A. Introduction
The Court of Appeal in its recent judgment of Wong Cheng Houng v Hoe Poh Lin & Anor raised two important issues, which some may argue as mandatory and new requirements for leave to commence statutory derivative action.
First, the Court of Appeal held that it is mandatory for a complainant to give 30 days’ notice in writing to the directors of a company of his intention to apply for leave for statutory derivative action. This is because of the word “shall” under section 348(2) of the Companies Act 2016 (“CA 2016“) which states:
“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“.
The Court of Appeal held that non-compliance with the 30 days’ notice requirement is fatal, and this must result in the dismissal of the leave application. It will be demonstrated below how case law revolving around this issue favour a more flexible and purposive approach. The Courts should assess whether there is any injustice resulting from the non-compliance of this notice requirement before deciding on the effect of such non-compliance (whether fatal or otherwise).
The second issue is a more interesting one. Although the Court of Appeal admitted that it is not a specific requirement under the CA 2016 for the directors to be named as parties to the leave proceedings, the Court still found that “it is only fair and just” for the directors to be named so that “those upon whom serious allegations have been made are given the opportunity to respond to the application by filing affidavits in reply“. However, it is not explicit in the Court of Appeal’s judgment that this is a new and mandatory requirement for leave to commence statutory derivative action.
This issue was once considered by the High Court on another occasion under the Companies Act 1965 (“CA 1965“). It was held that it is not necessary to cite other parties (besides the company in question) in leave proceedings. One of the most obvious reasons is because there is no such express requirement under the CA 1965 (just like how the CA 2016 is also silent on this issue).
B. Background Facts
Parties
The appellant is a 50% shareholder of the 2nd respondent company, with the 1st respondent and his son holding the remaining 50% shares.
The appellant is also a director of the 2nd respondent company, with the other only director being the 1st respondent. The 2nd respondent company is currently under liquidation.
1st High Court proceedings – Leave for statutory derivative action
The 1st respondent applied for leave for statutory derivative action to defend the 2nd respondent company in winding up proceedings. On 4.3.2022, the 1st respondent issued notice to the appellant and 4 days later, on 8.3.2022, the leave application was served on the 2nd respondent company.
The hearing of the leave proceedings was fixed the day after, on 9.3.2022. The appellant attempted to attend the leave hearing. However, the 1st respondent’s solicitors informed the High Court that the appellant was not entitled to attend the hearing as it was ex-parte. The High Court agreed and directed the appellant to leave the hearing. Subsequently, leave to commence statutory derivative action was granted.
2nd High Court proceedings – setting aside application
The appellant filed a new originating summons to set aside the order granting leave on the following grounds:
(i) the 1st respondent failed to comply with the requirements under section 348 of the CA 2016;
(ii) the 1st respondent failed to name the appellant in the leave proceedings;
(iii) the order granting leave is in breach of natural justice as the appellant was denied the right to be heard.
The appellant’s setting aside application was dismissed. The appellant appealed to the Court of Appeal.
C. Court of Appeal’s Decision
The Court of Appeal found that the High Court’s decision in dismissing the appellant’s setting aside application was wrong. It appears that this reversal of the High Court’s decision was premised upon the denial of the appellant’s right to be heard in the leave proceedings. The Court of Appeal held that the High Court “made a finding on the merits of [the leave] which should have been dealt with … in the presence of the appellant, the 1st respondent and the representative of the 2nd respondent. The appellant could not have done so because he was deprived of the right to do so“.
In its decision setting aside the leave to commence statutory derivative action, the Court of Appeal raised two important issues.
First point – mandatory requirement of 30 days’ notice
First, the Court of Appeal held that it is mandatory for the 1st respondent (being the complainant here) to issue 30 days’ notice in writing to the directors of the 2nd respondent company (being the 1st respondent himself and the appellant). The Court of Appeal held that this is clear from the term “shall” under section 348(2) of the CA 2016.
In this case, the 1st respondent only gave 3 days’ notice instead of 30 days. The non-compliance with the 30 days’ requirement is held to be fatal.
On this issue, the appellant and the 1st respondent relied on conflicting decisions. The appellant cited the High Court case of Salina bt Mohamad Sukor v MVD International Sdn Bhd [2019] 9 MLJ 762 and argued that the 30 days’ notice is a mandatory requirement. The 1st respondent relied on the High Court case of Ng Hoy Keong v Chua Choon Yang [2011] 4 CLJ 545 where the Court held that the non-compliance with the notice requirement is a mere irregularity.
The Court of Appeal in Wong Cheng Huong adopted the same proposition in the judgment of Salina bt Mohamad Sukor on the ground that the notice under section 384(2) of the CA 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“. On the facts of this case, the Court of Appeal held that the 3 days’ notice “is not only unreasonable and insufficient … but also fatal following the non-compliance of the mandatory requirement provided under s.348(2)“.
However, Salina bt Mohamad Sukor could be distinguished on the facts as in that case, 30 days had lapsed since the notice was issued. Interestingly, the High Court in Salina bt Mohamad Sukor referred to an earlier High Court decision in Independent Oil Tools Ltd v Dato’ Ramli bin Md Nor & Ors [2018] 5 CLJ 706 which suggests that the non-compliance with the 30 days’ notice requirement is not fatal.
This was what Azizul Azmi J (as he then was) held in Independent Oil:
“[17] Even if it is contended that the notice had not been duly given, the company would nonetheless become aware of the proposal for a derivative action to be commenced when it is served with the cause papers for the application under section 348. The company would then be able to consider the facts underlying the application and it would be open to the company after due consideration to either agree to commence the litigation action (in which case the application would be withdrawn), or to agree to the application itself (in which case the application would be approved by the court on the basis that it is unopposed).”
This reasoning is consistent with the High Court’s contextual approach in Ng Hoy Keong, where the non-compliance with the notice requirement was held to be a mere irregularity. The High Court in Ng Hoy Keong held that the intention of the notice requirement is not to take the directors by surprise and hence, as long as no injustice has been caused as a result of the non-compliance, the non-compliance must be treated as a mere irregularity. The High Court further referred to section 355(4) of the CA 1965 (in pari materia with section 582(4) of the CA 2016, which provides the Court power to enlarge or abridge time for the doing of any act allowed or limited under the CA 1965 (or CA 2016).
Case law on this issue shows that the 30 days’ notice requirement should not be imposed stringently, and a more flexible, purposive approach should be adopted. The Courts should still assess on a case-by-case basis, whether there is any injustice resulting from the non-compliance and not impose a carte blanche rule that the non-compliance should be deemed fatal.
Second point – new requirement on naming potential wrongdoers as parties to the leave application
The second point raised by the Court of Appeal relates to naming potential wrongdoers as parties to the leave application. In this case, the Court of Appeal held that “it is only fair and just that the appellant be named as a party … upon which serious allegations have been made against the appellant … that the appellant be given the opportunity to respond to the application by filing affidavits in reply“.
This is despite the Court of Appeal admitting that the CA 2016 does not specify that the directors of the company be named as a party in the leave application. It is unclear and inexplicit from the judgment of the Court of Appeal that this is a new and mandatory requirement.
This issue had been considered by Wong Kian Kheong J (as he then was) in Abdul Rahim bin Suleiman & Anor v Faridah binti Md Lazim & 7 Ors [2015] CLJU 313 (albeit under the CA 1965). In Abdul Rahim, Wong Kian Kheong J (as he then was) held that it is not necessary to name the other parties besides the company in question in the leave proceedings for the following reasons:
(a) there is nothing in section 181 of the CA 1965 which explicitly requires the complainant to do so;
(b) statutory derivative action is filed upon the company’s refusal to act in accordance with the notice given. As a company is a separate legal entity from its directors and officers, only the company in question should be made a party to the leave proceedings; and
(c) an application for leave to commence statutory derivative action is summary in nature and no substantive relief or remedy can be granted against any person, including the company in question.
While the High Court decision of Abdul Rahim is overruled by the Court of Appeal on a different issue (see [2017] 1 CLJ 633), the Court of Appeal did not interfere with the findings of the High Court on the issues of naming other parties as co-defendants in the leave proceedings.
The High Court’s reasoning in Abdul Rahim should be adopted, especially when it is not explicit from the Court of Appeal’s judgment in Wong Cheng Houng that it is a new, mandatory requirement to cite potential wrongdoers when applying for leave to commence statutory derivative action.
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