A Double-Barrelled Approach?
31 December 2019
Janice Ooi explains the guidance by the Court of Appeal in a joinder of a shareholder’s personal action and a derivative action
In the recent decision of Mak Siew Wei v Yeoh Eng Kong & Other Appeals
 7 CLJ 470 (“Mak Siew Wei
”), the Malaysian Court of Appeal had the opportunity to consider whether it is appropriate for a shareholder to sue in his personal capacity for losses he had suffered personally, and also on behalf of the company for losses suffered by the company by way of a derivative action, both in the same suit. In other words, can both a shareholder’s personal action and a derivative action be brought under the same suit?
The question posed to the Court of Appeal in Mak Siew Wei
is closely linked to the principle of reflective loss. Reflective loss is one suffered by a shareholder which is merely reflective of the company’s loss, such as where the shareholder’s loss is a diminution in the value of his shares as a result of a wrong committed against the company.
THE RULE AGAINST REFLECTIVE LOSS
It is a long-standing rule that the proper plaintiff in an action in respect of a wrong allegedly committed against a company is, prima facie
, the company. This is the common law rule laid down in Foss v Harbottle
(1843) 67 ER 189 (“Foss v Harbottle
However, the rule in Foss v Harbottle
is subject to exceptions and allows a shareholder to initiate a common law action on behalf of the company provided two requirements are met. First, the wrong is one that cannot be validly ratified by the majority due to a fraud on the minority; and second, the perpetrators of the fraud are in control of the company. This is the common law derivative action. It is based on a cause of action belonging to the company, not the shareholder.
At the heart of the common law rule in Foss v Harbottle
is the principle that a company is a separate legal entity and therefore, any loss suffered by a company is separate and distinct from that suffered by its shareholder. In a shareholder’s personal action, the allegation is that the wrongdoing in question is an invasion of rights that belong to the said shareholder individually and in his personal capacity as a member. This is to be contrasted with a situation where the wrong is committed against the company. While the shareholder may suffer a loss as a consequence of the wrong committed against the company, for example, in the form of diminution of the value of his shares, such loss is merely reflective of the loss suffered by the company by reason of a wrongdoing committed against the company. A shareholder cannot commence a personal action for such loss. The proper party to commence legal action to make good such loss would be the company. This is the principle against reflective loss.
The rationale of the principle against reflective loss is to prevent double recovery and to ensure that the company’s creditors are not prejudiced as a consequence of recovery by the shareholder personally. This rationale was reiterated by the Court of Appeal in Mak Siew Wei
The aggrieved shareholder can, however, commence a common law derivative action on behalf of the company provided that it falls within the exceptions to the rule in Foss v Harbottle
A statutory form of the derivative action is now provided in section 347(1) of the Companies Act 2016 (“CA2016”). Under section 347(1) of CA2016, a complainant which includes, among others, an aggrieved shareholder, may with the leave of the court, initiate, intervene in or defend a proceeding on behalf of the company, if the requirements in that subsection are satisfied.
In Mak Siew Wei
, the plaintiff/respondent (“respondent”), was a director and substantial shareholder holding approximately 7.791% of the shareholding of Scan Associates Berhad (“SCAN”). The first to eighth defendants/appellants (“appellants”) were directors of SCAN, which was the ninth appellant. The tenth appellant was the auditor of SCAN.
In essence, the respondent’s claim against the individual appellants was premised on misrepresentation and deceit. The respondent alleged that the appellants had concealed the actual financial status of SCAN from the respondent as well as the other shareholders of SCAN. Pursuant to the representations made by the appellants, the respondent proceeded to acquire a substantial shareholding in SCAN on or about June 2015. On 28 April 2017, SCAN’s shares were delisted and removed from the official list of Bursa Malaysia.
The respondent claimed to have suffered considerable loss in investing or purchasing the shareholding in SCAN as a consequence of the representations by the appellants. The respondent’s action against the appellants was brought in his personal capacity as a shareholder of SCAN and on behalf of all the other shareholders of SCAN.
More than a year after the claim was filed, the respondent sought to re-amend the claim against the appellants to:
- add a new and separate cause of action, namely a derivative action, for and on behalf of SCAN and all the shareholders save for the third and fourth appellants; and
- include events that had transpired since the filing of the claim, namely, the delisting of SCAN.
It is item (i) above that comprises the crux of the appeal before the Court of Appeal.
The appellants objected to the respondent’s re-amendment of the claim based on the following grounds:
- the re-amendment, if allowed, would have the effect of permitting the respondent to bring a common law derivative action which has been expressly abrogated by section 347(3) of CA2016; and
- there was a delay in applying for the re-amendment and the respondent had failed to provide any cogent reasons for such delay.
The High Court found in favour of the respondent and allowed the respondent’s application to re-amend the claim to include the derivative action on behalf of SCAN, as well as to plead the events that transpired since the filing of the claim. The High Court’s decision was based on, among others, the following reasons:
- the common law derivative action in respect of substantive rights acquired before CA2016 came into effect could still be initiated even after the enactment of CA2016. In short, CA2016 did not apply retrospectively. In this regard, the High Court relied on section 620(4) of CA2016 which provides that “Any right, privilege, obligation or liability acquired, accrued or incurred before the effective date or any legal proceedings, remedy or investigation in respect of such right, privilege, obligation or liability shall not be affected by this Act and shall continue to remain in force as if this Act has not been enacted”;
- the purpose of bringing the derivative action in these proceedings was to avoid multiplicity of proceedings which may arise if the derivative action were to be filed in another court; and
- the derivative action sought to be included in the proceedings vide the re-amendment did not change the character of the suit into another as it was not inconsistent with the complaints earlier pleaded by the respondent.
THE COURT OF APPEAL’S DECISION
The Court of Appeal upheld the High Court’s decision in allowing the respondent to re-amend the claim to plead the events that had transpired since the filing of the claim.
In respect of the re-amendment relating to the derivative action, the Court of Appeal agreed with the High Court that section 347(3) of CA2016 did not apply retrospectively by reason of section 620(4) of CA2016. However, after considering the jurisprudence from the United Kingdom and Malaysia, the Court of Appeal disagreed with the High Court’s decision in allowing the respondent’s re-amendment to include a derivative claim on behalf of SCAN and reversed the said decision.
The Court of Appeal placed heavy emphasis on the principle against reflective loss which had its genesis in the English Court of Appeal case of Prudential Assurance v Newman Industries No.2  Ch 204 (“Prudential Assurance No.2”). After considering Prudential Assurance No.2, Nallini Pathmanathan JCA (as Her Ladyship then was) distilled the principle against reflective loss into the following propositions:
- the loss suffered by a company is separate and distinct from that suffered by a shareholder;
- the nature of an action brought by a shareholder for loss suffered personally or qua shareholder, is completely different and distinct from that brought by a shareholder on behalf of the company for losses suffered by the latter; and
- any loss suffered by a shareholder in the form of a diminution in the value of the shares or dividends are not to be considered as personal loss; instead, it is a loss reflective of that suffered by the company resulting from a wrongdoing committed against the company. A claim for such loss cannot be brought by way of a shareholder’s personal action.
The Court of Appeal further emphasised that the rationale behind the principle against reflective loss is to prevent double recovery and to ensure that the company’s creditors are not prejudiced as a consequence of recovery by the shareholder personally.
The Court of Appeal took cognisance of the fact that based on the statement of claim, the respondent relied on the same series of facts and transactions to substantiate his claim in both capacities. The Court of Appeal also took cognisance of the fact that the numerous prayers set out in the statement of claim sought damages for both the company and the respondent in his capacity as a shareholder, interchangeably. In short, one was unable to tell from the statement of claim the difference between the two claims of a fundamentally different nature and character in law. The Court of Appeal considered this to be a contravention of the principle against reflective loss. There was, in the opinion of the Court, a real danger of double recovery and prejudice to the creditors of SCAN.
Apart from the fact that the re-amendment was in contravention of the principle against reflective loss, the Court of Appeal further noted that the re-amendment did not meet the requirements set out in Yamaha Motor Co Ltd v Yamaha Malaysia Sdn Bhd & Ors  1 MLJ 213. Firstly, the re-amendment changes unalterably or irrevocably, the character of the suit from a pure shareholder’s personal action to one that is both a shareholder’s action as well as a derivative action. Secondly, no cogent reasons were given as to why the application to re-amend the statement of claim was made more than a year after the claim was first filed. No reason was given as to why the derivative action was not brought at the outset of the suit.
The Court of Appeal also acknowledged that there is an exception to the principle against reflective loss. Such exception is when the breach of duty by the wrongdoers had the effect of disabling the company from pursuing such a cause of action. However, the Court of Appeal concluded that this was not the case in Mak Siew Wei.
JOINDER OF CLAIMS NOT PROHIBITED
It is pertinent to note that the Court of Appeal’s decision in Mak Siew Wei does not stand as authority that a shareholder’s personal action and a derivative action can never be brought under the same suit. In fact, the Court of Appeal recognised the possibility of such claims being joined under a same suit, such as in the case of Ranjeet Singh Sidhu & Anor v Zavarco PLC & Ors  2 CLJ 975.
Nallini Pathmanathan JCA added that for there to be a valid joinder of a shareholder’s personal action and a derivative action under the same suit, the causes of action should be pleaded in such a manner that the claims qua shareholder are distinct and clearly separable from the relief sought in the derivative action. This requirement was not met in Mak Siew Wei.
Her Ladyship further observed, per obiter, that even if the claims are commenced in separate proceedings, the issue of multiplicity of proceedings ought not to arise. If both actions proceed to trial separately, the findings of fact made in the first trial would, in the Learned Judge’s view, be binding in any subsequent trial. Hence, the issue of multiplicity should not arise.
The Court of Appeal’s decision in Mak Siew Wei is noteworthy in two respects. First, it is a reminder to litigants who wish to join both a shareholder’s personal action and a derivative action under the same suit that they must ensure that the statement of claim is pleaded in a way that it clearly distinguishes between the two separate causes of action and the separate reliefs sought.
Secondly, the decision adds to the body of Malaysian cases on the application of the principle of reflective loss to exclude certain claims in a personal action by a shareholder.