INTRODUCTION TO SECTION 181 OF THE COMPANIES ACT

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, 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).

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.
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
recognized 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.
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 recognized 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.

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.

Requirements for Leave

(i) 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 companys 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 moneys 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.

Leave to Discontinue, Compromise or Settle Proceedings

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
recognizes 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.

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.

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:

(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) 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.