Another High Court Decision on the Statutory Derivative Action

In the recent reported decision of Ng Hoy Keong v Chua Choon Yang & Ors [2010] 9 MLJ 145, the High Court had allowed leave under section 181A of the Companies Act 1965 (“the Act”) for the Plaintiff to take proceedings on behalf of the Company to defend a legal action filed against the Company.

Briefly, the Plaintiff was a director and 50% shareholder of the Company and was already involved in a shareholder dispute with the other 50% shareholder and the two other directors. Subsequently, another company, Satujaya, had obtained judgment in default against the Company and had then initiated garnishee proceedings against the Company. The Plaintiff gave 9 days notice to the directors before filing the leave application against the two directors and the Company. In the application for leave to take proceedings on behalf of the Company, the Plaintiff obtained an interim stay of the garnishee proceedings and also applied for an abridgement of the 30-day notice requirement of section 181B(2) of the Act.

Some issues to be highlighted of the decision:

1. The Court held that the time frame set out in section 181B(2) of the Act is not mandatory and had allowed the abridgement of time pursuant to section 355(4) of the Act which allows the Court to “…enlarge or abridge any time for doing any act or taking any proceedings allowed or limited by this Act …”

2. The Court applied the High Court decision of Mohd Shuaib Ishak v Celcom (M) Bhd [2008] 5 MLJ 857 (I had touched on the High Court decision in my post here) where only a prima facie case needed to be shown for leave. The Celcom decision has however been overturned on appeal where the Court of Appeal (and I commented on the Court of Appeal decision here) has held that one of the requirements for leave is that the applicant must honestly believe that a good cause of action exists and has a reasonable prospect of success.

3. An interesting aspect of this decision is that the Court allowed an interim stay of the garnishee proceedings between Satujaya and the Company. Prior to an applicant obtaining leave to wield the name of the company, it was thought that the applicant could not seek interim relief on behalf of the company. More so in the present case where Satujaya was not even a party to the leave proceedings.

4. While these findings may be subject to an appeal, this decision does highlight the inherent weaknesses of the section 181A framework and how the Plaintiff tried to overcome them. First, section 181B(2) of the Act makes it mandatory for the applicant to provide a 30-day notice to the directors prior to the filing of the leave application. Unlike other jurisdictions, section 181B does not allow for dispensation of this time period in urgent circumstances. This gives time for recalcitrant directors to possibly frustrate the pending legal proceedings, for instance here, to allow the assets of the Company to be depleted through the garnishee proceedings. Second, even when the leave application is filed and pending the hearing, interim relief may not be available for the Company to take steps to prevent the depletion of assets. The decision does not highlight any arguments that were made in relation to whether the interim stay of other court proceedings could be allowed. Hence where urgent interim relief is being sought, more so if there is justification to proceed on an ex parte basis, then legal proceedings under section 181 or even under a common law derivative action may be the more appropriate route to take.

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