In real world, there are many people made investment to increase their wealth, purchase company debentures and shares are common ways. However, most of the shareholder and debentures holder have minor access or no access to the management of the company dislike the other shareholder or debentures holder are composition of the Board of Directors or the director themselves. Thus, there is ignorance of interest of the shareholder or debentures holders who not fall within the centre of the power in company’s conduct or the majority component of the management exercise their power in oppressive manner. In order to protect the minority, S181 under Companies Act entitle the minority claim remedies in case of oppression.
According to Companies Act under S181, in case of oppression, the qualified proposer to claim remedies is member of company; include 1) anyone who listed in the register of members of the company (Owen Sim Liang Khui v Piasau Jaya Sdn. Bhd & Anor [1996] 1 MLJ 113); 2) anyone who owned company’s shares or debentures and be treated as a member by company or the board (applied doctrine of estoppel); 3) company depositor who named in record of depositors not less than 3 days fall between Monday to Friday and not public holiday or market holiday of Bursa Malaysia.
The minor (underage of 18) also can be company member which subjected to contract law. Basically, there are no restriction of age and sexual of member of company since the register of member just with certain prescribed info such as member’s liability or contribution towards company. For those shareholder who ceased to become member due to death, bankruptcy, or unable to administering their own affairs, personal representative can be appointed to replace them to be member. Besides, the membership also can be transfer to another people in form of inheritance through the WILL of dead member.
Other than that, according to the amendment to the Companies Act, insertion S181A (4), the qualified proposer to claim remedy other than one who mention above, include: company former member if the claim relates to circumstances in which the member ceased to be a member ; any directors of a company ; or declared company’s Registrar.
The Circumstances to Claim Remedies
According to the rule in Foss v Harbottle (1843) 2 Hare 461, the minority of company’s member (shareholder and debentures holder) had been restrict to sue or brought action to company, the majority of members, board of directors or company’s director since the damage or loss was due to negligence of directors and majority of members who suffer the same loss and not with any form of benefit, the case Pavlides v Jensen [1956] Ch 565 best explain it. The plaintiff claims that the defendants (company’s directors and company itself) sold the company owned mine undervalue inattentive, thus the wrong done need to be redress. However, the action of plaintiff was not maintainable due to the decision of selling the mine was decided by the majority not the defendants and it based on the reach of common consent.
S181 (1) stated that the company member allow to leave of court if their interest as company shareholders being disregard, powers of directors are exercise in oppressive manner, board of directors or majority member have power to resist the action or prevent the redress of wrong done, affairs of company being conducted in oppressive manner or capacity as member been unfairly prejudicial or unfairly discriminatory against.
Conditions above are fall under the exception of Foss v Harbottle (1843) – Fraud of minority. It means that the wrongdoers fall under centre power and controlling the company, thus they have power to prevent the redress action. The wrongdoers can be company directors or majority member. In statutory to prove that whether they are constitute a fraud, exercise their power in oppressive manner or their action been regarded as unfairly prejudicial or unfairly discriminatory towards a member, there are few grounds must be shown. First, the majority obtained benefit from company to themselves; second, by depressed the company, obtaining benefit; last, preventing redress action being brought.
There are few circumstances and real world case support action of the member to claim remedy. First, setting up subsidiary company into different and use it as a tool to enter different business field. In order to involve company into different business, sometimes the company will set up a subsidiary and raise fund then allow the company engage in the industry then winding up the subsidiary since the purpose to engage in new business must fulfilled. The case Scottish Cooperative Co. v Meyer [1959] perfectly reflected the circumstances above. The plaintiffs who are the minority shareholders of the subsidiary company claim that the defendants (majority shareholders) action of setting up the subsidiary and then winding up the subsidiary after the subsidiary helps the company enters the rayon industry is with bad intention, it leads to the shares hold by the plaintiffs become priceless. Thus S181 been applied and the company was ordered to redress it by purchase the shares owned by plaintiffs at fair value.
Second, some companies are fall under control of the majority member, the majority member (shareholders) sometimes are employed as director or in board of directors which have power to control over the company funds and assets, some of them may fulfilled self- interests or benefits by withdrawing company’s funds and these can be regarded as oppressive conduct and minority member can sued the majority shareholders by application of S181 (1) (a) in Companies Act. Eric Lau Man Hing v Eramara Jaya Sdn. Bhd. & Ors [1998] and Low Peng Boon v Low Janie [1999] case can be best cases to represent the circumstances mentioned above. Both defendants in these two cases withdrawing company funds to fulfil self-interest, one of them deposit the fund in joint names or individual fixed deposit accounts and one of them withdraw it for personal interest.
The two cases above also reflected that these are circumstances the shareholders suffer non- payment of dividend or dividend paid was inadequate compare to the majority, both plaintiffs in these cases did not received payment of dividend due to misappropriation of company funds withdrawing by the majority member who composited board of directors and lead to improper records of company fund’s amount. Another reason of non-payment of dividend was the majority shareholders derive the funds as director fees and benefit themselves by receiving tremendous amount from company in formed of salaries but not declaring dividend. This circumstance can be considered as the minority shareholders entitled to sue under S181 (1) (b) in Companies Act 1965 which stated that ” a remedy could be claimed if the action of the company which run in good faith but result in contrast to the interest of minority shareholders, yet the action can be claimed as unfairly prejudicial and discriminatory.”
The facts in Sanford v Sanford Courier Service Pty Ltd (1986) stated that the Defendants diverted the business from the company to another company which control by Defendants and get high director fees, motor vehicles and wealth retirement scheme in return. At the same time make non-payment of dividend to Plaintiffs. The Judge held that both actions of company favouring directors by given benefits and refuse to pay dividend were necessarily injustice discrimination and prejudicial.
In the Companies (Amendment) Laws, there are circumstances that if the complainants fall under S181A (4) found that the majority or director of company ratify or approve the conduct, the subject matter of the action- the ratification or approval does not prevent any person from bringing, intervening in or defending proceedings with the leave of court [Companies Amendment Act 2007-S181D (a)]. It means that the complainant can apply leave of the court to intervene the ratified conduct by the majority even there are not fraud on minority and due to the negligence of any empowered party. This new statutory derivative action is completely set out the rule of Foss v Harbottle which claimed that the ratified conduct made by majority and director are irrevocable (Pavlides v Jensen [1956]).
Examine the Circumstances to Claim
According to the S181 Companies Act, the circumstances to claim are too rigid to the applicant. To claim remedies, the qualified proposer need to fulfil the rules in the Foss v Harbottle under the ground of fraud on minority or prove that the conduct or act of the company which decided by the majority and directors are in oppressive manner or claimed as unfairly prejudicial and unfairly discriminatory. There are few considerations made by qualified applicant when they applied common law derivative to claim remedies. Those considerations are based on economical, constraint accessibility to company internal and feasibility to revoke the wrong done which have been ratified.
First, the economic constraints, the cost to process the claim of remedies need to bear by the minority shareholder who commences the application of derivative action. Before the application of claiming remedies, the applicant needs to prove that he or she or they have the locus standi to sue in a preliminary hearing, the cost involved to prove the locus standi bear by the applicant. Cost involved in claiming remedy could be burdensome to the applicant, then the shareholder may be reluctant to bring action since he need to use his own funds to proceed. Even the court held that the damage should be awarded but lastly the amount of damage awarded will go to company and benefit the whole body of shareholders but not compensable to the applicant. Case Tang Khor Ham & Ors v Pengurusan Danaharta National Bhd &Ors proved that, the application of claiming remedies is fraught with problem, in the end, the minority shareholders awarded unattractive remedy.
Second, the accessibility of minority shareholder determines whether they can be locus standi to sue. To claim remedies, the minority at first, need to fulfil the requirement to establish that the conduct or action of company affair are fall under ‘fraud of minority’ which the majority have the power to prevent the redress action bring to them. However, the extent and definition of ‘fraud of minority’ are ambiguous and with a lot of restrictions. Minority shareholders must use the law case and compared whether the situation of law cases are similar to the existing situation he/she or they met. The least accessibility to internal information regarding company of the minority shareholders or the majority with power to prevent the minority shareholders to get knowledge about company limit the chance of minority shareholders to prove there are oppressive prejudicial action towards them.
Last, once the wrong doing has been ratified by majority of shareholders, the wrong doing is hard to revoke. Like the situation in Pavlides v Jensen (1956), the decision of selling the mine under-value to another company was due to the negligence of directors and the minority shareholders cannot sue the director since the selling of mine had been brought to meeting and agreed by majority shareholders. According to S181 in Companies Act, ratification by majority shareholders regard a wrong done was amount to a decision not to sue as respect to the wrongdoers (Choong and Sujata, 2008). Besides, the case law did not set down a clean principle to what extent the wrong doing can be ratified by shareholders except the situation that the company assets had been withdraw.
To enhance the protection over the minority shareholders, there are amendments made to S181 of Companies Act by insertion of new subsection. The new subsection covered few area of claiming remedies. S181A stated that the proceedings can be bringing on behalf of a company by the range of complainant. S181 B stated the procedure of application for leave of court. S181 C listed that any proceedings brought under S181 A shall not be discontinued except with the leave of the court. S181 D determined the effect of ratification and S181 E defined the power of the court (Companies Amendment Act, 2007).
However, the new act from S181 A- S181 E increase the chance of statutory dispute of a company and it causes some injustice to company itself. In order to explain it more clearly, the case Mohd Shuaib Ishak v Celcom (Malaysia) Bhd which deals with the amendment Act been deployed. In this case, the Plaintiff who also the former member of Celcom (defendant) was qualified to apply for the leave of court to bring action on the respectful business decision was made by Celcom director as the applicant related to the circumstances in which the member ceased to be a member has fulfilled the meaning of “complainant” under S181 A (4) (b). S181 A wider the range of ‘complainant’ and allow no person to defend or discontinued any proceedings on behalf of a company. These lead to the high intervention of people to the business conduct of company (Lee Shih, 2009).
In this case, the intention of Plaintiff to sue directors fulfil the requirement of S181B (4) (a) with good faith (b) appears prima facie for best interest of the company and he complied the procedural requirement under S181B (2) which the complainant shall give 30 days notice in writing to the director of his intention to apply for the leave of court (Companies Amendment Act, 2007). Plaintiff intention to sue can be proved in this case, however, in other case, the intention of complainant are hard to define whether for company best interest or with any collateral benefits. If the intention of complainant unable to go through a strict assessment in order to prove that it fulfilled S181B (4) (a)&(b), the amendment act will be a tool to prevent company to perform their business conduct.
According to S181 C, once the action is proceeding, there are not allowed self-settlement, all of the action to discontinue, compromise or settle of the proceedings must with the leave of court. To overcome the difficulties in term of cost to bring a proceedings, S181E (1) (d)&(e) been stated. According to what stated under S181E (1) (a)&(b), the court require company to burden the reasonable legal fees, disbursements incurred in application for leave also the cost of the complainant for proceedings. In the end, this section just lead to the blight of company assets as the company need to pay all the relevant cost no matter the complainant is the successful party or not. Since the cost will bear by company, it encourages any person who falls under categories of complaint to apply for proceedings. The relevant costs can be a tremendous amount.
Recommendation on Amendment to the Malaysian Law
Even though amendment of S181 was on behalf of providing more thorough protection to those ‘complainant’ under S181A (4), however it also lead to injustice to the company since it increase the chance of ‘complainant’ to interfere and doubt the decision made by BOD and company’s director at the same time blight the company assets since the company requiring by S181E (d) and (e) to burden the relevant imbursement in the process of application. Other than blight company asset in term of monetary, the human resources also been required related with the proceedings, the company should always prepare to assist in the investigation of company’s books. Thus there are recommendations to the Companies (Amendment) Act 2007 to avoid injustice cause by the amendment statutory derivative action.
First, the court must carefully screen through the qualification of the applicant, ensure that he/she/they are qualified by fulfilled the requirement of S181A (4) (a)-(d) about the complainant before granted the leave of court, requiring those complainant fulfil the procedural requirement in S181B (2) which give 30 days notice in writing about their application. If the applicant fail to comply with the requirement, then the time, money and effort of a company in the application can be avoid.
Second, strictly examine the intention of the applicant, whether they made application in good faith and for the best interest of the company which fall under requirement of S181B (4) (a) and (b). Sometimes the intention of the applicant may aim for the collateral benefit if they get the granted leave of court. For example to harm the reputation of the company as it can be company precious assets in business negotiation or gaining contract.
Third, the court must acquiring the applicant to provide substance evidence based on the ground of ‘fraud on minority’ or the directors with intention to carry out the oppressive business conduct in order to support the application and the loss or damage could suffer by company if the oppressive action are continued. If the applicant fails to do so, then the court would not grant the leave of court.
Summary
In summary, the eligible applicant are the complainant who fall under the S181A (4) (a) to (d) including company member or who entitle to be an member like company’s depositors, shareholder and debenture holder been treat by the Board as member, representative of shareholder who ceased to be a member; former member of a company with terms and conditions; company’s director; or the Registrar of declare company.
The applicant are eligible to claim remedy if their interest are been disregard or been treat in basis of unfairly prejudicial and discriminatory or they found that the directors and majority shareholder exercise their power in oppressive manner or the majority with the power to prevent redress action.
The circumstances to claim remedy are restrict by the Foss v Harbottle rule as the applicant should prove the majority shareholder conduct action or propose action based on the ground of “fraud on minority”. Before the amendment to the Companies Act 1965, the circumstances to claim remedy are too rigid to the applicant and discourage them to take action as there is economic constraint on minority shareholder capability to bear the cost and enjoy the least damage awarded, have no accessibility to do inspection of company’s books and low feasibility to revoke the oppressive conduct which had been ratified by the majority shareholder.
After the amendment to the Act, the applicant been encourage doing so as the range of qualified proposer are increase; company acquired to bear the cost incurred in the application of leave of court; with the power of court, the applicant entitle to get assist and gain information including access to inspection of company’s book; interfere the oppressive conduct or propose act which decide by the majority shareholder and directors. However, it leads to injustice to the company in term of monetary, freedom of director to make decision without interference and the damage of reputation.
Thus, to overcome the rigidity impose to the company, there are recommendations provided. The court should carefully revise the application with investigation of applicant qualification as complainant, strictly examine the intention of complainant to bring the statutory derivative action without any collateral purpose, and with good faith or for company best interest, require some substance evidence about the oppressive conduct or any evidence that related to the ground of ‘Fraud on minority’.