By Annabelle Yip and Hon Yi Lim

One of the means by which company law seeks to ensure that a company will have proper recourse against a director that breaches his fiduciary duties to it is to allow the company's shareholders to bring a suit against the director on the company's behalf. Such an action may be taken under section 216A of the Companies Act. Approval of the court is required and this helps to ensure that shareholders do not abuse this right to conduct their own personal vendettas. The need for a shareholder to show that he is acting in good faith was the issue that was considered in the Court of Appeal decision of Ang Thiam Swee v Low Hian Chor.

Facts

This appeal arose from a dispute between two residual minority shareholders over the purported misappropriation of company funds. The company, Steel Forming & Rolling Specialists Pte Ltd (the "Company"), had been started by the appellant, the respondent, and a third party, Gan. Gan took care of business matters, while the appellant and respondent provided technical expertise. Gan was the majority shareholder, while the appellant and the respondent each held 10% of the Company's shares.

Gan ran the Company as if it were a sole proprietorship. In 2009, he was convicted of making fraudulent tax claims on alleged expenses of the Company and was statutorily disqualified from his directorship of the Company. The Company was also charged and penalised. The appellant and the respondent hired Stone Forest Corporate Advisory Pte Ltd ("Stone Forest") to check the Company's accounts and the investigations revealed that Gan had misappropriated some S$5 million from the Company. The Company commenced bankruptcy proceedings against Gan.

In 2011, the respondent filed an application seeking leave under section 216A of the Companies Act to commence an action in the Company's name against the appellant for breach of director's duties. The respondent alleged that Stone Forest's reports revealed that the appellant, as a co-signatory of the Company's account, had also misappropriated the Company's funds.

Legal Background

The right to bring a derivative action is contained in section 216A of the Companies Act. Under section 216A(3), the court may grant a complainant leave to bring an action in the name and on behalf of the company if the court is satisfied that:

  • The complainant has given 14 days' notice of his intention to do so to the company's directors;
  • The complainant is acting in good faith; and
  • It appears to be prima facie in the interests of the company that the action be brought.

Decision

The Court of Appeal focused on the second and third limbs of section 216A(3), namely, whether the respondent was acting in good faith, and whether it appeared to be prima facie in the interests of the Company that the action be brought.

With respect to the requirement of good faith, the Court held that it was important to assess the motivations of the applicant and whether the applicant honestly or reasonably believed that there was a good cause of action. It added that the motivations of an applicant would only amount to a lack of good faith if they showed that the applicant's judgment had been clouded by purely personal considerations. The Court also held that the onus is on the applicant to demonstrate that he is or may be genuinely aggrieved and that his collateral purpose is sufficiently consistent with the purpose of doing justice to a company so that he is not abusing the statute, and also the company, as a vehicle for his own aims and interests.

The motivations of an applicant would also be relevant to the inquiry into the third limb of section 216A(3), that of whether the action would be prima facie in the interests of the company. The Court noted that an applicant whose judgment is clouded by purely personal considerations may not honestly intend to serve the company's best interests and also may not be the proper party to represent the company's interests. It was not the questionable motivations of the applicant per se that amounted to bad faith. Instead, where the questionable motivations constituted a personal purpose, this indicated that the company's interests would not be served. The Court added that in determining whether the requirement in the third limb of section 216A(3) had been satisfied, the court may go further to examine whether it would be in the practical and commercial interest of the company for the action to be brought.

On the facts of the present case, the Court held that the respondent had not discharged the burden of establishing that he was acting in good faith. It noted that there was a significant amount of ill will between him and the appellant arising from clashes over several financial matters. The respondent was also upset at finding out that some of the dividends due to him had not been paid out and that the appellant had received a higher amount as directors' fees. Instead of establishing good faith, the Court observed that the respondent appeared to be motivated as much by spite as by the prospect of personal gain, and that in the absence of any clear coincidence between the Company's interests and his apparent collateral personal purpose of securing sole control of the Company, it would be a patent abuse of process to allow the respondent to use the Company as a vehicle for his private objectives.

As to satisfying the Court that the proposed action appeared to be prima facie in the interests of the Company, the respondent had to convince it that the Company's claim was legitimate and arguable. In this respect, too, the respondent did not succeed. The Court noted that the alleged misappropriations that had been raised were in fact the result of instigations by the respondent, and were not borne out by Stone Forest's reports on the Company's accounting records. Furthermore, the application offered no practical or commercial merit for the Company since the Company appeared to be coping well and Stone Forest's reports did not raise any red flags. Accordingly, the appellant's appeal against the High Court decision to grant leave for the respondent to pursue the statutory derivative action was allowed.

It may be interesting to note that while the Court in this instance stated that each application for leave to bring a statutory derivative action should turn on its own merits rather than the view of the majority shareholder(s), it appeared to consider the lack of support from the Official Assignee of Gan for the proceedings when determining whether the respondent acted in good faith and whether the action was prima facie in the interests of the Company.

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