Category Archives: company law

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.

Requirements for Restraining Order in a Scheme of Arrangement

Hishamudin J in the recent (as of now still unreported) decision of PECD Bhd & Anor (Applicants) (No. 2) [2008] 1 LNS 324 examined the requirements for the grant of a restraining order under section 176(10A) of the Companies Act 1965 (“the Act”).

A restraining order is a far-reaching stay-like order applied for under section 176(10) of the Act when a company is undergoing a scheme of arrangement. The company or any member or creditor of the company may apply to the Court to restrain further proceedings in any action or proceeding against the company, except by leave of the Court. Such an order to restrain ‘any action or proceeding’ would not only extend to restraining legal suits or winding up petitions filed against the company, but also to any possible de-listing procedures taken by Bursa Malaysia. A restraining order is applied for on an ex parte basis so it is timely that the High Court has clarified the requirements that need to be satisfied at the initial application stage.

Section 176(10A) of the Act sets out that the Court may grant a restraining order for a period of not more than ninety days or such longer period as the Court may for good reason allow if and only if-

(a) it is satisfied that there is a proposal for a scheme of compromise or arrangement between the company and its creditors or any class of creditors representing at least one-half in value of all the creditors;

(b) the restraining order is necessary to enable the company and its creditors to formalise the scheme of compromise or arrangement for the approval of the creditors or members pursuant to subsection (1);

(c) a statement in the prescribed form as to the affairs of the company made up to a date not more than three days before the application is lodged together with the application; and

(d) it approves the person nominated by a majority of the creditors in the application by the company under subsection (10) to act as a director or if that person is not already a director, notwithstanding the provisions of this Act or the memorandum and articles of the company, appoints the person to act as a director.


I will not delve too much into the facts of the case, but the issue to be determined in PECD Bhd was whether the stringent requirements of section 176(10A)(a) – (d) must be complied with even where the application for a restraining order did not exceed the period of 90 days. It boiled down to an interpretation of the phrase “…may grant a restraining order for a period of not more than ninety days or such longer period as the Court may for good reason allow if and only if.”

The Court held that “the four paragraphs apply to any application for a restraining order pursuant to subsections (10) and (10A) of section 176 of the Companies Act regardless of the length of the period of the restraining order applied for.”

Prior to this, the weight of the authorities (see Metroplex Bhd & Ors v Morgan Stanley Emerging Markets Inc & Ors [2005] 6 MLJ 487 and Re Kai Peng Bhd [2007] 8 CLJ 703) already supported this interpretation but they were all decided in the context of an extension of the restraining order past the 90-day period. There was also the seemingly-contrary High Court decisions in Jin Lin Wood Industries Sdn Bhd & Ors v Mulpha International Bhd (unreported) (2004) and Pelangi Airways Sdn Bhd v Mayban Trustees Bhd [2001] 2 MLJ 237, but Hishamudin J distinguished Pelangi Airways in this case.

This case is pending appeal I believe but I think that this is the correct interpretation of section 176(10A). There is firstly, the plain reading of the section, which Hishamudin J held that if it were intended that the requirements were to only apply for the period after 90 days, the draftsman would have drafted it differently.

Secondly, the background of the introduction of subsection 10A was the abuse of the restraining order provisions especially during the period of the last financial crisis. Restraining orders would be sought for long periods of time, and then further extended, with the debtor company enjoying a moratorium against their creditors and allowing the company to drag its feet in the implementation of the scheme of arrangement.

The need to comply with the requirements of section 176(10A) at the very initial application ensures that the creditors are not caught by surprise by the ex parte restraining order. The applicant company would have already sought most of their views and the creditor-nominated director would ensure that there is proper management of the assets of the company during the restraining order period. There would also be full disclosure of the financial information of the company at the very start.

Statutory Derivative Action in Malaysia

In what could possibly one of the first successful statutory derivative actions filed here in Malaysia, it was reported that a former shareholder of Celcom (Malaysia) Bhd had obtained leave from court to initiate a statutory derivative action on behalf of Celcom against Telekom Malaysia Bhd (TM). I had previously touched on the law of the new statutory derivative actionhere in Malaysia.From the public announcements, we see that leave under section 181A of the Companies Act 1965 was granted on 9 July 2008. Further details of the action being brought is also found in another recent Bursa announcement.

Quoting from the Edge Daily article, the action a former shareholder of Celcom, Mohd Shuaib Ishak, is suing TM and its wholly-owned subsidiary Telekom Enterprise Sdn Bhd (TESB) pertaining to the amended and restated supplemental agreement dated April 4, 2002 entered into between, among others, Celcom and DeTeAsia, the acquisition of Celcom shares by TESB, the consequent Mandatory General Offer (MGO) exercise implemented by TM and the de-merger exercise of the mobile and fixed-line businesses of the TM Group.

DeTeAsia was formerly the strategic partner of Celcom and made its entry into the mobile phone operator when it was majority-owned by companies belonging to Tan Sri Tajudin Ramli. After Tajudin defaulted on his debts, his shares in Celcom were forced sold by Pengurusan Danaharta Bhd to TM via TESB. TM then made a MGO for the rest of the Celcom shares at RM2.75 each.

DeTeAsia accepted the MGO but also filed a claim for additional RM4.25 per share with an international arbitration panel. It subsequently won the claim and TM paid a further RM740 million to DeTeAsia.

In the suit, Shuaib on behalf of Celcom has named as defendants TM, TESB and nineteen others, including the former and existing directors of Celcom and TM. Among the relief Shuaib is seeking on behalf of Celcom are:

(a) The sum of US$232,999,745.80, being the amount paid by Celcom to DeTeAsia under the Award;

(b) A declaration that the Sale and Purchase Agreement dated 28.10.2002 between Celcom and TM (or TESB) for the aquisition by Celcom of the shares in TM Cellular Sdn Bhd is illegal and void and of no effect;

(c) A declaration that all purchases of shares in Celcom made by TESB from the MGO is illegal and void and of no effect;

(e) That TM by itself, its servants and agents be restrained from giving effect to or executing any of the proposals set out relating to the proposed de-merger of the mobile and fixed-line businesses of the TM Group or in the event that any such proposals have been completed that TM, by itself, its servants and agents take all such steps as shall be required to rescind such completed proposals.

It will be very interesting to see the developments in this case, and the public will be able to follow any developments through the public announcements as well. The law on this area is still in its infancy and it already appears that shareholders are quick to use this procedure to bring an action in the interests of the company. It remains to be seen if my initial opinion that the floodgates of shareholder litigation will not be opened under this new derivative action.

Edit: The Court of Appeal has overturned the High Court decision, but the written grounds of judgment are not out yet.

The Limited Liability Partnership in Malaysia

IntroductionTraditional business models tend to veer between two options, that of a partnership and a corporation. While a partnership offers flexibility in allowing its members to agree and strike a bargain on the form of its arrangement, a corporation must adhere to a more mandatory framework with a division between its management and its members. However, a corporation enjoys its own separate legal personality with its shareholders enjoying limited liability.Within the practice of law here, legal practitioners can only choose between operating as a sole practitioner or to form a partnership.

A need for flexibility in running a business and to overcome certain limitations in all the above business models have led to the call for a hybrid vehicle to be enacted, that of a Limited Liability Partnership (LLP).

…it combines the protection of limited liability whilst offering a degree of flexibility of the partnership arrangement…

As its name suggests, it combines the protection of limited liability for its members whilst offering a degree of flexibility of the partnership arrangement for the internal management of the business. The most attractive feature of an LLP is that it is a separate legal entity and has a continuing legal existence independent of its members as compared to the traditional partnership of which its legal existence is dependent upon its membership.

The Companies Commission of Malaysia (CCM) has revived the consultation process in relation to the LLP and issued a second consultative document. The CCM recommends that the LLP should be a vehicle afforded to all business and not merely certain professional groups. It believes that the LLP provides businessmen and investors the flexibility to select the best business entity suited for its business.

It has been reported that the CCM hopes to implement the LLP model by 2009.

This article will highlight and touch on the CCM’s recommendations and the likely features of the LLP structure here in Malaysia. The discussion here highlights the proposals of the CCM.

The Conferment of Limited Liability Status

The proposed LLP Act will confer a separate legal entity status on the LLP – one that is distinct from its partners that will come into existence upon registration of the business entity.

Partners of the LLP will be accorded limited liability in respect of tort and contractual claims. However, it will not insulate a partner of the LLP which he would otherwise incur by his own wrongful act or omission, even though such acts were carried out in his role as a partner of the LLP. This is in line with the approach taken in the UK whereby the House of Lords applied the decision in Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830, HL, to LLPs.

The CCM was of the view that that there should be mandatory bonds/insurance for professional LLPs there should be mandatory bonds/insurance. For instance, Article 6 of the Jersey Act requires an LLP to make financial provision for a sum of £5 million to be paid by a bank/insurance company to creditors of the LLP upon the dissolution of the LLP.

Partners of the LLP will be accorded limited liability in respect of tort and contractual claims

However, the majority of the respondents in the first round of consultation disagreed that the bond requirement be mandated by the legislation as the requirement is specific for professionals only and instead, such requirement should be determined by the rule of the relevant professional bodies.

Registration Procedures

Registration will be simplified through the process of a single registration instrument. The CCM proposes that the information to be included in the registration form consists of inter alia the name and principal activities of the LLP, the address of the registered office of the LLP, the names and addresses of the partners and the name and address of a designated partner of the LLP. However, the Registrar may request additional information be included as part of the registration requirement. All this information will be made available for public inspection.

However, the partnership agreement will not be lodged with the Registrar in order to preserve the confidentiality of the agreement between the partners.

Membership Structure and Eligibility

The LLP should have a minimum number of 2 partners with no upper limit to its partnership. In the event that the number of partners drops below the required minimum, a certain grace period can be allowed to achieve the requirement, after which the LLP must cease to operate and be wound up.

Membership to an LLP should be made available to both natural and legal persons, in line with the Partnership Act 1961.

There were some concerns whether all partners to an LLP should be subject to the same disqualification and penalty provisions as that under sections 130 and 130A of the Companies Act, 1965, which is the position under the UK LLP Act. In Singapore however, the disqualification and penalty provisions are only applicable to the persons managing the LLP, who need not necessarily be a partner of the LLP. The CCM’s recommendation is to follow the Singapore position. The person who is involved in the management of an LLP should be subject to the same disqualification criteria faced by directors of companies.

Designated Compliance Officer

An LLP will require a designated compliance officer to ensure that the compliance requirements under the proposed LLP Act are fully adhered to. This will be a similar role to that of company secretaries and directors in relation to the Companies Act 1965.

The designated compliance officer need not necessarily be a partner of the firm. It is proposed that further conditions to be imposed on the designated compliance officer is that he or she must be a natural person ordinarily resident in Malaysia and subject to the same disqualifications criteria under sections 125, 130 and 130A of the Companies Act 1965.

Liability of Partners

Limited liability is to be given to innocent partners only and that it should be clearly stated that the defaulting partner is jointly liable with the LLP for the damage, loss or injury suffered by a third party.

Partners of an LLP should be accorded limited liability in respect of tort and contractual claims. A partner of an LLP should not, by reason only of being a partner of the LLP, be held personally liable for the conduct of other partners or the transactions or liabilities of the LLP.

It is also proposed that in the event an LLP becomes insolvent, a partner’s liability should be limited to the amount of his capital contribution to the LLP subsisting at the time.

Partners’ Authority to Bind LLP

The proposed LLP Act shall provide that partners of an LLP are deemed to be its agents and therefore they may act or represent on behalf of the LLP.

The circumstances in which an LLP will not be bound by acts of its partners are the following: –

…partners of an LLP are deemed to be its agents and therefore they may act or represent on behalf of the LLP

(i) the partner has no authority to act on behalf of the LLP; or

(ii) the third party dealing with the partner is aware of this; or

(iii) the third party does not know or believe that the partner is a partner of the LLP.

In the case of transactions with a former partner of an LLP, such transactions are still valid transactions binding the LLP unless the third party has actual notice that the partner is no longer a partner of the LLP at the time of the transaction.

It has been recommended that only actual notice will suffice and that constructive notice should not be applicable where transactions with a third party are concerned. This may be controversial since it may be too onerous on former partners if the doctrine of constructive notice is not applied. The respondents in the first round of consultation seemed to go both ways on this issue.

It may be in the public interest to only allow for actual notice and this view is supported by the approach taken by the Jersey LLP Act where it provides that for the purposes of determining whether a partner has authority to act on behalf of an LLP, no person is deemed to have notice of any records by reason only that they are made available by the Registrar for inspection.

Relationship between the LLP and Partners

The CCM is of the view that default rules should be provided in the proposed LLP Act. However, such default rules are only applicable in the absence of a partnership agreement or when certain matters are not dealt with in such agreement.

The default rules will cover areas relating to inter alia:
(i) Contribution of capital, sharing of profit and loss;
(ii) Right to indemnify;
(iii) Involvement in the management of the LLP;
(iv) Remuneration of members; and
(v) Introduction and withdrawal from membership to the LLP;

Creation of Debentures or Charges

The LLP should be allowed to create debentures or charges in order to raise loans and the CCM is in favour of this. Traditional partnerships would have to rely on the personal guarantee of the partners to secure a loan.

Creditors’ Protection Mechanism

The proposed LLP Act will contain claw-back provisions requiring contributions from partners and former partners who have withdrawn any property from the LLP within a stipulated time frame of the commencement of the winding up, if it can be shown that the LLP was insolvent at the time of withdrawal or that the partner(s) knew or have reasonable grounds for believing that the LLP was or would not be able to pay its debts.

The time frame may mirror the 6-month window under insolvency laws or a longer period may be adopted.

Such claw-back provisions should be limited to only the amount withdrawn by the partner or former partner of the LLP.

An LLP is deemed to be insolvent if at anytime the LLP is unable to pay its debts when they are due in the normal course of business or at any material time the value of the LLPs’ assets is less than the value of its liabilities. This is a clearer definition of insolvency than that contained in the Companies Act 1965 and codifies one of the common law tests for insolvency.

The circumstances of the LLP’s inability to pay debts should be made consistent with section 218(2) of the Companies Act 1965 which states that the inability of a company to pay its debts is when the company is indebted in a sum exceeding five hundred ringgit loans. This in itself may be controversial since there already is a criticism of the low 500 ringgit threshold for companies, and any amendment to the Companies Act 1965 to raise this limit should similarly be adopted under the proposed LLP Act.

Dissolution of the LLP

The partnership agreement can dictate the methods for dissolving an LLP and an LLP should not be affected by the death or bankruptcy of its partner.

An LLP can be voluntarily dissolved if its partners agree to do so. This may very well entail the filing of the necessary certificate of solvency with the Registrar or the making of a statutory declaration that the LLP is solvent before the commence of the winding up process (as is the position under the UK LLP Act).

The Court may also be empowered to order an LLP to be dissolved in certain
circumstances. The CCM is in favour of adopting the Singapore position, where some of the circumstances in which the Court can dissolve an LLP are:

(i) the partners have resolved that the LLP be wound up by the Court;
(ii) the LLP is unable to pay its debts;
(iii) the Court is of the opinion that it is not reasonable/practicable to carry on the business of the LLP in conformity with the partnership agreement;
(iv) the Court is of the opinion that it is just and equitable that the LLP be wound up; or
(v) the LLP is being used for unlawful purposes or for purposes prejudicial to public peace, welfare or good order or against national security or interests.

…the benefits enjoyed by the partners of the LLP must also be tempered with the protection of the public…

Conclusion

It is very encouraging to see the CCM pushing hard for the implementation of the LLP model. Aside from the proposed LLP Act which will adopt most of the above features, legislation like the Income Tax Act, and other statutes governing professional bodies, for instance the Legal Profession Act, will also have to be amended accordingly. It may be too much to ask to implement the entire structure by 2009 but at least that is the targeted time frame presently.

This new LLP vehicle will aid small and medium sized business as well as professionals in the running of their respective businesses. The CCM is already mindful that the benefits enjoyed by the partners of the LLP must also be tempered with the protection of the public dealing with the LLPs.

The Statutory Derivative Action

The Minority Shareholder’s Sword to Pierce the Majority’s Twin Shields of Corporate Personality and Majority Rule[26/9/2010: This article must now be read subject to the Malaysian authorities applying the new statutory derivative action provisions. The present leading decision is the Court of Appeal case of Celcom (Malaysia) Berhad v Mohd Shuaib Ishak]

Part A. Introduction

A derivative action is an action brought by a shareholder based on a cause of action that the company has, rather than a cause of action belonging to the shareholder. The common law allows a minority shareholder to bring this action on behalf of the company in situations where the company does not take action because the wrongdoer controls the company and is able to prevent the company from taking any action.

The new statutory derivative action allows a shareholder to sidestep the restrictions of the common law derivative action.

The new statutory derivative action, under sections 181A to 181E of the Companies Act 1965 (“the Act”), allows a complainant to apply for leave of the Court to bring an action on behalf of the company. This new action, which came into effect on 15 August 2007 under the Companies (Amendment) Act 2007, allows a shareholder to sidestep the restrictions of the common law derivative action.

The common law rule in Foss v Harbottle (1843) 67 ER 189 states that if a company suffers a wrong then, because it is a separate legal entity from its shareholders, prima facie it is the company that should bring an action. Such a rule allowed a shareholder to bring an action on behalf of the company if two elements could be proven. First, that the wrong is one that cannot be validly ratified by the majority as there has been a fraud on the minority, and second, that the perpetrators of the fraud were in control of the company.

The new statutory derivative action bypasses the narrow Foss v Harbottle rule. However, it is clear that the right to bring a common law derivative action continues to be maintained here in Malaysia (see section 181A(3) of the Act).

The new sections 181A to 181E of the Act are very similar to the statutory derivative action provisions of the Singapore Companies Act, which were in turn modelled after the provisions of the Canadian Business Corporations Act.


Part B. Applicable to Pre-Amendment Wrongdoings?

Before delving into the provisions of the statutory derivative action, it is submitted that the new provisions can apply to wrongdoings or events which occurred before the coming into force of the amendments, i.e. before 15 August 2007. This may be the case where a member of the company seeks leave to bring an action but the issue is not so clear in respect of other parties seeking leave to bring a statutory derivative action.

…the new sections 181A to 181E of the Act merely set out a new procedural form for the common law derivative action, and therefore these provisions are applicable retrospectively to pre-amendment wrongdoings.


It can be strongly argued that the new sections 181A to 181E of the Act merely set out a new procedural form for the common law derivative action, and therefore these provisions are applicable retrospectively to pre-amendment wrongdoings. In the Federal Court decision of Lee Chow Meng v Public Prosecutor [1978] 2 MLJ 36, it was recognised that a statute dealing with procedure has retrospective effect, that is, it applies to proceedings begun before and after the commencement of the statute, unless a contrary intention is expressed or clearly implied. The statutory recognition of the common law right to bring proceedings on behalf of the company is stressed in section 181A(3) of the Act.

Although the Australian provisions on statutory derivative actions are quite dissimilar to the Malaysian provisions, the Australian cases of Advent Investors Pty Ltd and Others v Goldhirsch and Others [2001] 37 ACSR 529 (“Advent Investors“) and Karam & Ors v ANZ Banking Group Ltd & Anor (2000) 34 ACSR 545 (“Karam“) held that the new provisions merely set out a new procedure to bring proceedings on behalf of a company and therefore could apply retrospectively to pre-amendment events. It must be noted that the issues in these two cases primarily involved claimants in each case, who had brought a common law derivative action, arguing that they need not seek leave to bring an action when the new provisions of the Corporations Act came into effect i.e. that the new provisions on seeking leave to bring a statutory derivative action were prospective. The new provisions had displaced the common law derivative action and the Courts held that the provisions were retrospective and that leave was required.

One issue that must be highlighted however, is that while the statutory derivative action may be a procedural streamlining of the common law derivative action brought by a member of a company, the statutory derivative action goes further than that in granting standing to a director and even a former member of a company to bring an action. Such parties were never recognised as having the locus standi to bring a derivative action. It could be argued that a retrospective application of sections 181A to 181E of the Act should not apply to such parties.

In both Advent Investors and Karam, the issue of whether the provisions applied retrospectively arose in cases involving shareholders bringing a derivative action. It is not clear how the issue on retrospectivity will play out if for instance, a director seeks leave under section 181B of the Act, in respect of wrongdoings prior to the amendments to the Act.

Or perhaps a simpler answer can be that there is no reference to events or wrongdoing in the new provisions, and section 181A of the Act merely allows a complainant to bring an action on behalf of a company. The company, on behalf of which the action is being brought, always had the right to sue for pre-amendment wrongs. The difficult untanglement of the new provisions could have been avoided if the Companies (Amendment) Act 2007 had contained some transitional or saving provisions.

Part C. Who Can Apply for Leave to Bring a Statutory Derivative Action?

Section 181B of the Act requires a ‘complainant’ to seek leave of the Court to bring a derivative action in the name of the company. Unlike the common law derivative action which is confined to only members of the company, section 181A(4) of the Act allows a wider standing for a complainant to bring an application for leave from the Court.

A complainant is defined as (1) a member, or a person entitled to be registered as a member, of a company; (2) a former member of a company if the application relates to circumstances in which the member ceased to be a member; (3) any director; or (4) the Registrar for certain types of company.

Part D. Requirements for Leave

(i) Notice

One criticism of this requirement of notice is that unlike in other jurisdictions, the Court is not given the discretion to allow for the dispensation of such a notice.


The first requirement in applying for leave of the Court is that the complainant must give thirty days notice in writing to the directors of his intention to apply for leave under section 181A of the Act. The purpose of this compulsory notice is to first give the company the opportunity, through its board of directors, to consider its rights and course of action.

One criticism of this requirement of notice is that unlike in other jurisdictions, the Court is not given the discretion to allow for the dispensation of such a notice. In cases where urgent injunctive relief is required, for instance where there is a wrongful dissipation of the company’s assets by the directors, the compulsory 30-day notice to be given to the wrongdoers themselves prior to applying for leave would discourage a complainant from utilising the remedy of a statutory derivative action.

(ii) Good Faith

After the 30-day notice, a complainant can make an application by originating summons for leave of the Court (as required by section 181B of the Act). There are two requirements which the Court shall take into account when deciding whether or not to grant leave. The first is whether the complainant is acting in good faith.

The Singapore Court of Appeal has held in Pang Yong Hock and another v PKS Contracts Services Pte Ltd [2004] 3 SLR 1 (“Pang Yang Hock”) that “the best way of demonstrating good faith is to show a legitimate claim which the directors are unreasonably reluctant to pursue with the appropriate vigour or at all.” This echoes what was held in the Canadian case of Re Richardson Greenshields of Canada Ltd and Kalmacoff et al (1995) 123 DLR (4th) 628 in that “there [were] legitimate legal questions raised here that call for judicial resolution.”

The Singapore Court of Appeal in Pang Yang Hock also approved the case of Agus Irawan v Toh Teck Chye & Ors [2002] 2 SLR 198 (“Agus Irawan”) which suggested that the burden would be on the opponent to show that the applicant did not act in good faith. The Singapore Court of Appeal had also noted that hostility between factions involved is normally present in such applications and is therefore generally insufficient evidence of lack of good faith on the part of the applicant.

(iii) Prima Facie in the Best Interest of Company

The second requirement which must be demonstrated is that it appears prima facie to be in the best interest of the company that the application for leave be granted. As observed in Agus Irawan, this requirement of good faith overlaps with the requirement that the claim must be in the interests of the company.

Agus Irawan had interpreted the almost identical Singapore provision to mean that the claim must have a reasonable semblance of merit – not that it was bound to succeed or likely to succeed, but that if proved, the company will stand to gain substantially in money or money’s worth.

The Court may also weigh the availability of an alternative remedy, such as the winding up of the company. In Pang Yang Hock, where there was an impasse in the management of the company and the company was not performing well financially, the appropriate solution in that case was to wind up the company.

Part E. Leave to Discontinue, Compromise or Settle Proceedings

This provision recognises the danger that such an action may be brought for the sole purpose of and in the hope of reaching some collusive settlement for the benefit of the complainant and the alleged wrongdoers.


Section 181C of the Act provides that proceedings brought, intervened in or defended under section 181A may be settled only with leave of the Court. This provision recognises the danger that such an action may be brought for the sole purpose of and in the hope of reaching some collusive settlement for the benefit of the complainant and the alleged wrongdoers. The interests of the other shareholders or the company may then be prejudiced if the action is settled. This provision allows the Court to reject the settlement of the action if it considers the terms unfair or unjust.


Part F. Ratification

Under common law, if a wrong has been effectively ratified by the shareholders of the company, this will be a complete bar to a derivative action. The company will not have any wrong to complaint about as an act authorised by its shareholders is an act of the company itself.

Section 181D of the Act does away with this problem by providing that the fact the alleged wrong to the company may be approved or ratified by the members is not by itself sufficient for a stay or dismissal of the action. Such approval or ratification may however be taken into account by the Court when determining whether to grant leave under section 181B of the Act and in the making of any orders under section 181E of the Act.

Part G. Powers of the Court

In granting leave, section 181E of the Act grants the Court wide ranging powers in making such orders as it thinks appropriate. Aside from authorising the complainant or some other person to control the conduct of the proceedings, some of the other orders the Court may grant include: –

In granting leave, section 181E of the Act grants the Court wide ranging powers in making such orders as it thinks appropriate.

 

(i) Giving Directions

Depending on the circumstances of the case, the Court is able to grant specific directions for the conduct of the proceedings. In the Singapore case of Teo Gek Luang v Ng Ai Tiong [1999] 1 SLR 434, the Court granted leave to the complainant subject to certain conditions. The Court exercised its discretion, under the similar Singapore provisions, to make an order that the complainant was not to commence action until 22 days had passed, and if the defendant-director paid the sums due to the company within 14 days of the order, the complainant was not to commence an action.

(ii) Access to Information

This provision allows a complainant to obtain evidence by accessing documents normally not available to him, for instance Board documents or management accounts.

(ii) Costs

Sections 181E(d) and (e) of the Act allows the Court to relieve the burden of costs on the complainant by allowing both a payment by the company of reasonable legal fees and disbursements incurred by the complainant, and also a wider order for indemnity for all the costs incurred.

The Court may be guided by the principle set out in Wallersteiner v Moir (No 2) [1975] QB 373, where Denning J (as he then was) suggested that where there is a reasonable case for the minority shareholder to bring an action at the expense at the company, then the shareholder should ordinarily have a right to an indemnity for his costs, whether or not the case is successful.

Part H. Conclusion

Based on the experience from the other jurisdictions, it is not anticipated that the new statutory derivative action will open the floodgates of shareholder litigation. Derivative litigation by its nature is altruistic in that the benefit of any remedy goes to the company. The plaintiff-shareholder will only benefit indirectly and even then, only on a pro-rata basis. The other shareholders not involved in the proceedings would free-ride on any successful litigation, without any of the risks.

…it is not anticipated that the new statutory derivative action will open the floodgates of shareholder litigation.


Unlike in Canada and New Zealand, Malaysia’s provisions do not allow the Court to order for damages to be paid directly to the complainant. A shareholder will still be more attracted, where practicable, to the filing of an oppression petition under section 181 of the Act due to the prospect of obtaining personal relief against the oppression and not merely damages to be paid to the company.

However, the lack of statutory derivative litigation in other jurisdictions may also be an indication that it does serve as an effective deterrent on managerial misconduct by imposing the threat of liability. As one academic commented more than a decade ago, ‘the knowledge that one is being watched and that one must justify one’s actions improves the behaviour of most individuals.’

The introduction of the statutory derivative action increases the scope of shareholder intervention, while the leave requirements will ensure that there are safeguards against abuse of unjustified litigation. Allowing for increased shareholder activism will ensure that directors of companies will have to take into greater account shareholder rights and interests.

Blitzkrieg Ex Parte Appointment of a Provisional Liquidator

Introduction

A provisional liquidation is the Court appointment of a liquidator to a company in the period between the filing of the application to wind up the company and the Court hearing the application, pursuant to section 231 of the Companies Act 1965 (“the Act”) and Rule 35 of the Companies (Winding Up) Rules 1972 (“the Rules”). The appointment is provisional because the company may not be wound up at that hearing, or another official liquidator may be appointed.

The effect of the appointment of a provisional liquidator is that the powers of the board of directors immediately cease, and the powers of managing the company vests in the provisional liquidator. A sudden ex parte (i.e. without any notice being given to the other party) appointment of a provisional liquidator over a company allows the provisional liquidator to show up at the doorstep of the company’s office, the Order of appointment in hand, and proceed to lock up the office and seize control of all documents, assets and property of the company.

Depending on the circumstances, the terms of the ex parte Order may even allow the provisional liquidator (and his representatives) to enter the homes of the directors or any other place to seize company documents, if there are grounds to believe that these company documents have been secreted away.

The business of the company may well be paralysed as the provisional liquidator may or may not continue with the running of the company. Additionally, there may be irreversible damage to the goodwill and reputation of the company.

The ex parte appointment is normally based on the justification that the assets and affairs of the respondent company are in jeopardy. Such appointment is made to ensure that the assets and property of the respondent are under the control of the provisional liquidator until the determination of the winding up petition. Hence, any notice given to the respondent might result in a dissipation of the assets before the provisional liquidator is appointed.

The ex parte appointment is normally based on the justification that the assets and affairs of the respondent company are in jeopardy.

The ex parte appointment of the provisional liquidator lasts until the disposal of the winding up petition and even then there is no automatic right to an inter partes hearing. Hence it is crucial for the respondent company to quickly apply to set aside this ex parte appointment or the company will continue to be paralysed.

There are several grounds the respondent can rely on, namely:

(i) Failure to Show a Good Prima Facie Case for Winding Up

As held in the case of Kok Fook Sang v. Juta Vila (M) Sdn Bhd [1996] 2 MLJ 666, a court will only appoint a provisional liquidator upon the presentation of a winding-up petition when there is good prima facie evidence that the company will be wound up because the company is obviously insolvent, or its assets are in jeopardy or there are other circumstances which make it imperative for the court to intervene.

It was further held that the primary facts set out in the petition if assumed to be true and the uncontested evidence taken as a whole must add up to the conclusion that it is imperative that the winding-up order be made. Therefore, the respondent in applying to set aside the ex parte appointment must demonstrate that there is no good prima facie case for winding up, and that the allegations in the winding up petition do not support a winding up order. This is illustrated in the case of Re Lo Siong Fong [1994] 2 MLJ 72 where the petition had no hope of being successfully prosecuted, and the appointment of the provisional liquidator was set aside.

(ii) Failure to Make a Full and Frank Disclosure of Material Facts

The respondent can challenge the appointment of a provisional liquidator on the ground that there has been material non-disclosure during the ex parte hearing. Malaysian cases like Re Lo Siong Fong [1994] 2 MLJ 72 and Kong Long Huat Chemicals Sdn Bhd v. Raylee Industries Sdn Bhd [1998] 6 MLJ 330, and the Singapore case of Pac Asian Services Pte Ltd v. European Asian Bank AG [1989] 3 MLJ 385 involved material non-disclosures of facts during the ex parte hearing that led to the setting aside of the appointment of the provisional liquidator.

In the English case of Siporex Trade v. Comdel [1986] 2 Lloyd’s Rep 428 the Court held that the applicant must identify the crucial points for and against the application, and not merely rely on general statements and the exhibiting of numerous documents.

This duty of disclosing material facts also extends to the oral hearing of the application itself. In the English case of Memory Corporation Plc v. Sidhu (No. 2) [2000] 1 WLR 1443, the Court made a general statement regarding urgent without notice hearings; that there is a high duty on the advocate to make full and frank disclosure and that extends to the oral hearing of the application itself. The advocate must draw the court’s attention to the unusual features of the evidence and to the applicable law.

(iii) Balance of Convenience

The onus is on the petitioner to establish the urgency and need for the appointment of a provisional liquidator and the Court must have regards to the balance of convenience due to the devastating effect on the company.

Further as held in the Australian case of Zempilas & Ors v. J N Taylor Holdings Ltd & Ors (1990) 3 ACSR 518, the appointment of a provisional liquidator is not to be contemplated if other measures would be adequate to preserve the status quo. Hence, alternative measures in preserving the status quo would shift the balance of convenience to justify the setting aside of the appointment of the provisional liquidator.

(iv) Failure to Give Undertaking for Damages?

Even if the petitioner had failed to give an undertaking for damages in the ex parte application for a provisional liquidator, it appears that this is not a ground to support a setting aside application.

In Pui Chiau Tien v. Foi Chaw Leong & Anor [2004] 5 CLJ 145, the Court considered the contrasting decisions of Eveready Manufacturing (Pte) Ltd v. Explast Industries Sdn Bhd [1998] 5 CLJ 212 and Kong Long Huat Chemicals Sdn Bhd v. Raylee Industries Sdn Bhd [1998] 6 MLJ 330 and clarified that the undertaking in damages by the applicant is not mandatory in an ex parte application for the appointment of a provisional liquidator but it is customary and in accord with general practice. Section 231 of the Act and Rule 35(1) of the Rules do not lay down the requirement that there must be an undertaking as to damages before the appointment of a provisional liquidator. It is entirely up to the court’s discretion and the absence of such an order for undertaking as to damages does not in any way invalidate the Order.

…the setting aside may well represent a hollow victory…

Although the above factors justify the setting aside of the ex parte appointment of a provisional liquidator, it may take a long time to achieve this. Thus, the setting aside may well represent a hollow victory as the respondent company may already have suffered irreparable damage to its business i.e. its business would be suspended and bank accounts frozen during that period.

The true security of companies against the ill-effects of the unjustified ex parte appointment of a provisional liquidator thus resides in the vigilance of the Court in determining whether the grounds in support of the ex parte application truly warrant the appointment of a provisional liquidator.

Injunction to Restrain Filing of a Winding Up Petition

In light of a few recent Court of Appeal decisions, it is useful to set out the position in law regarding an injunction to restrain the presentation of a winding up petition.A filing of a winding up petition is often used by a creditor as a means to exert pressure on the company to pay its debt. As the presentation of such a petition must be advertised, this would have an adverse impact on the financial standing and the reputation of the company, and may also result in the freezing of the company’s bank accounts.

The companies court should not be used for the collateral purpose of pressuring a company to pay a disputed debt and the law allows the company to apply for an injunction to restrain the filing of such a petition.

When a court restrains the presentation of a winding up petition to that court it exercises part of its inherent jurisdiction to prevent abuse of its process.

Prior to the filing of a winding up petition based on a debt, a creditor must issue a notice (often described as a Section 218 Notice) giving the company 21 days to pay the sum demanded . If this debt is disputed, it is within this crucial 21-day period that the company must then apply for an injunction to restrain the filing of the winding-up petition.

Inherent Jurisdiction of the Court

There is no specific provision under the Companies Act or the Companies (Winding-Up) Rules which allows for such an injunction. The Court exercises its inherent jurisdiction to prevent an abuse of its process when it issues such an injunction. As recognised in Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83:

“When a court restrains the presentation of a winding up petition to that court it exercises part of its inherent jurisdiction to prevent abuse of its process. Mann v Goldstein, [1968] 1 WLR 1091, at pp. 1093-4; [1968] 2 All E.R. 769.

Usually a court acts against abuse of its process after proceedings have been commenced. Thus, existing proceedings may be stayed or dismissed, or documents delivered as a step in the proceedings may be struck out. This is done to relieve a party to the proceedings from an oppressive and damaging situation in which he has been placed through abuse of court process.

The law has long recognized that with proceedings to wind up a company, intervention after the commencement of proceedings would often be too late to relieve the company of oppression and damage. The courts have recognized that irreparable damage may be done to a company merely through public knowledge of the presentation of a petition. Usually the damage flows from the loss of commercial reputation which results. The courts have also been conscious of the pressure which may be put on a company, by a person with a disputed claim against it, threatening to present a winding up petition unless the company meets his claim. While that threat exists, the company, in order to avoid the damage involved in the presentation of a petition, is pressed to meet the claim although it may have substantial and genuine grounds for regarding itself as not required to do so.”

…the test to be applied is whether there is a bona fide dispute of debt based on substantial grounds.

‘Bona Fide Dispute of Debt on Substantial Grounds’

The position under Malaysian law has been confirmed in the Court of Appeal case of Tan Kok Tong v Hoe Hong Trading Co Sdn Bhd [2007] 4 MLJ 355 where the Court quoted with approval the above passage. When deciding whether to grant an injunction to restrain a petition that is based on a statutory demand for a debt, the Court must be satisfied that there is a prima facie case and not merely a serious issue to be tried. In demonstrating this prima facie case, the Court of Appeal held that the test to be applied is whether there is a bona fide dispute of debt based on substantial grounds.

This helps to clarify the somewhat conflicting High Court authorities which held that the test in granting such an injunction is whether the winding up petition is bound to fail (for instance, see Sri Binaraya Sdn Bhd v Golden Approach Sdn Bhd [2000] 3 MLJ 465 and as discussed in Pembinaan Lian Keong Sdn Bhd v Yip Fook Thai (practising as Messrs Yip & Co) [2005] 5 MLJ 786).

For a creditor to resist such an injunction and to demonstrate that there is no ‘bona fide dispute of debt on substantial grounds’, a creditor should come armed with a judgment sum or with a clear admission of debt (as seen in the Supreme Court case of Chip Yew Brick Works Sdn Bhd v Chang Heer Enterprise Sdn Bhd [1988] 2 MLJ 447).

Injunction to Restrain Advertisement of Petition?

If the petition has been filed, can the company apply for an injunction to restrain the creditor from advertising the petition? In Chip Yew, the Supreme Court refused to grant an injunction to restrain the advertisement and this was similarly followed in the High Court decision of Azman Tay & Associates Sdn Bhd v Sentul Raya Sdn Bhd [2002] 2 MLJ 395.

…once a winding-up petition is filed, the court is precluded from granting an injunction against advertisement or gazettal of the petition.

Now, the Court of Appeal in People Realty Sdn Bhd v Red Rock Construction Sdn Bhd [2008] 1 CLJ 632 has confirmed that once a winding-up petition is filed, the court is precluded from granting an injunction against advertisement or gazettal of the petition. (Ed: The Appellant’s leave to appeal to the Federal Court was dismissed. Hence, the case of People Realty continues to remain as binding authority on this point)

This Court of Appeal decision must surely lay to rest the anomalous High Court decision of Celcom (Malaysia) Bhd v Inmiss Communication Sdn Bhd [2002] 3 MLJ 178 where the Court granted an Erinford injunction to restrain the advertisement and gazettal of the petition. People Realty confirms the mandatory requirements of advertisement and gazetting as set out in the Companies (Winding-Up) Rules.

Echoing the words of Vincent Ng J (as he then was) in Azman Tay, “…the court is not empowered to make any order to restrain or injunct the petitioners from carrying out their statutory obligation to comply with r.24.”

This makes it even more imperative for the company to obtain an injunction during the 21-day window after the issuance of the Section 218 Notice, since the filing of the petition would prevent any injunction restraining the advertisement and gazetting of the petition.