Court of Appeal decision on the Statutory Derivative Action

I had earlier highlighted the High Court decision of Mohd Shuaib Ishak v Celcom (Malaysia) Berhadwhich was the first Malaysian decision interpreting the provisions of the statutory derivative action under the Companies Act 1965.This decision has been overturned on appeal in the as-yet unreported decision of Celcom (Malaysia) Berhad v Mohd Shuaib Ishak [2010] 1 LNS 560 (“Celcom”). While I am not altogether surprised with the reversal of the High Court decision, let me analyse some of the principles of law enunciated by the Court of Appeal that will not govern the leave requirement for a statutory derivative action. I had earlier set out my analysis of some of the other Canadian and Singapore authorities on the principles in those jurisdictions, especially since their statutory provisions are very similar to ours. [edit: Based on a Bursa announcement dated 10 August 2010, the leave to appeal to the Federal Court against the Court of Appeal decision has been dismissed. So this is a final decision.]

When looking at judgment of Celcom, the Court of Appeal seems to have taken a stricter approach in deciding whether to allow leave under section 181A compared with the approach advocated by the High Court. This restrictive approach could be justified in this case since the case involved a former member complaining about certain acts of the company.

The Court of Appeal, when analysing the first limb requiring good faith, held the test is two-fold. One is an honest belief on the part of the Respondent, and two, that this application is not brought up for a collateral purpose. It applied the dicta of Palmer J found in Swansson v R.A. Pratt Properties Pty Ltd & Anor [2002] NSWC 583):

“Nevertheless, in my opinion, there are at least two interrelated factors to which the courts will always have regard in determining whether the good faith requirement of s. 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds this belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process”.

In the Celcom decision, a significant factor the Court took into consideration that there was a prudent business and commercial decision of the directors, made under independent legal advice. The Court would be slow to interfere and substitute its own judgment in such a situation.

It appears from the judgment, that the Court did not fully consider the requirement that the proposed action must prima facie appear to be in the best interest of the company. The Court of Appeal did apply the judgment in Swansson to hold that there was no reasonable prospect of success, and hence it could be said that the other requirement under section 181A was also not satisfied.

Nonetheless, the Courts should be slow to refer in a blanket manner to Australian authorities on statutory derivative actions, since the Australian Corporations Act 2001 (specifically section 237) have quite different provisions from ours. Firstly, Australian law requires an applicant to show that “it is in the best interests of the company that the applicant be granted leave” whereas our act states merely that “it appears prima facie to be in the best interest of the company” for leave to be granted. This seems to mean that our Act requires a lower threshold than that in Australia. Secondly, Australian law requires an applicant to show a serious question to be tried and such a requirement is absent in the provisions in Malaysia, Singapore and Canada (where all 3 have similar wordings in their provisions).

It is useful to to now have an appellate authority to refer to, when seeking to apply for leave under section 181A of the Companies Act 1965. On the facts of Celcom, I think it is the correct decision for leave to be denied. However, it remains to be seen whether this interpretation of section 181A will shut the door on any legitimate applications for leave to initiate a statutory derivative action.

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