Grounds of Judgment for Statutory Derivative Action

I had previously highlighted the news on an aggrieved shareholder obtaining leave from the High Court to bring a statutory derivative action on behalf of Celcom (Malaysia) Berhad.The unreported decision is now out in Mohd Shuaib Ishak v Celcom (Malaysia) Berhad[2008] 1 LNS 314 where Ramly J set out his detailed grounds of judgment. It makes for very interesting reading.The Judge confirmed that the test in assessing “good faith” is whether there is an arguable case for Celcom to bring a claim against the proposed Defendants. Self-interest on the part of the applicant was insufficient to lead to a finding of bad faith.In determining whether it was “prima facie to be in the best interests of the company that the application for leave be granted”, the Judge held that the test to be whether an applicant has adduced sufficient evidence which on the face of that evidence discloses that it is, so far as can be judged from the disclosure, in the interests of the company to pursue the action.It is very useful that the Court has set out in great detail the list of authorities, mainly drawn from Canada and Singapore, governing the principles governing an application for leave under section 181A of the Companies Act 1965. There are some questions arising from the second half of the judgment though, where I find it curious that the Court saw the need to see if the proposed Defendants (ranging from Celcom’s directors, Telekom, to the advising banks) owed a duty of care to the shareholders. The action, once leave is given, is brought by the Company against the Defendants. The applicant, although being a shareholder, is only seeking leave to ‘borrow’ the name of the Company in order to bring an action. Hence, the issue of an arguable case has to be an analysis of the cause of action that the Company has against the proposed Defendants, and not vis-a-vis the shareholders and the proposed Defendants.A procedural point also arises once leave to bring an action has been granted. The successful applicant would of course want the very same Judge who heard the leave application to also hear the suit itself. In Carr v Cheng [2005] BCSC 445, the Supreme Court of British Columbia, in dealing with a leave application under similar provisions, did warn against this and held that “It is obvious that a Judge hearing an application for leave to commence an action, cannot try the action.”

That could be the correct position of law to be applied here. More issues then arise.

While having a suit filed in another court in the Company’s name, parties may well have to go back to the first court which granted leave in order to obtain further directions or seek relief for non-compliance for the orders made: disclosure or inspection of documents for instance, or for the payment of the indemnity of costs.

Another issue, with one High Court having found an ‘arguable case’ in the leave stage, would that exclude or severely hamper the Defendants from striking out the derivative suit filed in the other High Court? These Defendants were not heard at the leave stage, so should proposed Defendants automatically apply to intervene at the leave stage? The wording of the Companies Act does not make it clear who should be made respondents to a leave application.

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