Introduction
The Court of Appeal in Ng Boon Teik v Chang Tong Lee(1) ruled that sections 347(1) and (2) of the Companies Act 2016, requiring leave of court to be obtained before any action may be initiated on behalf of a company and that any such action be brought in the name of the company, are substantive law and not merely procedural.
Section 347 of the Companies Act 2016
Section 347 provides for statutory derivative proceedings. It reads as follows:
(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.
In Ng Boon Teik, one argument raised by the respondent was that non-compliance with sections 347(1) and (2) was a mere irregularity which could be cured and/or amended.
Facts of the Case
In the case, the respondent obtained an order from the High Court to commence a legal action purportedly on behalf of the company. The respondent then brought a writ action against the alleged wrongdoers, including the appellant (a director of the company), and named the company as a nominal defendant. The respondent pleaded that the action was commenced pursuant to the said High Court order and sought remedies on behalf of the company.
However, the High Court order did not state that leave was granted for the respondent to initiate an action on behalf of the company. To the contrary, the order gave leave to the respondent to initiate an action against the company. The appellant therefore applied to strike out the writ action against him.
Legal Position
We acted for the appellant both at the High Court and at the Court of Appeal. We argued that the requirement for leave of the court under section 347(1) is not merely form or procedural in nature. It is substantive because only with the court’s permission does a complainant have standing to bring a claim for or on behalf of the company(2).
We also contended that the writ action could not be saved by amendments because the illegality concerned the locus standi of the respondent to bring the action on behalf of the company.
As this was a novel point of law in Malaysia, we sought guidance from foreign authorities. The BVI Business Companies Act 2004 has a similar provision as section 347 of the Companies Act 2016:
184C. (1) Subject to subsection (3), the Court may, on the application of a member of a company, grant leave to that member to (a) bring proceedings in the name and on behalf of that company; or (b) intervene in the proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.
Foreign Authority Guidance
In Novatrust Ltd v Kea Investments Ltd and other companies(3), it was observed:
Vaughn v. LJ International Inc, an unreported decision of the Court of Appeal of the State of California, concerned a derivative claim in California for a BVI registered company. Permission to commence proceedings had not been obtained from the BVI Court, and the claim was struck out. The argument that the requirement for permission was procedural rather than substantive was rejected. The Court of Appeal held that s.184C limited entitlement to sue to shareholders who complied with its provisions. Although in a sense procedural, permission from the BVI Court was substantive as only with permission did a shareholder have standing to bring the claim.
Similarly, in Wong Ming Bun v Wang Ming Fan & Ors(4), a derivative claim in Hong Kong by a shareholder of a BVI company was struck out for failure to obtain leave from the BVI High Court. Ng J noted that whether a shareholder can commence a derivative action is a matter of substantive law governed by the law of the place of incorporation.
Comments
Following the Court of Appeal decision, it is now clear that violations of sections 347(1) and (2) are not mere irregularities but illegalities. Therefore, where leave of the court has not been obtained to commence a derivative action on behalf of a company, striking out is appropriate.
Key takeaways:
- Leave of the court must be obtained before commencing a derivative proceeding.
- The leave order must explicitly reflect that leave is granted for the complainant to take action on behalf of the company.
- Common law derivative action has been abrogated; a derivative action cannot be initiated via representative capacity.
- The company itself must be named as the plaintiff in the intended action, even if pleadings indicate the action benefits the company.
Authors
Gan Khong Aik FCIArb
Partner, Gan Partnership
E: khongaik@ganlaw.my
Kang Mei Yee FCIArb
Senior Associate, Gan Partnership
E: meiyee@ganlaw.my
Endnotes
- Ng Boon Teik v Chang Tong Lee [2020] 1 LNS 1135.
- Novatrust Ltd v Kea Investments Ltd and other companies [2014] EWHC 4061 (Ch), at paragraph 40.
- Novatrust Ltd v Kea Investments Ltd and other companies [2014] EWHC 4061 (Ch).
- Wong Ming Bun v Wang Ming Fan & Ors [2014] 1 HKLRD 1108.
