiring the company to pay reasonable legal fees and disbursements
incurred by the complainant in connection with the application or
action, or pending the grant of the leave or pending the grant of any
injunction by the Court hearing the application for leave under this
section; or
e) The costs of the complainant, the company or any other person for
proceedings taken under this section, including an order as to
indemnity for costs.
