The Malaysian Lawyer

We start this year’s Top 5 cases series with a feature on the Top 5 Company Law Cases in Malaysia for 2021 (see the 2020 Company Law Cases edition and the 2019 Company Law Cases edition).

This list will cover decisions on shareholder’s oppression, the shadow director, indemnity for officers, pre-emptive right and adjourned general meetings.

 

#1: Auspicious Journey Decision – Federal Court Decides on Third Parties’ Liability in Oppression

Grounds by: Nallini Pathmanathan FCJ

(Auspicious Journey Sdn Bhd v Ebony Ritz Sdn Bhd & Ors [2021] 3 MLJ 549, FC and grounds of judgment dated 9 March 2021)

Why is this case important?

The Federal Court decision emphasised the wide and liberal construction of the oppression provision (section 346 of the Companies Act 2016 (CA 2016) and formerly section 181 of the Companies Act 1965).

In line with this liberal construction, the Court confirmed that an oppression action is not merely confined to reliefs against the ‘oppressor’ shareholder.

The Court can go further and impose liability against the directors of the company in question or even third parties. This is provided that there is a sufficiently close nexus between the oppressive conduct and the party in question. It requires deliberate involvement in the impugned transactions, or a sufficiently close nexus, participation or connection to warrant the imposition of liability on those directors or third parties in question.

The Federal Court set out the 7 factors as to when oppression liability can be imposed on such third parties (see [128] of the decision).

(a) There should be evidence of deliberate involvement or participation in, or a sufficiently close nexus to the oppressive or detrimental or prejudicial conduct that the minority complains of, to warrant the attribution of liability to a director or third party.

(b) The imposition of liability should be fair or just in all the circumstances of the particular case.

(c) In assessing whether the imposition of such liability is fair or just, the court should be satisfied that the remedy results in fairness to the parties concerned as a whole. In this context, liability may well be more easily assessed and imposed where a director has breached his duties, acquired personal benefit or where his acts or omission will result in prejudice to other shareholders. However, the foregoing examples do not comprise conditions without which liability will not be imposed. Ultimately the facts and factual matrix of each particular case will determine whether or not the imposition of liability on directors and/or third parties is justified. Such an assessment is undertaken on an objective basis.

(d) The attribution or imposition of liability should be circumspect, going no further than is necessary to remedy the breach complained of or to stop the oppressive or prejudicial conduct;

(e) Such imposition of liability must be reasonable, and serve to alleviate the legitimate concerns of the shareholders of the company in question;

(f) In exercising its powers under section 181 of the CA 1965 (and now section 346 of the CA 2016), the court should bear in mind general corporate law principles, such that director liability does not become a substitute for other statutory relief or under the common law.

(g) In summary, the question for the court is whether, in the context of the oppression provision, the defendant was so connected to the oppressive, detrimental or prejudicial conduct that it would be fair and just to impose liability against him for such conduct.

 

#2: Najib Razak Decision – Court of Appeal Rules on the Issue of Shadow Director

Grounds by: Abdul Karim Abdul Jalil, Has Zanah Mehat and Vazeer Alam Mydin Meera JJCA

(Dato’ Sri Mohd Najib bin Hj Abd Razak v Public Prosecutor [2022] 1 MLJ 137, CA and grounds of judgment dated 8 December 2021)

Why is this case important?

Among the different legal issues, the Court of Appeal decided on a significant point in establishing that the former Prime Minister of Malaysia, Dato’ Sri Najib Razak, was a shadow director of SRC International Sdn Bhd.

This point was in the context of section 402A of the Penal Code which defines the term director as the following (and where this is a near-identical phrasing as the Companies Act 2016 definition)

“director” includes any person occupying the position of director of a company, by whatever name called, and includes a person who acts or issues directions or instructions in a manner in which directors of a company are accustomed to issue or act, and includes an alternate or substitute director, notwithstanding any defect in the appointment or qualification of such person

 

This Court of Appeal decision carefully dissected the interpretation and drew on criminal and company law cases. This was to map out the characteristics of a shadow director and how the elements of a shadow director would fall within the above definition. The description and application of the shadow director elements would be equally relevant to company law cases in the future.

 

#3: Perdana Petroleum Decision – Court of Appeal Explains the Legal Nature of the Constitution and the Indemnity for Directors and Officers

Grounds by: Darryl Goon Siew Chye JCA

(Perdana Petroleum Bhd v Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra & Ors [2021] 6 MLJ 663, CA and grounds of judgment dated 15 October 2021)

Why is this case important?

I had written a case update earlier.

First, this decision is a tour de force in mapping out the origins and the legal status of the memorandum and articles of association (i.e. the predecessor term for the constitution) of a company. Ultimately, the memorandum and articles of association, or constitution, is a contract between the members, in their capacity as members, and the company.

Second, this decision explains that the usual Article 113 indemnity provision in the Table A of the articles of association (as seen in Article 170 of the Perdana Petroleum case), without more, cannot extend to the company providing an indemnity to third parties.

Indemnity

113. Every director, managing director, agent, auditor, secretary, and other officer for the time being of the company shall be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application under the Act in which relief is granted to him by the Court in respect of any negligence, default, breach of duty or breach of trust.

 

This decision will affect third parties like directors, auditors and company secretaries.

 

#4: Concrete Parade Decision – Court of Appeal Imposes Strict Standards for Pre-Emptive Right

Grounds by: Lau Bee Lan JCA

(Concrete Parade Sdn Bhd v Apex Equity Holdings Bhd & Ors [2021] 9 CLJ 849, CA and grounds of judgment dated 18 August 2021)

Why is this case important?

A pre-emptive right is where existing shareholders have a right to be first offered any new shares to be issued. In the corporate sphere, there are two important provisions relating to pre-emptive rights.

Section 85 of the CA 2016 states that “[s]ubject to the constitution, where a company issues shares which rank equally to existing shares as to voting or distribution rights, those shares shall first be offered to the holders of existing shares” in order to “maintain the relative voting and distribution rights of those shareholders.”

Since this is subject to the constitution, it is important that the constitution sets out a mechanism addressing the effect of section 85. It is common to have a provision in the constitution that says “subject to any direction to the contrary, all new shares shall be offered to the shareholders in proportion to the amount of the existing shares.”

The Court of Appeal set out the restrictions when attempting to bypass the pre-emptive right in section 85 of the CA 2016.

First, the Court of Appeal suggested that “subject to any direction to the contrary” cannot completely displace or remove the shareholder’s pre-emptive right in section 85. “Subject to any direction to the contrary” can only refer to the manner and proportion in which the shares have to be offered to the existing shareholders.

Second, and in any event, if there is to be a “direction to the contrary“, there must be full disclosure of the shareholders’ pre-emptive right under section 85. In particular, the shareholders must be informed of their statutory pre-emptive right and that by voting for a resolution for a direction to the contrary, that the shareholders are waiving their statutory right.

Third, the directors’ power under section 75 of the CA 2016 to allot shares in the company cannot bypass the restrictions imposed in section 85 of the CA 2016.

Hence, future cases dealing with pre-emptive rights will have to carefully navigate the restrictions as clarified in this Court of Appeal decision.

 

#5: Golden Plus Holdings Decision – Adjournment of General Meeting and Statutory Requirements

Grounds by: Ahmad Fairuz J

(Teo Kim Hui & Ors v Golden Plus Holdings Bhd and another case [2021] 12 MLJ 227, HC and grounds of judgment dated 26 February 2021)

Why is this case important?

This case is part of the long series of company law litigation relating to Golden Plus Holdings Bhd.

This case decided on several novel and significant points of company law. In particular, relating to the law on meetings and adjourned meetings.

This case touched on:

1. For an adjourned general meeting, and one that dealt with removal of directors, there was no need for a fresh special notice to be issued. The adjourned meeting would be treated as a continuation of the original meeting.
2. The expectations of the conduct of the chairperson of a meeting. Especially where the chairperson, as a director of the company, was also being subject to a resolution for the removal of the directors.
3. When a chairperson can legitimately exercise the power to adjourn a meeting.
4. For a notice of general meeting, notice had to be given to the auditors of the company. Nonetheless, the failure to issue the notice to the auditor in this case did not invalidate the general meeting. The auditor’s role at the general meeting would relate to the auditor’s role relating to the financial statements. The failure to issue the notice to the auditors could be cured by the court.