1. Governed by the Companies Act 2016
Section 347 of the Companies Act 2016 provides the following:
“Derivative proceedings
(1) A complainant may, with the leave of the Court initiate, intervene in or defend a proceeding on behalf of the company.
(2) Proceedings brought under this section shall be brought in the company’s name.
(3) The right of any person to bring, intervene in, defend or discontinue any proceedings on behalf of a company at common law is abrogated.”
The definition of ‘complainant’ is provided for in Section 345 of the Companies Act 2016:
“(a) a member of a company, or a person who is entitled to be registered as a member of a company;
(b) a former member of a company if the application relates to the circumstances in which the member ceased to be a member;
(c) any director of a company; or
(d) the Registrar, in the case of a company declared under section 590.”
2. Purpose: To recover losses suffered by the company
In Mak Siew Wei v Yeoh Eng Kong and other appeals [2020] 1 MLJ 258, Nallini Pathmanathan JCA (now FCJ) had the occasion to say:
“The loss suffered by the shareholder is reflective loss, ie loss reflective of the loss actually suffered by the company. The shareholder does not suffer actual loss. To that extent, a personal action brought by a shareholder in respect of losses suffered by him personally cannot be equated with a derivative action brought by the same shareholder on behalf of the company to enable the company to recover its losses suffered by acts or omissions committed by (generally) the majority wrongdoers in control of the company.”[1] (Emphasis ours)
Further, the Federal Court in Rinota Construction Sdn Bhd v Mascon Rinota Sdn Bhd & Ors [2018] 1 MLJ 141 succinctly pointed out the difference between a minority oppression petition and a derivative action:
“(a) a minority oppression petition deals with action by the minority shareholder of a company against the majority controllers where the company cannot be the petitioner and is only a nominal defendant; and
(b) by contrast a derivative action is brought by a minority shareholder for and on behalf of the company to deal with wrongs done to the company and for the benefit of the company eg to recover for the company assets which may have been unlawfully siphoned off from the company.”[2] (Emphasis ours)
3. First step – Issue notice of intention to apply for leave of Court
This is required under Section 348(2) of the Companies Act 2016:
“(2) The complainant shall give thirty days’ notice in writing to the directors of his intention to apply for the leave of Court under section 347”
As pointed out by Vazeer Alam Mydin J (now JCA) in Salina bt Mohamad Sukor v MVD International Sdn Bhd & Anor [2019] 9 MLJ 762:
“… The purpose and function of a notice under s 348(2) of the Companies Act 2016 is to ‘give an opportunity to the directors of the company to consider, respond and accede to a request by the complainant for proceedings to be commenced in the name of the company’ (see Independent Oil Tools Ltd v Dato’ Ramli bin Md Nor & Ors [2018] MLJU 133; [2018] 5 CLJ 706).”[3] [Emphasis ours]
4. Second step – File application for leave of Court
Sections 348(1) and 348(4) of the Companies Act 2016 provides that:
“Leave of Court
(1) An application for leave of the Court under section 347 shall be made to the Court without the need for an appearance to be entered.
…
(4) In deciding whether or not the leave shall be granted, the Court shall take into account whether-
(a) the complainant is acting in good faith; and
(b) it appears prima facie to be in the best interest of the company that the application for leave be granted.”
In Celcom (M) Bhd v Mohd Shuaib Ishak [2011] 3 MLJ 636 (“Celcom”), the Court of Appeal expounded on the test of ‘good faith’ for the purposes of derivative proceedings:
“[15] … The test of good faith is two-fold. One is an honest belief on the part of the respondent, and two, that this application is not brought up for a collateral purpose.
[16] This second requirement will depend on the factual circumstance which comes before the court. This was stated by Palmer J in Swansson with these words:
Nevertheless, in my opinion, there are at least two interrelated factors to which the courts will always have regard in determining whether the good faith requirement of s 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds this belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.”[4] (Emphasis ours)
As for the prima facie-best interest test, the Court of Appeal in Dato’ Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd [2022] 4 MLJ 947 adopted and followed the low threshold in Abdul Rahim bin Suleiman (suing as the director and minority shareholder of Semangat Motor Sdn Bhd and in the interest of Semangat Motor Sdn Bhd) & Anor v Faridah bt Md Lazim & Ors [2016] 6 MLJ 449:
“[83] The appellant had referred to Abdul Rahim bin Suleiman where at p 474 it was stated:
…We need only say on this aspect that firstly, the court in an application for leave, should not go into the merits of the case at the leave stage. Its role is to see if the application for leave is frivolous …
…
[86] We would adopt and follow the threshold as stated in Abdul Rahim bin Suleiman and not Celcom. This court in Tai May Chean v United Eastern Resources Sdn Bhd and Anor [2022] 4 MLJ 779 at p 793; [2022] 2 CLJ 757 at p 770 noted the same with reference to Abdul Rahim bin Suleiman in its para 45.”[5] (Emphasis ours)
5. Third step – Initiate derivative action/proceedings within 30 days from granting of leave of Court
Section 348(3) of the Companies Act 2016 provides the following:
“(3) Where leave has been granted for an application under section 347, the complainant shall initiate proceedings in Court within thirty days from the grant of leave.”
[1] Mak Siew Wei v Yeoh Eng Kong and other appeals [2020] 1 MLJ 258 (CA), at para 41
[2] Rinota Construction Sdn Bhd v Mascon Rinota Sdn Bhd & Ors [2018] 1 MLJ 141 (FC), at para 34
[3] Salina bt Mohamad Sukor v MVD International Sdn Bhd & Anor [2019] 9 MLJ 762 (HC), at para 17
[4] Celcom (M) Bhd v Mohd Shuaib Ishak [2011] 3 MLJ 636 (CA), at paras 15 to 16
[5] Dato’ Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd [2022] 4 MLJ 947 (CA), at paras 83 and 86