Case Update: High Court Distinguishes Between Personal Wrong and Corporate Wrong in Shareholder Oppression

Joyce Lim writes a case update on this High Court decision on the importance between a personal wrong and a corporate wrong in a shareholder oppression action.

The High Court in the recent case of Dato’ Shabaruddin Bin Ibrahim v Dato’ Ruslan Bin Ali Omar & Ors [2020] MLJU 1744 (with grounds of judgment dated 26 October 2020) (Shabaruddin) dealt with the distinction between a personal wrong committed against shareholders of a company and a corporate wrong committed against the company.

Summary of the Decision and Significance

 The Plaintiff in this case (Dato’ Shabaruddin) was the minority shareholder in Pesaka Consolidated Sdn Bhd (Pesaka). The Plaintiff filed an oppression action pursuant to section 346 of the Companies Act 2016 (CA 2016) against, among others, the majority shareholder of Pesaka being Dato’ Ruslan bin Ali Omar (Dato’ Ruslan).

Ong Chee Kwan JC dismissed the oppression action primarily because the oppressive conduct complained of constituted a corporate wrong committed against Pesaka and not a personal wrong against Dato’ Shabaruddin. Dato’ Shabaruddin had failed to establish that he had suffered loss that was distinct from that of the loss suffered by Pesaka. The proper remedy was for a derivative action. A derivative action is an action which is to be brought in the name of and on behalf of a company. It is the company that then sues alleged wrongdoers.

The decision is important as it explains the principles applicable in distinguishing a personal wrong from a corporate wrong. This has implications on whether an aggrieved shareholder should bring an oppression action or a derivative action for purposes of seeking relief from the Court. The loss suffered by the minority shareholder is merely reflective of the company’s loss. The general rule is that the reflective loss is not recoverable by the minority. The company is the proper plaintiff to bring an action against wrongdoing controllers.

The Singapore Court of Appeal in Ho Yew Kong v Sakae Holdings Ltd [2018] SGCA 33 (“Sakae Holdings”) also sets out a useful analytical framework for distinguishing between a personal wrong and a corporate wrong. You can read more in an earlier article. Shabaruddin (which cited Sakae Holdings with approval) serves as additional guidance on this distinction.

Brief Facts

 Dato’ Shabaruddin was a 30% shareholder of Pesaka whereas Dato’ Ruslan was a 70% shareholder. Pesaka and its subsidiaries were involved in the business of owning and operating an independent power producing facility.

Before the filing of the oppression action, there was a legal dispute between UMNO, Dato’ Shabaruddin, Dato’ Ruslan and Pesaka. UMNO claimed that it was the beneficial owner of 100% of the shares in Pesaka. Dato’ Shabaruddin and Dato’ Ruslan subsequently engaged in various (but separate) negotiations with UMNO to achieve a settlement.

Without Dato’ Shabaruddin’s knowledge and consent, Dato’ Ruslan arrived at a proposed settlement scheme with UMNO (Proposed Settlement Scheme). The Proposed Settlement Scheme involved Pesaka paying a sum of RM70 million to UMNO. Dato’ Shabaruddin objected to the Proposed Settlement Scheme on the primary basis that the liability to pay the settlement sum should fall on Dato’ Ruslan, rather than PCSB. Further, the business and assets of Pesaka would be at risk in the event of a default on the payment of the sums under the Proposed Settlement Scheme. Despite Dato’ Shabaruddin’s objections, Pesaka’s Board approved the Proposed Settlement Scheme.

Dato’ Shabaruddin filed the oppression action against, among others, Dato’ Ruslan. The High Court categorised the alleged oppressive conduct into three distinct heads:

  1. Alleged oppressive action arising from the Proposed Settlement Scheme: Dato’ Shabaruddin contended that it was not in the interest of Pesaka for its assets to be used for its shareholders’ personal interests.
  2. Continuing oppressive action post filing of the oppression action: Dato’ Shabaruddin contended that since the filing of the oppression action, Dato’ Ruslan had shown a propensity to railroad through resolutions without proper discussions. Further, Dato’ Shabaruddin claimed that his rights and interests were continually side-lined by the majority directors of Pesaka.
  3. Conduct in the proceedings of the oppression action: Dato’ Shabaruddin contended that how Dato’ Ruslan conducted the present litigation showed a propensity or tendency to oppress him through the misuse of the majority powers by the board. Such conduct includes the refusal to provide discovery and misleading the Court about the existence of certain documents.

Decision

Ong Chee Kwan JC dismissed the oppression action. The reasons behind the decision are set out below.

Alleged oppressive action arising from the Proposed Settlement Scheme

Having considered case law from Malaysia and Singapore (including Sakae Holdings), the Court found that Dato’ Shabaruddin’s oppression claim was not made out as:

  1. His real injury or complaint regarding the Proposed Settlement Scheme constituted a corporate wrong on Pesaka rather than a personal wrong on him.
  2. There was no separate and distinct injury suffered by him as a shareholder of Pesaka.
  3. The proper course of action would be for him to commence a derivative action instead of an oppression action.

In arriving at this decision, the Court adopted the following principles to determine whether the corporate wrong committed against Pesaka could also constitute a distinct personal wrong against Dato’ Shabaruddin to permit a finding of oppressive conduct:

  1. Whether there is oppression is a question of fact to be answered not by a consideration of events in isolation but as part of a consecutive story. It is within this story that in some cases, even a single act or transaction which amounts to a corporate wrong may suffice to constitute oppression.
  2. The story must disclose an awareness of the minority interest and a conscious decision by the majority to override it or brush it aside or set to nought the proper company procedure.
  3. The Court will look at the effect and consequences of the corporate wrongs done to determine if a firm tendency or propensity to oppress or disregard the interest of the minority exists and continues to exist at the time of the proceedings. This firm tendency or propensity must be such that it would not be satisfactorily remedied with the mere order to compensate the company for the wrongs done to it.

Continuing oppressive conduct post-filing of the oppression action

 The Court observed that this complaint was in relation to Dato’ Ruslan’s position qua director, and not qua shareholder. The Court held that section 346 of the Companies Act 2016 was a provision to redress complaints by a member of the company qua his status as a shareholder, and not as a director.

Conduct in the proceedings of the oppression action

 The Court disagreed that Dato’ Ruslan’s conduct in dealing with Dato’ Shabaruddin’s request for discovery of documents could have had a bearing on the issue of oppression in this action. The oppression action, being governed by the Rules of Court 2012, cannot be treated as an extension of the management of the company and/or a reflection of how the affairs of the company are being conducted.

Further, since Dato’ Shabaruddin’s real complaint in respect of the Proposed Settlement Scheme was a wrong done to Pesaka, there was never a case made out for oppression by Dato’ Shabaruddin to begin with.

Comments

Where a minority shareholder is aggrieved by a majority shareholder’s actions, the filing of an oppression action may seem like the immediate and natural port of call. This may be for a few reasons. First, the minority shareholder would primarily seek a personal remedy (for example, a share buy-out). In contrast, a derivative action would result in remedies accruing to the company, which would also indirectly benefit the majority shareholder’s wrongdoing. This may seem counterintuitive to the minority shareholder. Second, unlike a derivative action, the commencement of an oppression action does not require the leave of court.

Shabaruddin shows that the distinction between a corporate wrong and a personal wrong is fundamental in minority protection actions. Adopting the wrong action may have adverse time and costs consequences for a minority shareholder. Therefore, aggrieved minority shareholders have to consider the distinction carefully before deciding whether an oppression action or a derivative action ought to be pursued.

 

Joyce Lim is an associate with the boutique disputes firm, Lim Chee Wee Partnership. She has acted in a range of company law disputes.

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