What can a shareholder or company member do if the company has a claim against a third party but the directors of the company fail, neglect or refuse to commence action to pursue that claim? What if the claim is against the company’s directors for breach of directors’ or fiduciary duties? Or what if the directors are pursuing a legal action on behalf of the company which does more harm than good to the company?
The member can apply to the Singapore Court to commence, defend or discontinue an action on behalf of the company. Under Singapore law, such an action is known as a derivative action. It’s derivative because under common law principles, the claim strictly speaking belongs only to the company (this is the proper plaintiff rule). However, the common law and the Companies Act in Singapore provide for certain rules to allow a member to bring a derivative action on behalf of the company under Singapore law.
Which provision in the Companies Act governs this?
Section 216A of the Companies Act sets out the law on the statutory derivative action.
What types of companies does section 216A apply to?
Any Singapore-incorporated company. Previously, it only applied to unlisted companies. The recent amendments to the Act which took effect on 1 July 2015 changed this position. Any Singapore-incorporated company, whether listed or unlisted, whether listed in Singapore or elsewhere, would be caught by section 216A.
Does section 216A apply to court litigation or arbitration?
It is applicable to both litigation and arbitration. Previously, the wording of section 216A suggested that it only applied to litigation. The change is the result of recent amendments to the Companies Act, which took effect on 1 July 2015.
What are the requirements for a member to obtain the Court’s leave to bring a statutory derivative action?
Section 216A(3) sets out the requirements as follows:
“(3) No action or arbitration may be brought and no intervention in an action or arbitration may be made under subsection (2) unless the Court is satisfied that —
(a) the complainant has given 14 days’ notice to the directors of the company of his intention to apply to the Court under subsection (2) if the directors of the company do not bring, diligently prosecute or defend or discontinue the action or arbitration;
(b) the complainant is acting in good faith; and
(c) it appears to be prima facie in the interests of the company that the action or arbitration be brought, prosecuted, defended or discontinued.”
In respect of the requirement in section 216A(3)(c), two further elements must be considered:
a. There must be a reasonable basis for the complaint and a legitimate or arguable case against the proposed defendants; and
b. Assuming that there is an arguable case, it is in the interests of the company that the case be pursued.
To give context to these requirements, in the Singapore Parliamentary Debates on the introduction of section 216A, then Minister of Finance, Dr Richard Hu emphasized that “section 216A contains strict conditions that must be satisfied before any action can be brought against corporations” (Singapore Parliamentary Debates, Official Report (14 September 1992), Column 231). The purpose of these strict conditions was to “to ensure that the remedies that would be open to shareholders are not abused and give rise to unjustified court actions”. In the Select Committee Report, Dr Richard Hu Tsu Tau [at pg B9] similarly noted that the objective of this amendment “has to be balanced against the need not to encourage frivolous complaints which will be detrimental to companies” (Report Of The Select Committee On The Companies (Amendment) Bill [Bill No. 33/92]).
Requirement (a): 14 days’ notice to company directors
Margaret Chew argues that the purpose of the notice requirement is to “alert the directors that a derivative action is being contemplated, and to give the directors an opportunity for remedying the situation, in particular, to cause the company to pursue the action as the proper plaintiff” (Margaret Chew, Minority Shareholders’ Rights and Remedies (2007) at 298). Associate Professor Pearlie Koh states that the objective of the notice requirement is to “give the company the opportunity, through its board of directors, to consider its rights and course of action” (Pearlie Koh, :The Statutory Derivative Action in Singapore – a Critical and Comparative Examination” (2001) Bond Law Review, 13(1), 64-94). Associate Professor Dan Puchniak states that the requirement is “eminently sensible” as the board is the preferred body to make litigation decisions and “it is only when it declines to discharge its functions properly that an individual shareholder may be allowed to apply to court to be given the authority to conduct legal proceedings” (Dan W.Puchniak, The Derivative Action in Asia: A Comparative and Functional Approach (2008) at 337).
However, section 216A of the Companies Act does not stipulate the exact form of notice that must be given. For instance, how detailed must the proposed action or issues or causes of action be described in the notice? Must the notice list out all the causes of action and all the reliefs intended to be claimed in the proposed action? This is subject to academic controversy. For an academic article on this issue written by me, see: Ronald JJ Wong & Jeremy Yeo Wen An, “Rationalising The Notice Requirement For Statutory Derivative Actions: Comparing Singapore And Canadian Perspectives” (2015) 27 SAcLJ 528.
Requirement (b): complainant must be acting in good faith
The applicant/complainant must show that he is commencing the derivative action in good faith. At risk of circularity, it means that the applicant cannot be commencing the derivative action in bad faith, e.g. to achieve some sinister objective other than to vindicate the company’s wrongs.
However, this requirement does not mean that there must be good faith generally in all past conduct of the applicant: IGM Resources Corp. v. 979708 Alberta Ltd  A.J. No. 1462 at .
The burden is on the applicant / complainant to establish good faith; there is no presumption of good faith in favour of the applicant: Ang Thiam Swee v Low Hian Chor  SGCA 11.
The Singapore courts have generally taken into account the following factors in determining whether there is good faith:
a. whether the applicant honestly or reasonably believes that there is a good cause of action: Ang Thiam Swee v Low Hian Chor  SGCA 11 at ; the British Columbia Supreme Court decision in Primex Investments Ltd v Northwest Sports Enterprises Ltd and 453333 BC Ltd  4 WWR 54 (“Primex Investments”) at ; the British Columbia Supreme Court decision in Discovery Enterprises Inc. v. Ebco Industries Ltd  B.C.J. No. 1766 (“Discovery Enterprises”) at ; the New South Wales Supreme Court decision in Swansson v Pratt  NSWSC 583 (“Swansson”) at ; South Johnstone Mill Ltd v Dennis and Scales  FCA 1448 (14 September 2007) (“South Johnstone Mill”) at . .
There is no necessary connection between the applicant’s good faith and the merits of his application; any considerations of legal merits must be yoked to an assessment of whether the applicant honestly or reasonably believes that there is a good cause of action: Ang Thiam Swee v Low Hian Chor  SGCA 11;
b. whether the applicant has a collateral purpose in pursuing the derivative action such that that his collateral purpose is not consistent with the purpose of ‘doing justice to a company’ so that he is abusing the process of court or the statute, and, by extension, also the company, as a vehicle for his own aims and interests: see Ang Thiam Swee at -; Primex Investments at ; Swansson at ; South Johnstone Mill Ltd v Dennis and Scales  FCA 1448 (14 September 2007) affirming Swansson at .
The abuse of process test is a useful standard to determine if an applicant has a collateral purpose for pursuing the derivative action that amounts to bad faith – the burden is on the applicant to show that he is ‘genuinely aggrieved’ and that his collateral purpose is sufficiently consistent with the purpose of ‘doing justice to a company’ so that he is not abusing the statute, and, by extension, also the company: Ang Thiam Swee v Low Hian Chor  SGCA 11;
c. whether the applicant is so motivated by vendetta, perceived or real, that his judgment will be clouded by purely personal considerations or the applicant appears set on damaging or destroying the company out of sheer spite or worse, for the benefit of a competitor, lack of good faith may be found: Pang Yong Hock and another v PKS Contracts Services Pte Ltd  3 SLR(R) 1 (CA) (“Pang Yong Hock”) at ; and Ang Thiam Swee at . Questionable motivations such as the applicant’s self-interest per se do not amount to bad faith. Instead, bad faith may be established where the questionable motivations constitute a personal purpose which indicates that the company’s interests will not be served: Ang Thiam Swee v Low Hian Chor  SGCA 11; Primex Investments Ltd v Northwest Sports Enterprises Ltd and 453333 BC Ltd  4 WWR 54 at .
An applicant’s concurrent commencement of a derivative suit application and a personal claim as a shareholder in oppression does not amount to bad faith as it is so entitled: Discovery Enterprises at .
It cannot be bad faith that the Applicant did not raise the issues in the derivative suit application earlier if the Applicant had not had his suspicions aroused and thus had not obtained relevant evidence which showed a change of circumstances that warranted raising the issue in the derivative suit: Pathak v. Moloo  A.J. No. 706.
Requirement (c): prima facie in the interests of the company
Under this requirement, there are two elements:
a. reasonable basis for the complaint and a legitimate or arguable case against the proposed defendants; and
b. in the interests of the company that the case be pursued.
At the stage where the complainant/applicant applies to the Court for leave to bring the derivative action under section 216A, the court need not and ought not be drawn into an adjudication on the disputed facts. Leave to cross-examine in such situations ought to be sparingly granted. The Court needs only consider the grounds and points of challenge raised by the defendants to see if they are sufficient in themselves to destroy the credibility of the applicant’s propounded case without a full scale hearing to determine who was truthful and who was not: Agus Irawan v Toh Teck Chye and others  SGHC 49  1 SLR(R) 471 at .
The “legitimate and arguable case” requirement means that the claim must have a reasonable semblance of merit; not that it is bound to succeed or likely to succeed, but that if proved the company will stand to gain substantially in money or money’s worth: Agus Irawan v Toh Teck Chye and others  SGHC 49  1 SLR(R) 471 at . The Singapore Court of Appeal in Pang Yong Hock and another v PKS Contracts Services Pte Ltd  3 SLR(R) 1 (CA) clarified at  that the above phrase, ‘stand to gain substantially in money or money’s worth’ relates to the issue of whether it was in the interest of the company to pursue the action, rather than whether the claim was meritorious or not.
The court is not required to make an extensive inquiry into the merits of the claim and ought not to be drawn into an adjudication on the disputed facts as it is merely determining whether leave for bringing the action ought to be granted and is not trying the action itself (Agus Irawan at ; Teo Gek Luang v Ng Ai Tiong  2 SLR(R) 426 at ). In this regard, it would be sufficient for the court to rely on affidavit evidence filed by both sides in support of their claims to ascertain whether the action to be brought in the company’s name has any semblance of merit (Pang Yong Hock at  to ; Agus Irawan at ).
In considering the requirement in s 216A(3)(c), the court should also consider whether there is an alternative adequate remedy available, such as the winding up of the company (Pang Yong Hock at ).
In Fong Wai Lyn Carolyn v Airtrust (Singapore) Pte Ltd  3 SLR 980, the High Court considered allegations of breach of director duties in connection with several affliated companies. The Court considered each allegation and accepted some allegations as having reasonable basis and a semblance of merit while rejecting some. In regard to one such allegation which the Court rejected (at -), the Court took the view that the explanation offered by a third party in regard to the alleged director’s conduct was satisfactory while the applicant could not adduce any evidence to cast doubt on the explanations or on the alleged director’s explanations.
In Poondy Radhakrishnan and Another v Sivapiragasam so Veerasingam  SGHC 228, at , the High Court allowed the application because it was of the view that there existed reasonable evidence from third party witnesses in the form of affidavits or statutory declarations claiming first hand knowledge of the events pertaining to the claims against the alleged director for breach of fiduciary duties.
Factors to consider in ‘best interests’ of company
a. Prospects of success of the proceedings, their likely costs, the likely recovery if the proceedings are successful and the likely consequences if they are not: Re MYCORP GROUP PTY LTD – BC201313229 (Supreme Court of New South Wales).
b. The character of the company, in that different considerations may well apply depending on whether the company is a small private company whose few shareholders are the members of a family, or whether it is a large public listed company — the effect of the proposed litigation on the purpose for which the company was established and on the family members being potentially relevant in the former but not the latter case; or if the company is a joint venture company in which the venturers are deadlocked so that the proposed derivative action is seen as being for the purpose of vindicating one side’s position rather than the other’s in a way which will not achieve a useful result:Maher v Honeysett & Maher Electrical Contractors Pty Ltd  NSWSC 859.
c. The business if any of the company and the effects of the proposed litigation on its proper conduct:Maher v Honeysett & Maher Electrical Contractors Pty Ltd  NSWSC 859.
d. Matters relevant to whether the substance of the redress sought by the applicant is available by a means which does not require the company to be brought into litigation against its will — so that if the applicant can achieve the desired result in proceedings in his or her own name it is not in the best interests of the company to be involved in litigation at all, as was the case in Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd  QSC 324: Maher v Honeysett & Maher Electrical Contractors Pty Ltd  NSWSC 859.
e. The ability of the proposed defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action, so that the Court may ascertain whether the action would be of any practical benefit to the company: Maher v Honeysett & Maher Electrical Contractors Pty Ltd  NSWSC 859.
It is not a cost-benefit analysis of possible outcomes of prospective litigation: Swansson v Pratt  NSWSC 583 (3 July 2002) at .
What is the ‘company’ when considering the best interests of company? Ongoing concern, company is shareholders. Liquidation, company refers to the creditors and contributories. CASSEGRAIN v GERARD CASSEGRAIN & CO PTY LTD and Another – (2008) 68 ACSR 132; CHARLTON v BABER – BC200304563.