Derivative Action Under New Companies Act

1) Introduction
Being a game changer for corporate governance, the new Companies Act 2016[1] (the New
Act) is ushering in many salient changes to the current corporate regime.

Derivative action is no exception. The term derivative action can be understood on the face
of it, as it refers to an action derived from a right belonging to the company.[2] This is premised
on what is known as majority rule and proper plaintiff rule, as grounded in the rule laid
out in Foss v. Harbottle[3].
If Salomon v. Salomon[4] is regarded as the most famous case in the Company law as it
upheld firmly the sacrosanct principle of limited liability, then Foss v. Harbottle[5] should
come second.

It was held in Foss v. Harbottle[6] that the courts will generally not interfere with irregularities
in internal management of a company. Besides, where a wrong is committed against a
company, it is the company itself, as opposed to its shareholders, that is the proper claimant in
respect of that wrong. Indeed, the proper plaintiff rule is actually premised upon the principle
of limited liability.

However, this rule is mitigated by the four exceptions laid down in the same case, namely ultra
vires or illegal acts; transactions requiring special majorities; personal rights; and the fraud on
the minority. If a disgruntled shareholder can bring his case within any of the exceptions, he
can bring a derivative action on behalf of himself and all the other shareholders of the company,
other than the alleged wrongdoers.

2) Abrogation of Common Law Derivative Action

Under the predecessor[7] of the New Act (the Old Act), the common law derivative action
was expressly preserved under s.181A(3) of the Old Act, where it stated, the right of any
person to bring, intervene in, defend or discontinue any proceedings on behalf of a company
at common law is not abrogated. [8]

Whilst the s.181A of the Old Act was in pari materia with s.347 of the New Act, the subsection
(3) of the latter now provides that right of any person to bring, intervene in, defend or
discontinue any proceedings on behalf of a company at common law is abrogated.

The natural consequence of this abrogation is that the abovementioned exceptions can no
longer be relied on, unless any of such exceptions have been codified.
3) Changes to Statutory Derivative Action
The abrogation would naturally mean that litigants are now only left with statutory derivative
action, which was previously thought to be an additional statutory exception to the proper
plaintiff rule.[9]

a) Leave

This also follows that leave is now required for every derivative action under s.348 of the New
Act, as the litigants are deprived of the option of bringing common law derivative action which
does not require the leave of court.[10] [11]This change is significant as it has been emphasised
that the threshold for leave is higher and is not on the same footing as the leave for judicial
review.[12] Of course this must not be taken to mean that the common law derivative action
had no downsides.

Besides, it is unclear as to whether application for leave must still be made by originating
summons, as was previously specified under s.181B(1) of the Old Act, since there is now no
such requirement in the New Act.

b) Meaning of complainant

Another notable change is that the complainant that can bring derivative action with the leave
of the court is no longer defined under s.347 of New Act that deals with complainants power
to bring derivative action with courts leave, nor is it defined in Part II of the New Act that
deals with preliminaries including definition of terms.

This is different from the Old Act under which the complainant has been defined under
s.181A as to mean (a) a member of a company, or a person who is entitled to be registered as
member of a company; (b) a former member of a company; (c) director; or (d) the Registrar,
in case of a company declared to be under investigation by Registrar.

Whilst the lack of definition cannot be taken to mean that the scope will necessarily expand, it
goes without saying that there is now more room for judicial interpretation as to what
constitutes complainant as the courts are no longer restrained by the categories laid out by
the Old Act. Indeed, there is no reason why the courts should stick with the old definition when
the Parliament has intentionally taken away the categories of persons that can come under
complainant.

In this regard, it may be interesting to take note of the Companies Act of our Singaporean
counterpart, under which the scope of complainant is much wider due to its statutory
definition which includes a category of any other person who, in the discretion of the Court,
is a proper person.
4) Multiple Derivative Action?
Multiple derivative action refers to an action brought by a shareholder of a parent or holding
company on behalf of its subsidiary company against the directors of that subsidiary company.
In other words, such action skips one or more levels of the corporate structure as the party is
not even a shareholder of the company against whom the action is brought.

The position on multiple derivative action in Malaysia has always been unclear, mainly because
both the Old Act and New Act are silent on it, and there are no many cases that are required to
deal with this point of law.

a) Malaysia case that recognised multiple derivative action

Fortunately, some light has been shed on this position in the High Court case of Ranjeet Singh
Sidhu & Anor v. Zavarco Plc & Ors[13]

Without being assisted by any Malaysia authority on the validity of multiple derivative action,
His Lordship relied on the Hong Kong authority of Waddington Ltd v. Chan Chun Hoo
Thomas & Ors[14] which has been followed in the English case of Re Fort Gilkicker Ltd,
Universal Project Management Services Ltd v. Fort Gilkicker Ltd & Ors[15]
It was then held that there is nothing in principle to prohibit the filing of a multiple derivative
action in Malaysia, nor is there any policy consideration which is contrary to the filing of such
action.[16]

The need for allowing multiple derivative action is, as held by His Lordship, bolstered by the
fact that such action is necessary to safeguard the interest of the companies and shareholders
in question and to prevent a wrongdoer from benefiting from his wrongdoing. Otherwise the
law would fail in its purpose and injustice would be done without redress.[17]

b) Validity after abrogation of common law?

However, whilst the New Act is still silent on multiple derivative action, a shadow of doubt
would now be cast on the validity of the ratio in Ranjeet Singh, following the abrogation of
the common law. It must be highlighted that in Ranjeet Singh, His Lordship based his decision
on the reason, inter alia, that the common law derivative suits against companies has been
expressly preserved by the Old Act.

This quandary goes deeper as one should bear in mind that in the English case of Re Fort
Gilkicker Ltd,[18] His Lordship relied on the fact that the UK Parliament did not expressly
abolish the whole of the common law derivative action.[19] Instead, it was skilfully opined that
the Parliament intended to replace only the main version of that common law procedural
device, i.e. derivative action, leaving other instances of its application unaffected, i.e. multiple
derivative action.[20]
This interesting view has also found its way in Bhullar v Bhullar[21] where the court affirmed
this position.[22]

Albeit being a good law in UK, this view however would crumble insofar as Malaysias
position on multiple derivative action simply because s.347 of the Malaysias New Act has
expressly abrogated common law derivative action unlike its UK counterpart. Hence, sceptics
can fairly argue that Ranjeet Singh should now be rendered as a doubtful authority in relation
to the right to bring multiple derivative action, following the abrogation of the common law.

5) Conclusion
The derivative action under the New Companies Act remains largely the same, save insofar as
the abrogation of the right to bring common law derivative actions. It would not be surprised
that we will see judicial creativity to be placed on the interpretation of the meaning of
complainant under s.347 of the New Act.
The abrogation of the right to bring common law derivative actions should not be seen as an
attack on the minority shareholders. Quite to the contrary, as common law derivative action
running in parallel with its statutory counterpart did not seem to have served as satisfactory
remedy for the litigants who have to flip through the conflicting and unwieldy case law on
common law derivative action, the streamlining of the law on derivative action must be
welcomed.

In relation to the multiple derivative action, it will not be late until the curtain rises again on
the applicability of multiple derivative action in Malaysia when this question of law arises
again on future occasion.
[1] Act [777]
[2] Wallersteiner v Moir (No 2) [1975] QB 373 (Lord Denning MR)
[3] 67 E.R. 189
[4] [1897] A.C. 22
[5] Ibid (n 3)
[6] Ibid
[7] Companies Act 1965 [Act 125]

[8] Sections 181A to 181E came into force on 15 August 2007 as part of the amendment to the
Old Act under the Companies (Amendment) Act 2007
[9] Abdul Rahim Suleiman & Anor v. Faridah Md Lazim & Ors [2017] 1 CLJ 633
[10] Koh Jui Hiong v Ki Tak Sang [2014] 3 MLJ 10

[11] Litigants also had such option even after the leave application for statutory derivative
action has been refused, as held in Abdul Rahim Suleiman & Anor v. Faridah Md Lazim & Ors
[2015] 1 LNS 313.
[12] Celcom (M) Sdn Bhd v Mohd Shuaib Ishak [2010] 7 CLJ 808
[13] [2016] 2 CLJ 975
[14] [2009] 2 BCLC 82
[15] [2013] 3 All ER 546
[16] Ibid (n 12), 26
[17] Ibid
[18] Ibid (n 15)
[19] Ibid, 46
[20] Ibid, 44-45
[21] [2016] B.C.C. 134

[22] It is however crystal clear that the main version (as argued in Re Fort Gilkicker Ltd) of
the common law derivative action has been abolished, as held in Iesini v Westrip Holdings Ltd
[2010] B.C.C. 420 and affirmed in Bridge v Daley [2015] EWHC 2121 (Ch).