Company Law Assignment, UM, Malaysia The plaintiff and the second defendant were directors and equal shareholders in the first defendant’s company

University Universiti Malaya (UM)
Subject Company law

The plaintiff and the second defendant were directors and equal shareholders in the first defendant’s company. Tan Wei Rong, the son of the second defendant owned a piece of land (‘TWR land’) located adjacent to a piece of land owned by the first defendant (‘first defendant’s land’). Tan Wei Rong (‘Tan’) had been negotiating with China State Construction Engineering (M) Sdn Bhd (‘CSC’) to rent out the TWR Land.

Given that access to TWR Land was through the first defendant’s land, and since CSC required larger space, Tan suggested that the first defendant’s land be rented to CSC as well. The plaintiff and the second defendant agreed with the suggestion provided the interest of the first defendant be safeguarded in any such transaction. The solicitors were instructed to prepare a draft tenancy agreement. On 17 September 2014, Tan entered into a tenancy agreement with CSC in respect of both TWR Land and the first defendant’s land, the latter by way of a subtenancy in Tan’s capacity as [*605] its purported tenant, notwithstanding the absence of a written tenancy agreement between the first defendant and Tan.

CSC was then given access to the first defendant’s land. The plaintiff thus commenced this application for leave under s 181A of the Companies Act 1965 (‘the Act’) to bring a statutory derivative action on behalf of the first defendant company, against CSC and Tan. The plaintiff claimed that CSC and Tan had trespassed into the first defendant’s land, causing losses to the first defendant.

The second defendant had refused to cooperate with and assist the plaintiff to protect the first defendant and prevent the first defendant from incurring losses as a consequence of the actions and conduct of CSC and Tan. The plaintiff claimed that the second defendant had failed in his duty as a director of the first defendant by putting personal interest before the interest of the first defendant. No income or profits had thus far accrued to the first defendant from the exploitation and unlawful occupation of the first defendant.

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  • The first question to be determined was whether the plaintiff fell within the concept of a ‘complainant’ who sought leave to bring an action on behalf of and in the name of the company, as described under s 181A(4) of the Act. The plaintiff as a director of the first defendant company fulfilled the requirement of s 181A(4)(c) which refers to any director of a company.
  • The plaintiff had on a balance of probabilities established good faith in accordance with s 181B(4)(a). The plaintiff honestly believed that a good cause of action existed and had a reasonable prospect of success. There was no evidence that the intended suit was instituted for a collateral purpose.
  • The presence of private interest cannot necessarily negate good faith if the same coincides with that of the company, especially given the shareholding structure of the company, and equally importantly, whether an analysis of the entire circumstances of the case establishes other evidence to suggests otherwise.
  • Tan could not rely on the Turquand Rule on indoor management and assumed the first defendant had validly authorized him to enter into the tenancy with CSC since he would have been aware from his own active involvement in the discussion, as well as through his father, being the second defendant, that the only the other director and 50% shareholder of the first defendant had not given his consent.
  • The second defendant did not appear to demonstrate conduct consistent with that expected of a responsible director and fiduciary of a company when facing the situation, choosing instead for a deadlock and worse still favoring a position that could expose himself to an allegation of breach of duty for conflict of interest.
  • Given the absence of a valid tenancy agreement between the first defendant and Tan for the first defendant’s land, the latter’s entry into the tenancy agreement with CSC on that very same property, coupled with at the very least, an acquiescing role played by the second defendant, represented to the plaintiff a reasonable prospect of the plaintiff’s claim on behalf of the first defendant being successful. Principally, the cause of action would likely be one on the tort of trespass to land
  • The usual disinclination of the courts to interfere in the exercise of a company’s commercial discretion and business judgment would become secondary when there are credible allegations of misconduct or conflict situations. Nor did the second defendant suggest the presence of any basis which could militate against the first defendant pursuing the action such that it would not be in the best interest of the first defendant to do so, other than the contention about the loss of rental from CSC. The plaintiff had shown that instituting the derivative action was prima facie in the best interest of the first defendant.

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  • Ultimately, the question to be asked is whether, based on the facts of each particular case, the complainant, being a shareholder is able to get the company to take action to seek redress for the wrong done to the company, as perpetuated or facilitated by an insider in a position of influence or control. Therefore, it is strictly not necessary for a plaintiff to be a minority shareholder in order to institute s 181A of the Act. It is also not necessarily the case that an action under s 181A can only be taken if the insider benefits from the wrong done to the company.
  • It is not a legal requirement under s 181A derivative action that the insider in default must be a party to be sued by the plaintiff on behalf of the company.
  • A derivative action under s 181A may be instituted even against a third-party wrongdoer if the wrong arises from the default of an insider. The trespass by Tan and CSC was made possible by the breach of fiduciary duty on the part of the second defendant, a director of the company. As such, in addition to the fulfillment of the requirements for leave under ss 181A and 181B, the derivative action by the plaintiff, on behalf of the first defendant company, may be commenced against Tan and CSC, both being third parties who allegedly committed a trespass against the first defendant company given the offending role of the insider second defendant who had preferred taking an acquiescing stance in the face of the trespass but who was himself not being sued.

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