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Derivative

Action
(Question 2)

Nur Syamimi binti Mazri (1628280)


Sakinah
Fatin
La Vida Sdn Bhd is a company, involved in manufacturing, distributing and
marketing health and beauty products. Shares of the company are divided
between 10 shareholders. Arif, Saleh, Fong (who are the directors) own
75% shares. Meanwhile Rina own 10% shares. At some point, Rina has
sued the 3 directors for defamation. Case is still on going.

In 2015, director sold the company’s asset to Glad Sdn Bhd. However, the
full purchase price for this sale is still not paid but no action has been
initiated. Directors said any legal action has already time-barred. However,
it is turn out that Glad Sdn Bhd is actually being controlled by the
director’s family.

Facts of
the case
Director said that the company has entered into an exclusive contract
with other producer. Therefore they rejected other manufacturers’
offer. However, Rina discovered that the exclusive contract has expired.
She suspects the new contract was diverted to Glad Sdn Bhd. At
general meeting, this decision was approved as an investment in glad
Sdn bhd. Rina did not receive the notice of meeting.

Rina want to sue them. However, the directors said that due to
defamation action, Rina is not acting in good faith. Advise Rina.

Facts of
the case
Section 347 CA

Sec 347(1) “A complainant, may with leave


of court bring, intervene in or defend an
action on behalf of the company”
Paidiah Genganaidu v Lower Perak
Syndicate Sdn Bhd. (1974)
 Action taken by minority shareholders
against resolution by company to waive
payment by directors for breach of their
duty
 Decision made by shareholders at general
meeting
 Directors were not majority shareholders
 Held: decision by independent shareholders
is binding
Acknowledgement of the derivative action
in Malaysia
-Abdul Rahim bin Aki v Krubong Industrial
Park (Melaka) Sdn Bhd [1995]

 it is sufficient for a plaintiff in an action


grounded upon the doctrine to show that
those wielding majority control abused the
powers vested in them. Not for the purpose
of the company.
Whether Rina can
apply to court?
Sect 345 : who can apply to court

A member of a company or a person who is


entitled to be registered as a member,
Owen v Piasau Jaya S/B [1996] 1 MLJ 113

 Held
 The person applying must have his name
appear on the register of member but this
is a general rule not universal;
 The petitioner had been deprived of
membership and this is the act complained
of so the respondent cannot rely on his
unconscionable conduct to deprive appellant
from having locus standi
Kitnasamy s/o Marudapan v Nagatheran s/o
Manogar [2000] 2 SLR 598
 Held:
 evidence indicated that he was a shareholder of
a company although his name did not appear in
the register of members. The omission of the
appellant’s name was due to respondent’s fault.
 Respondents were estopped from denying that
the appellant was a shareholder and member
because they had issued the notice of the
general meeting to the appellant, a notice to
which he was not entitled to if he were not a
member of the company.
Swannson v Pratt [2002] 42 ACSR 313

 Where the application is made by a 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’s satisfaction.
Application

Rina is one of the shareholder


of the company, who own
10% of the company’s shares.
Therefore she’s entitled to
proceed with the legal action
by virtue sect 345 of CA
Section 348 (4) :
How does the court
exercise its discretion?

(a) The complainant is acting in good faith

(b) It appears prima facie to be in the best interest of the company that the application for leave to be granted
“GOOD FAITH AND
CLEAN HANDS”

Fong Wai Lyn Carolyn v Airtrust


(Singapore) Pte Ltd and Another [2011]
SGHC 88
CELCOM (M) Bhd v Mohd
Shuaib Ishak [2011] 3 MLJ
636

Judgment from Court of Appeal :

 Test of good faith is two-fold


 The first one is an honest belief on the part of the
applicant
 The second one is the application is not brought up
for a collateral purpose
Swansson v. R. A.
Pratt Properties Pty Ltd
[2002] NSWSC 583

 The court observed that this involved considering whether


‘the applicant honestly believes that a good cause of action
exists and has reasonable prospects of success.’
 Further, the application should not have been brought for
a collateral purpose
COLLATERAL
PURPOSE
The authorities clearly state that the courts
should readily draw an inference of good faith
where the applicant has :

Would indirectly
Substantial benefit from any
economic recovery by the
company as a
interest in result of the
the company proceedings
Contd.

Goozee v Graphic World Group


Holdings [2002] 42 ACSR
534

 Where the application was to force


directors to pay
dividends or to force directors to
purchase plaintiff’s share
Ong Keng Huat v Fortune
Frontier (M) Sdn Bhd &
Anor [2015] 11 MLJ 604

Judgment from the High Court :

 The burden of proof lies on the applicant


 The court must assess the motivation of an applicant
 However, the consideration before the court is more on the
purpose of the proposed derivation
 The applicant must demonstrate that he is genuinely aggrieved
and his collateral purpose is sufficiently consistent to uphold
justice for the company
Dynamic Industries Pty Ltd
[2014] VSC 101 [95]

It was found that the applicant’s efforts and expense


incurred in obtaining access to the books of the
company, and undertaking to indemnify the company in
respect of the costs of proceedings, supported the
finding that the proceedings were brought in good faith
PRIMA FACIE FOR THE
BEST INTEREST OF THE
COMPANY
 The court also considered the criterion in Sec 181B(4)
as to whether it “appeared prima facie to be in the best
interest of the company that the application for leave be
granted” – Celcom’s case

 Examined whether there were reasonable prospects


of success or considered the strength of evidence
adduced in support of the claim
Lee Suan Ngee v On Network Sdn Bhd
[2013] 1 LNS 506

Abdul Rahim Suleiman v Faridah Md


Lazim [2015] 1 LNS 313
 Leave to bring a derivative action was deemed not to be in the best
interest of the company due to the
lack of evidence

 Leave was refused as the derivative action was deemed to have no


reasonable prospect of success

Consequently, the court held that it was not prima facie in the best
interest of the company that leave should be granted
Tam Tak Chuen v Eden
Aesthetics Pte Ltd and
Another

 The main motivation is not personal but


was financial
 The company’s loss of income arising
from breach of director’s fiduciary duty
Dato’ Seri Timor Shah Rafiq v Nautilus
Tug & Towage Sdn Bhd [2019] 10 MLJ
693

 If no reasonable cause of action and one that had a reasonable prospect of


success
 Or if there was a collateral purpose for wanting to initiate proceedings
 would be incompatible with the required good faith in seeking to initiate
proceedings in the name and on behalf of the company

Ie : underlying purpose of furthering a dispute or to create


controversy or to disrupt an opposing party’s management of the company
FRAUD ON
MINORITY – MUST IT
SHOWN?
 NOT NECESSARY – COMMON LAW PRINCIPLE

 SUFFICIENT TO ONLY PROVE THE MAJORITY CONTROL


ABUSED THE POWER
Daniels v Daniels
(1978) 2 All ER 89.

Where directors had used their power,


intentionally or unintentionally, fraudulently or
negligently in a manner which benefits
themselves at the expense of the company,
there was fraud on the minority
Application
 Rina may be considered as acting in a good faith
because of :
a) She is not a part from the default happened
b) The suit is for the best interest of the company
c) No evidence of collateral purpose

 The claim brought is for the best interest of the company


a) The directors sold one of the company’s assets to Glad Sdn
Bhd and turn out to be controlled by the directors‘ family
b) The contract for a beauty product manufacturer to be the
distributor of the products is rejected by the directors

 Fraud on minority
a) Rina is not invited where approval to invest in Glad Sdn
Bhd
Sect 349 : Effect of Ratification

(a) The ratification or approval does not


prevent any person from bringing,
intervening in or defending proceedings
with the leave of the court
Application

At general meeting, the


decision was approved as
an investment in Glad Sdn
bhd. However, by virtue
s349, the approval does not
prevent Rina from bringing
an action
What are the
procedures that
need to be taken
by Rina?
Notice Period
 Section 348 (2) : The complainant shall give thirty days’ notice in writing to the
directors of his intention to apply for the leave of court under Section 347.
 Independant Oil Tools Ltd v Dato’ Ramli bin Md Nor & Ors [2018] MLJU 133 : The
function of the notice is to give an opportunity to the company to consider and to
respond to a request by a complainant for proceeding to be commenced in the
name of the company. Thus, if the company responds to the notice by stating that
it has taken note of the contents and will be commencing legal action in the
manner requested or suggested, then no need for the complainant to proceed to
make the application to obtain leave of court.
 Section 348 (3) : Where leave has been granted for an application under Section
347, the complainant shall initiate proceedings in Court within thirty days from the
grant of leave.
 Section 348(4) : 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.

To whom Notice must be given?


 Independent Oil Tools Ltd v Dato’ Ramli bin Md Nor & Ors [2018] MLJU 133
APPLICATION

Thus, Rina has to send the notice in writing to the company secretary
who will send it to the other directors at least 30 days before she
commences the legal action. If the company responds to the notice
and will be commencing the legal action as requested, then no need
for Rina to make application for the leave of court. However, if the
company did not responds to her notice, she can makes an
application for the leave of court under Section 348 of Companies
Act 2016.
What are the
orders that can
be made by the
court?
Section 350 of the Companies Act 2016 stated that:

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 book.
d) Requiring the company to pay reasonable legal fees and disbursements incurred by
the complainant
e) The cost of the complainant, the company or any other person for proceedings
taken under this section, including an order as to indemnity for costs.

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