Derivative Action (How to answer)
transaction to be entered
INTRODUCTION
1. Generally as a consequence of
incorporation and the application of
the doctrine of separate legal entity,
a company has the power to sue in
its own name for any wrong against
the company.
2. No other person can enforce the
company’s rights. This is known as
the proper plaintiff rule which was
laid down in Foss v Harbottle.
3. The proper plaintiff or the person
having locus standi to enforce any
obligation owed to the company is
the company itself and not any
individual member even if the
member is a majority shareholder.
4. Furthermore, no group
shareholders has the right to bring
the legal action unless they have the
majority votes at the general
meeting resolving to commence
legal action.
5. Foss v Harbottle
 Two shareholders brought an
action against five directors and
other person.
 They alleged that the directors
had misapplied the company
property and had caused certain
company.
improperly.
 Held: dismissed the claim.
During general meeting, the
majority voted that no action
should be taken against them.
 The proper plaintiff rule is that a
wrong done to the company may
be vindicated by the company
alone (separate legal entity) and
 The majority rule principle
applied. If the alleged wrong can
be confirmed or ratified by a
simple majority of members in a
general meeting, then the court
will not interfere.
6. Court will not interfere unless the
directors are themselves the
wrongdoer.
7. Due to this, the common law
of
recognises an exception commonly
known as common law derivative
action.
8. There are a few grounds under the
common law derivative action which
are fraud on minority, an
infringement of a members’ personal
right, ultra vires act and etc.
9. This exception essentially allows the
minority shareholder to commence
an action (in a representative
capacity) for and on behalf of the
10. The derivative action acts as
deterrent against misconduct as it
warn the potential wrongdoer that
there is a remedy available for the
minority shareholders to seek
redress through the court despite the
wrongdoer being able to prevent
litigation to be brought against him
or to influence the company to ratify
the wrongdoing.
11. Common law derivative action was
expressly preserved under Section
181A of Companies Act 1965.
12. However, under Companies Act 2016
(CA 2016), by virtue of Section
347(3), common law derivative
action is no more applicable and has
been abrogated. The common law
derivative action can no longer be
relied on. It would naturally means
that litigants are now only left with
statutory derivative action.
13. This statutory derivative action
bypasses the narrow Foss v Harbottle
rule.
14. Pursuant to Section 347(1) of CA
2016, a complainant may, with the
leave of the court initiate, intervene
in or defend a proceeding on behalf
of the company.

ISSUE ON LOCUS STANDI
1. Statutory derivative action enables
wide category of persons to apply for
the leave of court to commence the
derivative action.
2. The question of what constitutes
sufficient locus standi for different
classes of person to invoke the
section of the act has been expressly
mentioned in the act itself.
3. Section 347(1) of CA 2016, a
complainant may, with the leave of
the court initiate, intervene in or
defend a proceeding on behalf of the
company.
4. Section 347 of CA 2016 only
mentions the word ‘a complainant’
without giving a definition of it.
5. However, Section 345 of CA 2016
provides that the complainant
means:
a) Member of a company or a
person who is entitled to be
registered as a member of a
company or
b) Former member of a company if
the applicant relates to the
circumstances in which the
member ceased to be a member
or
c) Any director of a company
d) Registrar in the case of a 3. United Engineers (Malaysia) Bhd
company declared under Section (suing on behalf of UEM Genisys
590 for the investigation of affairs Sdn Bhd) v Seow Boon Cheng,
 The High Court decided that the
of company at the direction of
plaintiff being a majority
the ministers.
shareholder by virtue of having
6. On the other hand, pursuant to control over more than 51%
Section 2 of CA 2016, the word shares in the company cannot
member means inter alia in the case take action on behalf of the
of a company limited by shares is a company as only the minority
person whose name is entered in the shareholders can bring a
register of members at the holder for derivative action.
the time being of one or more shares  It was held that the proper
in the company plaintiff in this case was the
company itself and that it is the
7. Section 347 of CA 2016 goes company that must decide on its
further than the common law course of conduct against the
derivative action as they allow a director.
complainant to intervene in or to  Nevertheless, it is unfortunate if
defend an existing action. we read United Engineers as
laying down an absolute rule that
ISSUE ON MINORITY only a minority shareholder can
apply for a derivative action.
SHAREHOLDER
 While the decision states so, the
1. CA 2016 does not expressly reasoning was the fact that the
mentions that the minority plaintiff had the ability, through
shareholder also entitled to bring the him possessing the necessary
derivative action. voting power to decide whether
or not the company should
2. However, it has been well accepted litigate.
that the derivative action is used
more often by the minority THE BOARD REFUSE To ADOPT
shareholder. THE PROCEEDING (SUE THE
WRONGDOER
1. The constitution of modern
companies often confers on the
board the power to decide whether
or not to litigate for the company.
The court will not normally interfere
with the division of power as
stipulated by the company’s
constitution.
2. A decision made by an independent
group of directors at the board of
directors meeting not to commence
legal action against the wrongdoer
will usually be upheld and respected
by the courts unless there is conflict
of interest because the directors are
themselves the wrongdoer. In this
situation, the decision of the board
not to sue will not be upheld.
3. The situation become worst if the
wrongdoer to the company was also
a majority shareholder and is able to
control the general meeting and the
board.
4. Pursuant to Section 348(2) of the
CA 2016, the complainant shall give
thirty days notice in writing to the
directors of his intention to apply for
the leave of court to commence the
proceedings.
5. When there is no response from the
directors, or when the directors have
indicated their refusal to bring the
proceedings enforcing the company’s  However, the board of Havilland
right, the applicant may file the leave directors later claimed that the
application at the expiration of the appellant did not put the matter
30 days. into the hands of the board or
shareholders before commencing
6. This shows that the Section 348(2) the action.
of the CA 2016 does not require that  The court found that the
the applicant obtain the directors’ appellant had, indeed, raised the
consent. allegations of wrongdoing at
several meetings (on 17 May
7. Ting Sing Ning (Alias Malcolm 1999, 16 February 2000 and 10
Ding) v Ting Check Swee (Alias March 2000) and, having
Ting Chick Sui) and others received no response or
 Havilland is a company
clarification, was compelled to
incorporated under the laws of
take out an action on 20 March
Hong Kong and having its
2000.
principal place of business in  In this regard, the court held that
Singapore. there is no requirement in law for
 The appellant in this case
the appellant to specifically
commenced an action in 2000 on
propose to the Board or
behalf of the Havilland claiming
shareholders at a general
inter alia that the respondent,
meeting that an action be
being the directors of Havilland,
brought against the errant
were in breach of their fiduciary
directors on behalf of the
duties against Havilland.
company.
 After that, the appellant wrote to
 Even though this case is brought
Havilland’s board of director and
under common law derivative
enquired whether the board
action, this common law
wished to adopt the action
derivative action has been
commenced by the appellant
adopted in the statutory
however, the board refused to
derivative action. The decision
adopt the proceeding after got
made by the court showed that
the indication from all the
the consent from the board of
shareholders.
directors is not required.
8. Swansson v R A Pratt Properties
Pty Ltd.
 Palmer J held that “If a wrong
appears to have been done to a
company and those in control
refuse to take proceedings to
redress it, the Court should
permit a derivative action to be
instituted only by those within
the categories allowed by Section
236(1) who would suffer a real
and substantive injury if the
action were not permitted.
 The injury must be necessarily
dependent upon or connected
with the applicant’s status as a
current or former shareholder or
director and the remedy afforded
by the derivative action must be
reasonably capable of redressing
the injury.”
PERMISSION OR LEAVE TO
INTERVENE OR DEFEND A COMPANY
1. Apart from being relied on by a
member to sue on behalf the
company, Section 347 also enables a
member to obtain court’s permission
to intervene or defend a company.
2. Metyor v Queensland Electronic
Switching
 Company is not doing diligently.
3. Lembaga Tabung Angkatan COMMENCING THE DERIVATIVE
Tentera v Prime Utilities Berhad ACTION
 The company has initiated legal
proceedings where the cause of 1. The Companies Act 2016 does not
action involves breach of specify the types of actions in
director’s duties but the company respect of which a statutory
then did not pursue the derivative action may be brought.
proceedings diligently.
2. Basically, a derivative action is an
4. Hawksford v hawksford action taken by a member on behalf
 The complainant will be able to of a company to remedy a wrong
apply for leave and leave should done against the company and is
be granted if the lack of diligence brought because the company would
in pursuing the proceedings or otherwise not do so.
delay was to frustrate the
enforcement of the company’s 3. Since any breach of director’s duty is
rights. infringement of the company’s right,
this can be basis of the statutory
derivative action.
APPEAL WHEN THE LEAVE HAS
NOT BEEN GRANTED
4. Under Companies Act 2016, the
director’s fiduciary duties among
1. It is not clear from the section.
others are to act in the best interests
2. The better view is that the leave of the company, exercise powers for
does not extend to appeal against a proper purpose, duty to avoid
the rejection conflict of interest and director’s duty
of care, skill and diligence.
COMPANY IN LIQUIDATION
5. Tam Tak Chuen v Eden Aesthetics
1. Some decision from Australia allows Pte Ltd
the statutory derivative action to be
brought when a company is in  The plaintiff, Dr Tam and Dr.
liquidation. Khairul were medical
practitioners in partnership under
WHAT KIND OF WRONGDOING the style of Eden Family Clinic.
CAN BE RELIED FOR
 Subsequently they incorporated
Eden Aesthetics Pte Ltd and Eden
Healthcare Pte Ltd under which
the income of Eden Family Clinic
was booked.
 Dr Tam and Dr Khairul were equal
shareholders and the directors of
both in Eden Aesthetics and Eden
Healthcare.
 Later, Dr Khairul suspected Dr.
Tam having an illicit affair with
one of the nurses. Dr Khairul
installed a closed circuit camera
in the clinic and as a result he
obtained evidence of Dr Tam’s
activities.
 In the meantime, Dr Khairul
incorporated KAR Pte Ltd with
himself as its sole shareholder
and director.
 Dr Khairul has confronted Dr Tam
with the video footage and
threatened him with public
disclosure.
 He then demanded that Dr Tam’s
shares in both company be sold
to him at gross undervalue.
 Dr Tam acceded to this demand
but shortly thereafter, Dr Tam
decided to rescind the
transaction.
 Subsequently Dr Tam discovered
that Dr Khairul had in sometime
transferred the business of Eden
Family Clinic from Eden
Anaesthetics and Eden
Healthcare to KAR resulting KAR
receiving more than 1 million for
2007 and 2008 respectively.
 Dr Tam applied for the leave to
commence derivative
proceedings on behalf of Eden
Anaesthetics and Eden
Healthcare in respect of the
alleged breach of fiduciary duties
by Dr Khairul as a director in both
company.
 The court had granted the leave
to commence derivative
proceedings.
6. In Lembaga Tabung Angkatan
Tentera v Prime Utilities Berhad
 The plaintiff (LTAT) held 10%
shares in prime, the defendant
company.
 The action was brought to obtain
leave to sue the directors of
Prime on the basis that of their
failure to exercise due care, skill
and diligence in recovering
investments made by Prime in
Boston Asset Management Ltd.
 Prime was actually filed a suit
against Boston but since no
further action was taken, the suit
was struck out.
 Subsequently, another action was
filed but no action was taken to
serve the writ out of jurisdiction.
 LTAT had applied for leave to sue
Boston on behalf of the company
but this was withdrawn as Boston
was then already wound up.
 Held: the leave to sue on behalf
the company was granted.
 The directors had failed to
diligently pursue the recovery of
the amount due from Boston by
the series of legal action that
were not followed through and by
their failure to file proof of debt in
Boston’s winding up.
SUE A THIRD PARTY
NOTICE REQUIREMENT
1. Pursuant to Section 348(2) of the
CA 2016, the complainant shall give
thirty days notice in writing to the
directors of his intention to apply for
the leave of court to commence the
proceeding on behalf of the
company.
2. This procedure and the time frame
are intended to give the directors the
opportunity to decide whether or not
to commence the action.
3. It also operates to inform other
directors of allegation of breach of
duty by any of the director.

4. Where the directors decide to adopt
the proceedings, then there would be
no need for the applicant to apply for
leave as the application will be
redundant.
5. The notice requirement is a by the court due to the necessity
mandatory requirement. Section
347 and Section 348 of CA 2016 do
not contain a provision that allows
the court to waive the compliance
with the notice period.
6. However the ability of the Malaysian
courts to waive statutory notice was
dealt with in the decided case which
was related to an application for
leave to defend on behalf of the
company where the court relied on
Section 582(4) of CA 2016,
irregularities in proceedings
(Section 355(4) CA 1965), to
enable a waiver of the statutory
notice.
7. Nevertheless, the issue about
whether statutory notice may be
waived in an application for leave to
sue on behalf of the company in
Malaysia is not so clear.
8. Most of the cases were solely
confined exclusively on their fact.
9. Ng Hoy Keong v Chua Choon
yang & Ors
 the nine days notice to the
directors informing them of the
applicant’s intention to apply for
leave to intervene in or defend
the company in some legal
proceedings was held rationale
to act expeditiously, particularly
in view of a judgment in default if
the company failed to file a
statement of defence when the
company is being sued.
 Section 355(4) CA 1965 applied
in this case. (Section 582(4) CA
2016). The case is at best,
persuasive.
10. In Singapore case Fong Wai Lyn
Carolyn v Airtrust (Singapore)
Pte Ltd.
 The applicant had filed a leave
application to sue the defendants
on behalf of the company.
 However, no advance notice was
given to the company as required
by Singapore Companies Act
which provides 14 days advance
notice to be given.
 Instead, the notice was given
seven days after the leave
application was made.
 The applicant reason that she
feared that the defendant would
instigate the alleged wrongdoers
to destroy, conceal or forge
evidence and to move funds out
of AT and into companies she
controlled to frustrate the
company’s effort to seek
recovery.
 The court held that the court has
the power to dispense with notice
or to make such orders as the
court though fit for the giving of
notice it was not expedient to
give notice prior to the
commencement of the action
under Section 216A(4).
 The court stated that the 14
days notice was not practicable
depends on the facts of the case
and court is entitled to look at the
totality of circumstances to
determine whether impracticality
existed.
 The court held than it was
impracticable in the present case
particularly since after notice was
given the company did not
proceed with any meaningful
exercise that amounted to a bona
fide and determined effort to
investigate. As such the notice
has been futile.
11. Similarly In Ting Sing Ning (Alias
Malcolm Ding) v Ting Check
Swee (Alias Ting Chik Sui) and
others
  Where the fact has been the directors who are usually the proceedings is one of factors
discussed earlier. The allegation person being sued, the relevant for the court in
was brought to the company’s wrongdoer will be put on notice exercising its discretion to grant
notice at several meeting prior to of an impending action and could leave.
the filling of the petition. dissipate assets or destroy
 Section 348(2) CA does not evidence prior to filing the leave 16. Teo Seng Ho v IDV Concepts Pte
require the applicant obtain the application. Ltd:
director’s consent.
14. Swanson v R A Pratt Properties  The notice need not list down all
12. Alan K Koh, “excusing Notice Pty Ltd the allegation being made
Under Singapore’s Statutory against the defendants, it must
Derivative Action” Austarlian  there could be situation where be sufficient to inform the
Journal of Asian Law, Vol 14, No the directors could do not clearly directors of the intention to bring
2, Article 3, 2013 unequivocally state what is their the action on behalf of the
 Two situation where waiver of stand, for example, the directors company.
advance notice could be given could state that they are
(i) Where the is wrongdoer initiating investigations to decide 17. If the criteria for the court to grant
control i.e if all the directors whether or not to take action. the leave are met, the court will
of the corporation or its  In this situation, it has been held make an order, allowing the
subsidiary are defendants in that the complainant must prove applicant to bring the action on
the action or that there is actual or probable behalf of the company.
(ii) Where there is real risk of inaction.
dissipation of assets or 18. Once leave has been granted, the
destruction of evidence. 15. Tam Tak Chuen v Eden Aesthetics complainant must bring the action
Pte Ltd within 30 days. (Section 348(3) of
13. Lee Seng Eder v Wee Kim Chwee CA 2016).
& Ors:  The director or the company is
 The Singapore Court held that to not required to obtain 19. This is a mandatory requirement
minimize the possibility of independent legal advice first unless Section 582(4) of CA 2016 is
tampering with evidence, the before deciding whether or not to applicable.
applicant could apply for an commence legal proceedings.
 Nonetheless, the fact that the 20. The applicant’s failure to do so
Anton piller order while applying
company had obtained means that the applicant right lapses
for leave to commence a
independent legal advice where and he will have to file afresh.
derivative action.
 Unfortunately, because advance the legal advice did not
notice is required to be given to recommend any legal
21. Since the derivative action is an
equitable remedy, this delay could
defeat any future application.
22. When the circumstances that
underpin the application for leave
has changed, the court has granted
an application to strike out the leave.
23. Shamsul bin Saad (suing as
minority shareholder of Petra
Perdana Berhad and bringing
this action for the interest of
Petra Perdana Berhad) v Tengku
Dato’ Ibrahim Petra bin Tengku
Indra Petra
 In an earlier application, by the
same petitioner, the court had
granted leave. Subsequently, the
case was brought to court.
 The defendant sought to set
aside the leave and for the court
to determine the appropriates of
leave when circumstances
subsequent to filing of the
petition for leave indicated that
there was no longer any
wrongdoer control.
 The petition to strike out was
granted as the directors against
whom the suit was brought had
been removed by the EGM and
the plaintiff was effectively in
control of the company.
Court of Appeal in the case of
Celcom (M) Bhd v Mohd Shuaib
CRITERIA FOR LEAVE Ishak.
 The plaintiff, a former member of
1. The court has discretion to allow a the defendant company (Celcom)
person (complainant) to bring a applied for leave to bring a
statutory derivative action. statutory derivative action in
respect of certain business
2. The discretion must be exercised
decisions taken by the directors
based on the guideline laid down in
of Celcom.
Section 348(4) of CA 2016.
 At the High Court, the main issue
was whether or not the
3. Section 348(4) of CA 2016: in
requirements of Section
deciding whether or not the leave
181B(4) (under CA 1965) were
shall be granted, the court shall take
satisfied; namely, that the
into account whether:
plaintiff was acting in good faith
a) The complainant is acting in
and it appears prima facie to be
good faith and
b) It appears prima facie to be in in the best interest of the
the best interest of the company that the application for
company that the application leave be granted.
for leave be granted.  Ramli J was of the view that for
Section 181B (4) to be satisfied
4. The court will assume that the the complainant had to
plaintiff who comes to court with demonstrate ‘that there was a
reasonable and legitimate claim is reasonable basis for the
acting in good faith until proven complaint and that the proposed
otherwise. action was legitimate and
arguable, in that it had some
5. In assessing good faith, the court will
semblance of merit.
scrutinise with particular care the
 The learned judge said that at the
purpose for which the derivative
leave stage, which is the
action is said to be brought.
threshold stage, the court is not
to go into substantial issues on
6. Section 348 of the CA 2016 was merits. All the applicant had to do
explained in detail by the Malaysian was to show a prima facie case
 and that there was some
substance in the grounds
supporting the application that is
the low threshold test.
 The Court of Appeal overturned
the High Court decision. The
Court of Appeal said the intention
of the statutory derivative
procedure is to enable a member,
present or past, to seek leave to
bring an action in the name of
the company to recover losses
sustained by that company.
 As such, leave to bring a
derivative action must not be
given lightly.
 Abdul Hamid Embong JCA,
delivering the judgment of the
appellate court, went on to say
that the High Court judge was
wrong in stating that the matter
before him was ‘only an
application for leave’ and relying
on the low threshold test used
under Order 53 of the Rules of
the High Court.
 On the requirement of good faith,
the Court of Appeal said the
complainant must show he or she
was acting in good faith in
making the application. The onus
of proof is on the complainant on
the balance of probabilities.
 The Court of Appeal followed the
decision in the Australian case of
Swansson v RA Pratt
Properties Pty Ltd [2002]
NSWSC 583 and said that the
test of good faith is two-fold:
(i) the complainant must
have an honest belief that
a good cause of action
exists and has a good faith and leave should not
reasonable prospect of
success, and
(ii) The application is not
brought up for a collateral
purpose.
 The Court of Appeal said the High
Court judge had completely failed
to take the two-fold test into
consideration.
 In this case, the complainant had
commenced a personal action
which was virtually identical to
the derivative action and with
identical reliefs sought.
 The Court of Appeal found there
was an inconsistency as in the
personal action.
 The complainant was suing
Celcom for damages while in the
derivative action he was
purportedly trying to recover
damages on behalf of the
company.
 This raised a suspicion on the
complainant’s true motive in
bringing the derivative action.
 The Court of Appeal concluded
that the complainant did not
have the interest of the company
at heart but was merely
advancing his own interest.
 In these circumstances, the
complainant was not acting in
have been granted.
 In addition, leave should not be
granted as there was no
reasonable commercial sense of
the derivative action and it would
be counterproductive to the
company’s interests.
 In determining whether the
derivative action was in the
interest of the company, the
Court of Appeal applied and
followed the tests set out in the
Singapore case of Pang Yong
Hock v PKS Contracts
Services Pte Ltd [2004] 3
SLR, and in the Canadian case of
Ontario Ltd v Bernstein (2000
OTC 758).
 In Pang Yong Hock’s case, the
court referred to the passage
stating that “an applicant is
acting in good faith and that a
claim appears genuine, the court
must nevertheless weigh all the
circumstances and decide
whether the claim ought to be
pursued.
 Whether the company stands ‘to
gain substantially in money or in
money’s worth’ (per Choo JC in
Agus Irawan’s case) relates more
to the issue of whether it is in the
interests of the company to
pursue the claim rather than
whether the claim is meritorious
or not.
 A $100 claim may be meritorious
but it may not be expedient to
commence an action for it.
 The company may have genuine
7. Therefore, to ascertain whether it is
commercial consideration for not
wanting to pursue certain claims.
 Perhaps it does not want to
damage a good, long-term,
profitable relationship.
 It could also be that it does not
wish to generate bad publicity for
8. The test used by the court in
itself because of some important
negotiations which are underway.
 while in Ontario Ltd’s case, the
passage referred was Whether or
not a corporation shall seek to
enforce in the courts a course of
action for damages is, like other
business questions, ordinarily a
9. When directors want to consider
matter of internal management
and is left to the discretion of the
directors, in the absence of
instruction by vote of the
stockholders.
 Courts interfere seldom to control
such discretion intra vires the
corporation, except where the
directors are guilty of misconduct
equivalent to a breach of trust, or
where they stand in a dual
relation which prevents an
unprejudiced exercise of
judgment.
 From this two cases referred, the
court has considered and looked
into a company’s genuine
commercial reasons for not to
proceed with any litigation.
11. Swanson v Pratt
in the best interest of the company
for leave to be granted, a company’s
genuine commercial reasons not to
proceed with any litigation must be
considered
deciding what is in the best interest
of the company is whether an
intelligent and honest person in the
position of the director could have
reasonably believed that the decision
was for the benefit of the company.
whether any legal proceedings
should be commenced, they would
have to assess the benefit and cost
of the litigation.
10. Some commercial reasons for
deciding whether or not to litigate
may be:
 the financial advantage or
disadvantage and capabilities of
the company,
 how the litigation could affect the
reputation of the company and
 in some instances the business
relationship with the alleged
wrongdoer.
 he Australian court made the
following observation, linking how
the status of the complainant
could have some bearing on
ascertaining his intention i.e
acting in good faith to apply for
leave:
i. Current shareholder of a
company who has more than
a token shareholding and the
derivative action seeks
recovery of property so that
the value of the applicant’s
shares would be increased,
good faith will be relatively
easy for the applicant to
demonstrate to the court
satisfaction.
ii. Current director or officer, it
will generally be easy to show
that such an application has a
legitimate interest in the
 welfare and good court will not grant leave. (Pang  The court held: the main
management of the company Yong Hock v PKS Contracts motivation of the plaintiff was
itself, warranting action Services Pte Ltd) financial, not personal as there
recover property or to ensure were real concerns about the
that the majority of the 15. If there is a history of grievances company’s loss of income arising
shareholders or of the board against the current majority of from a breach of a director’s
do not act unlawfully to the shareholders or the current board, fiduciary duty.
detriment of the company as this could influence the court to  The company benefits financially
a whole. refuse (Swanson v Pratt) when the company receives
iii. Applicant is former substantial amount of cash if the
16.Tam Tak Chuen v Eden
shareholder with nothing allegation of breach is proven, or
Aesthetics Pte Ltd
obvious to gain directly by the where the company is able to
 The plaintiff and the defendants
success of the derivative recover its assets.
were partners in a medical
action, the court will
practise which were later 17. In some instances, the defendant
scrutinise with particular care,
incorporated. had tried to use the availability of
the purpose which the
 As a result of the plaintiff’s extra
derivative action is said to be an alternative remedy such as an
marital affair with one of the
brought. oppression provision or a winding up
nurses, the defendant convinced
order to argue that leave should not
12. The fact that the petitioner would the plaintiff to sells his shares to
be given.
have benefitted personally from the the defendant at below market
derivative action does not value. 18. The court also will consider the
necessarily indicate that he lacks  The plaintiff later successfully availability of alternative remedy is
good faith. brought a court proceeding deciding whether it is in the best
rescinding the sale and his interest of the company for the
13. The value of his shareholdings will removal as director. leave to be given. (Vinciguerra v
increase when the applicant is  Subsequent investigation MG Corrosion Consultants Pty
successful. The indirect benefit is in unearthed the fact that there has Ltd)
line with the increase in the been breach of fiduciary duties
company’s asset because of where the defendant had 19.Gooze v Graphic world Group
successful recovery of the company’s diverted the company’s business. Holdings Pty Ltd
fund.  The defendant raised the point  The Austarlian court found that
that the action was motivated by the purpose of the action being
14. The existence of hostility, dislike, ill personal hostilities due to the brought was to persuade other
feeling or other personal reasons defendant’s knowledge of the shareholders to concur in and
does not necessarily mean that the plaintiff’s adultery. procure the payment of
 dividends by the company or to
buy the applicant’s shares in the
company.
 This was held to be a collateral
purpose amounting to abuse of
process. The leave will not be
granted where the main reason
for the plaintiff is primarily to
obtain a better price for the
shares.
20. To ascertain whether it is in the best
interest of the company for leave to
be granted, a company’s genuine
commercial reasons not to proceed
with any litigation must also be
considered. (Celcom (M) Bhd v
Mohd Shuaib Ishak)
21. When directors want to consider
whether any legal proceedings
should be commenced, they would
have to assess the benefit and cost
of the litigation.
22. Some commercial reasons for
deciding whether or not to litigate
may be
 The financial advantage or
disadvantage of the company.
 Capabilities of the company.
 How the litigation could affect the
reputation of the company and in
some instances the business
relationship with the alleged
wrongdoer (Pang Yong Hock v
PKS Contracts Services Pte
Ltd)
23. Where the company argued that
that it is in the company’s
commercial benefit not to pursue
litigation against wrongdoer,
provided that there is no conflict of
interest, the court will have to rely
on the director’s decision on this
point and make an assessment
about their decision.
24. A decision by an applicant in
applying leave where leaved was
refused due to conflict of interest
can be seen in Mcevoy v Caplan:
 In this case where there was a
pending litigation between two
companies where the applicant in
the present case, Mcevoy, was a
director of both these companies.
 Mcevoy applied for leave under
Section 237 of the Corporation
Act 2001 to bring a cross-claim as
a derivative action on behalf the
defendants companies.
 The trial judge refused lease as
there was a clear conflict on
Mcevoy’s part.
 he judge felt that the roles he
played in these two companies in
relation to the legal proceedings
between these companies meant
that it would not be in the best
interest of the defendant
companies for leaved to be
granted.
WRONGDOER CONTROL
1. Shamsul bin Saad (suing as
minority shareholder of Petra
Perdana Berhad and bringing
this action for the interest of
Petra Perdana Berhad) v Tengku
Dato’ Ibrahim Petra bin Tengku
Indra Petra
 The applicant for leave was
refused as the plaintiff was
already in control of the company
via an interlocutory injunction
and because the alleged
wrongdoer has already been
removed by the general meeting.
It seems that the requirement for
wrongdoer control as laid down
under the common law is
subsumed within the statutory
derivative action.
2. Suhaimi bin Ibrahim v Hi
Summit Construction Sdn Bhd
 The fact that the appellant still
retained control of the board
indicated that they have control
of the company despite not being
a majority shareholder and this
influenced the court to refuse
leave.
 EFFECT OF RATIFICATION
1. Section 349 of CA 2016 provides
that if members of a company, ratify
or approve the conduct of the
subject matter of the action:
a) The ratification or approval does
not prevent any person from
bringing, intervening in or
defending proceedings with the
leave of the court.
b) The application for leave or
action brought or intervened in
shall not be stayed or dismissed
by reason only of the ratification
or approval and
c) The court may take into account
the ratification or approval in
determining what order to make.
2. Thus the fact that the general
meeting has ratified the transaction
is not a bar to the grant of the leave.
3. It is possible that the ratification is
not valid due to the involvement of
the wrongdoer in the voting.
4. Even if the wrongdoer has not voted
on the resolution ratifying the
wrongdoer’s misconduct, the
ratification is invalid if it is by votes
of the shareholders over whom the
wrongdoer exercise control.
5. It is also possible that the ratification
was not properly made as the
independent shareholders were not
given relevant and adequate
information to make an informed
decision (Ting Sing Ning v Ting
Chek Swee)
6. In fact, the ratification itself may be
the subject of contention, for
example where the validity of the
meeting purporting to ratify the
breach was itself questionable
(Parry v Bartlett).
POWER OF THE COURT
1. Where leave is granted, the obvious
order is for the complainant to be
allowed to bring the action of behalf
of the company or to control the
proceedings.
2. It is also possible for the court to
order that another person take over
the action or make an order for the
original complainant to be replaced
by another person. This could be an
appropriate order where the
complainant may not be entirely
blameless, for example, if there were
some concerns about the innocence
of the plaintiff.
3. Section 350 of CA 2016: In granting
leave under this section and sections
347 and 348, the Court may make
such other orders as the Court thinks
appropriate including an order:
a) Authorizing the complainant or
any other person to control the
conduct of the proceedings;
b) giving directions for the conduct
of the proceedings;
c) for any person to provide
assistance and information to the
complainant, including to allow
inspection of the company’s
books;
d) requiring the company to pay
reasonable legal fees and
disbursements incurred by the
complainant in connection with
the application or action, or
pending the grant of the leave or
pending the grant of any
injunction by the Court hearing
the application for leave under
this section; or
e) The costs of the complainant, the
company or any other person for
proceedings taken under this
section, including an order as to
indemnity for costs.