Section 346 of the Companies Act 2016 (“CA 2016”) provides wide powers to the Court to grant remedies as it deems necessary to bring an end to the matters complained of in an oppression action. In Lee Kai Wuen v Lee Yee Wuen(1), the Federal Court refused leave to appeal against the Court of Appeal’s decision, which found that the Court’s powers in an oppression action are wide and unfettered. This includes the power to order restitution to the company — a remedy traditionally seen as belonging to the company.
Facts
The subject company has two shareholders. The Plaintiff (majority shareholder) filed an oppression action against the other shareholder and a third party (“Oppressors”) based, among others, on the allegation of misappropriation of company funds. According to the Plaintiff, upon the hospitalization and eventual death of the previous majority shareholder, the Oppressors conspired to cause the creditors to pay them monies that were supposed to be paid to the company. The Plaintiff successfully obtained a Mareva injunction to freeze the Oppressors’ bank accounts in order to preserve the misappropriated funds while the court action was pending.(2)
Separately, the Oppressors filed an application to summarily strike out the Plaintiff’s oppression action, chiefly on the ground of abuse of the Court’s process. Essentially, the Oppressors argued that, since the Plaintiff was asking for the monies to be returned to the company, the company should sue for those monies by way of a derivative action, and not the Plaintiff, who is the majority shareholder of the company. It was therefore an abuse of process for the Plaintiff to initiate the oppression action to bypass the notice requirement in a derivative action.
High Court’s Decision
At first instance, the High Court allowed the Oppressors’ application, thereby striking out certain prayers of the oppression action that asked for the funds to be returned to the company.(3)
The High Court allowed the application primarily on the basis that, since the prayers sought relief for the company, they were essentially derivative claims, and the Plaintiff was wrong to commence an oppression action instead of a derivative action. In this regard, the High Court placed heavy reliance on the distinction between “personal wrong” and “corporate wrong,” or between “personal loss” and “company loss.” Namely, when the relief prayed for concerns a company loss — i.e., the misappropriation of company funds — the company is the proper plaintiff to sue, not a shareholder.
Accordingly, the High Court struck out the prayers for the funds to be returned to the company.
Court of Appeal’s Decision
The Plaintiff appealed to the Court of Appeal. The Court of Appeal reversed the High Court’s decision, thereby reinstating the prayers in the oppression action for hearing in the High Court.(4)
(a) Wide Powers to Grant Remedies
In its Grounds of Judgment, the Court of Appeal applied a plain interpretation to the wording of section 346 of the CA 2016, which provides the Court with discretion to choose from a wide array of remedies and grant appropriate relief. The Court of Appeal went further to hold that such extensive power even includes the discretion to grant “relief which has not even been prayed for.” The Court of Appeal used terms such as “unfettered” and “no limits” to illustrate the extent of this power.
On the facts of this case, the Court of Appeal considered it trite law that misappropriation of monies can constitute an act of oppression. The same applies when the misappropriation is committed against a family company. Otherwise, the Court of Appeal held that it is “illogical” and “incomprehensible” that, while misappropriation can constitute oppression, the Court cannot thereafter grant restitutionary relief for the monies to be repaid to the company.
(b) Reflective Loss Principle Inapplicable
Having held that restitutionary remedies are not prohibited by section 346 of the CA 2016, the next issue was whether the Reflective Loss Principle (“RLP”) operates to prevent the granting of such remedies. Based on RLP, a shareholder cannot bring a claim for the diminution in value of its shares that results from a loss suffered by the company (company loss) in relation to a wrong done to the company (corporate wrong). The primary justification for RLP is to avoid double recovery.
In delivering the judgment, the Court of Appeal discussed several appellate pronouncements in Commonwealth jurisdictions, including the Federal Court’s decisions in Re Kong Thai Sawmill (Miri) Sdn Bhd(5), Rinota Construction Sdn Bhd v Mascon Rinota Sdn Bhd(6), the Singapore Court of Appeal’s decision in Ho Yee Kong v Sakae Holdings(7), and the UK Supreme Court’s decision in Marex Financial Ltd v Sevilleja(8).
In Marex, Sevilleja (“S”) owned and controlled two companies (“Companies”). Marex Financial Ltd (“M”) obtained a judgment against the Companies. S moved assets from the Companies, disabling them from satisfying the judgment debt. M sued S for the tort of causing the Companies to suffer losses by unlawful means. The UK Supreme Court held that RLP applies to shareholders, but not to creditors of the company. As such, M was not prevented by RLP from suing S.
While recognizing that RLP remains applicable to shareholders in the UK, the Court of Appeal questioned its survivability in the future. Nonetheless, for the purposes of this case, the Court of Appeal held that RLP does not apply to an oppression action where restitutionary remedies are sought for the misappropriated monies to be repaid by the wrongdoer to the company, provided there is no risk of double recovery. In this regard, the Court of Appeal relied on the pronouncement in Rinota that RLP has no application to an oppression action where the diminution in share value is due to oppressive acts. RLP also does not apply when the complainant in an oppression action is not seeking a remedy for itself personally but is seeking restitution for the company.
Hence, the Court of Appeal concluded that the Plaintiff’s prayers for the return of the misappropriated funds were not unsustainable or entirely hopeless. Those prayers were reinstated in the High Court for hearing.
Federal Court’s Decision
The Oppressors applied for leave to appeal to the Federal Court and proposed 12 questions of law to challenge the Court of Appeal’s decision. The Federal Court dismissed the leave application in total and did not disturb the Court of Appeal’s decision.
Commentary
The wide language used in the oppression provision is crucial in providing the Court with the necessary discretion to formulate remedies that are appropriate and just in the circumstances of a particular case. The outcome of this series of legal battles safeguards such flexibility and judicial discretion. The right of an oppressed shareholder to bring an oppression action is not denied simply because certain remedies sought are for the benefit of the subject company.
This article is authored by:
Foo Joon Liang FCIArb FSIArb FHKIArb
Partner, Gan Partnership
E: joonliang@ganlaw.my
Lee Xin Div
Senior Associate, Gan Partnership
E: xindiv@ganlaw.my
Endnotes
- Lee Yee Wuen v Lee Kai Wuen, Federal Court Civil Application No.: 08(i)-148-07/2020(J).
- Lee Yee Wuen v Lee Kai Wuen [2020] MLJU 1953 (High Court) – Inter-partes Mareva Injunction.
- Lee Yee Wuen v Lee Kai Wuen [2019] 1 LNS 1862 (High Court) – Striking Out.
- Lee Yee Wuen v Lee Kai Wuen [2020] MLJU 1902 (Court of Appeal) – Striking Out.
- Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227 (Federal Court).
- Rinota Construction Sdn Bhd v Mascon Rinota Sdn Bhd [2018] 1 MLJ 141 (Federal Court).
- Ho Yee Kong v Sakae Holdings [2018] 2 SLR 333 (Court of Appeal, Singapore).
- Marex Financial Ltd v Sevilleja [2020] UKSC 31 (Supreme Court, United Kingdom).
DISCLAIMER: This article is for general information only and should not be relied upon as legal advice. The position stated herein is as at the date of publication on 31 December 2020. For any enquiries on this article, please contact Foo Joon Liang (joonliang@ganlaw.my) or Lee Xin Div (xindiv@ganlaw.my).
