The Multiple Derivative Action allowed in Malaysia

In an earlier article on ‘Getting Away with Fraud: Defraud the Subsidiary?‘, I had written about the development of the multiple derivative action in other jurisdictions. This is where a shareholder of a holding company brings an action on behalf of a subsidiary of that holding company. In a way, it allows you to skip past one or more levels of the corporate structure in order to bring an action for a wrong done to that subsidiary.

skipping stone

In the recent unreported Grounds of Judgment dated 16 November in the Zavarco case, the High Court upheld the existence of a multiple derivative action in Malaysia. It is therefore possible for a shareholder to bring such an action.

Brief Facts

While the case involved other issues as well, I focus on the salient points relevant to the analysis on the bringing of a multiple derivative action. The facts are slightly complicated.

The Plaintiffs are shareholders of Zavarco PLC (a UK incorporated company) but not shareholders of Zavarco Bhd (a Malaysian incorporated company). Zavarco Bhd is a wholly-owned subsidiary of Zavarco PLC. The Plaintiffs were aggrieved by a Consent Judgment that had been entered in the name of both Zavarco companies. The Plaintiffs claimed that the Consent Judgment was a sham and part of a conspiracy to defraud the Zavarco companies whereby the core business of the Zavarco companies would be transferred out.

The Defendants filed applications to strike out the Plaintiff’s derivative suit. One of the grounds raised was that the Plaintiffs would have required to obtain permission from the UK to bring a statutory derivative action on behalf of Zavarco PLC. No such permission was argued.

It was argued that the UK Companies Act had abolished the common law derivative action and that only the statutory route remained. Therefore, ordinarily, the Plaintiffs being shareholders of Zavarco PLC must obtain permission from the UK Courts to bring such a statutory derivative action to sue on behalf of Zavarco PLC.

Hence, this situation is not a true situation of a multiple derivative action. A multiple derivative action normally bypasses the holding company and it is the subsidiary which can bring an action. Here, the holding company, Zavarco PLC, also had a right to bring an action to set aside the Consent Judgment. Therefore, this striking out objection that the Plaintiffs could only seek relief on behalf of Zavarco PLC through the statutory derivative action provisions. Without Zavarco PLC in the picture, the Defendants alleged that the entire multiple derivative suit crumbled.

Findings

The High Court Judge dismissed the striking out application and confirmed the existence of the right to bring a multiple derivative action in Malaysia.

The Court relied on the English authority of Re Fort Gilkicker Ltd and the Hong Kong Court of Final Appeal decision of Waddington v Chan Chun Hoo. The Court set out two main reasons drawn from these authorities:

  1. If there are no derivative actions, the law would fail in its purpose and injustice would be done without redress. There may be occasions when multiple derivative actions are necessary in the interest of justice so as to safeguard the interest of the companies and their shareholders in question.
  2.  Multiple derivative actions may prevent a wrongdoers from benefiting from his or her own wrongdoing.

Such an analysis may correctly apply to Zavarco Bhd, the Malaysian incorporated company. A multiple derivative action would allow the Plaintiffs to go down the corporate structure to seek relief for a wrong done to Zavarco Bhd.

But the Court did not seem to find that the lack of permission to bring a statutory derivative action would bar the multiple derivative action filed in Malaysia on behalf of Zavarco PLC. As shareholders of Zavarco PLC, the Plaintiffs would have had the right to bring a statutory derivative action on behalf of Zavarco PLC but would have required permission from the UK Courts. One way around this could have been to find that the UK statutory derivative provisions only applied to the bringing of proceedings in the UK. This multiple derivative action is filed in Malaysia and Malaysian law applied.

This decision is significant in confirming that Malaysia is in line with other common law jurisdictions. We recognise the ability to bring a multiple derivative action, in order for there to be a suitably interested representative, or champion, of the wronged company. The law will clothe such a champion with the necessary standing to bring an action on behalf of the wronged company.

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