The Champion Arrives

31 March 2016

Lee Shih explains the adoption of the multiple derivative action by the Malaysian Courts.
 
The High Court has recently upheld the existence of the multiple derivative action in Malaysia. This is seen in the unreported Grounds of Judgment dated 16 November 2015 in Ranjeet Singh Sidhu and another v Zavarco plc and 15 others (Kuala Lumpur High Court Suit No. 22NCC-179-06/2015).
 
A multiple derivative action is where a shareholder of a holding company files an action on behalf of the subsidiary of that holding company. This common law action would allow shareholders to seek relief against wrongdoings where there are wrongs carried out against subsidiaries further down the corporate structure.
 
BACKGROUND FACTS
 
The Plaintiffs are shareholders of Zavarco plc (“Zavarco UK”), a UK incorporated company.
 
In turn, prior to the dispute, Zavarco Bhd (“Zavarco Malaysia”), a Malaysian incorporated company, is a wholly-owned subsidiary of Zavarco UK. At that material time, Zavarco Malaysia held 91% of the shares in a Malaysian incorporated company, V Telecoms Bhd (“V Telecoms”). V Telecoms was the operating entity within Zavarco UK’s group of companies.
 
Filing of the Civil Suit and the Impugned Consent Judgment
 
In May 2014, a Malaysian company, Open Fibre Sdn Bhd (“Open Fibre”), filed a suit in Malaysia against Zavarco UK and Zavarco Malaysia. The Plaintiffs alleged that Open Fibre was being controlled by the alleged wrongdoers in this action. Both Zavarco UK and Zavarco Malaysia were represented by Malaysian solicitors in that suit.
 
In July 2014, Zavarco UK and Zavarco Malaysia entered into a consent judgment. This consent judgment essentially required:
 
(i)      Zavarco Malaysia to transfer all its shares in V Telecoms over to Open Fibre and for Zavarco UK to allow Zavarco Malaysia to carry out this consent judgment;
 
(ii)     Both Zavarco UK and Zavarco Malaysia to transfer control and management of V Telecoms to Open Fibre together with all the documents of V Telecoms; and
 
(iii)    Zavarco UK to issue new shares to Open Fibre equivalent to RM150 million.
 
The Plaintiffs alleged that the suit and the consent judgment were sham proceedings pursuant to a conspiracy to defraud Zavarco UK and Zavarco Malaysia. They alleged that these proceedings allowed Open Fibre to misappropriate V Telecoms and to gain control of Zavarco UK and Zavarco Malaysia.
 
In February 2015, Zavarco UK issued and allotted shares to Open Fibre, resulting in the latter controlling 82.5% of the shares in Zavarco UK.
 
The Plaintiffs also discovered that all the shares in V Telecoms were then transferred to another Jersey incorporated company called Aries Telecoms Ltd (“Aries”).  Aries was essentially controlled by Open Fibre which was in turn controlled by the alleged wrongdoers in this dispute.
 
Filing of the Multiple Derivative Action in Malaysia
 
The Plaintiffs filed a multiple derivative action in the Malaysian courts in a representative capacity for the benefit of Zavarco UK and Zavarco Malaysia and for themselves.
 
The multiple derivative action sought, among others, the following reliefs:
 
(i)      To set aside the consent judgment;
(ii)     To unwind the transfer of the shares in V Telecoms to Open Fibre;
(iii)    An order for Aries to transfer all the shares in V Telecoms back to Zavarco Malaysia;
(iv)    An order for Open Fibre to deliver up to the Plaintiffs all documents of V Telecoms that have been transferred through the consent judgment; and
(v)     An order that all shares in Zavarco UK that were issued and/or transferred to Open Fibre through the consent judgment be cancelled and for Zavarco UK’s share register be rectified and restored accordingly.
 
Defendants’ Striking Out Applications
 
The Defendants filed applications to strike out the Plaintiffs’ multiple derivative action. One of the grounds for the striking out was the argument that the Plaintiffs did not have standing to file the action due to the failure to obtain permission from the English Courts to file this action.
 
It was argued that the UK Companies Act had abolished the common law derivative action and that only the statutory derivative action route remained. Therefore, the Plaintiffs as shareholders of Zavarco PLC had to obtain permission from the UK Courts to bring such a statutory derivative action to sue on behalf of Zavarco PLC.
 
It was further argued that Zavarco UK was an indispensable party in this action since it was the parent company of Zavarco Malaysia. Hence, the failure to obtain permission from the English Courts meant that the entire Malaysian action crumbled.
 
FINDINGS BY THE COURT
 
Ability to File a Multiple Derivative Action
 
First, the Court referred extensively to the Hong Kong Court of Final Appeal decision in Waddington Ltd v Chan Chun Hoo Thomas & Ors [2009] 2 BCLC 82. This was a landmark case which confirmed that a shareholder could bring a multiple derivative action under Hong Kong law. That decision held that if wrongdoers must not be allowed to defraud a parent company with impunity, they must also not be allowed to defraud its subsidiary with impunity.
 
Secondly, the Court also accepted the reasoning in the English High Court case of Universal Project Management Service Ltd v Fort Gilkicker Ltd and others [2013] Ch 551 (“Fort Gilkicker”). Fort Gilkicker held that the multiple derivative action continued to exist at common law.
 
The Court held that the right to bring a multiple derivative action also exists in Malaysia. It was a single piece of procedural ingenuity designed to serve the interests of justice. The multiple derivative action allows a member of the company, or a member of its parent company, to be a champion or representative of that company in wrongdoer control. The Court held that there was nothing in principle to prohibit the filing of a multiple derivative action in Malaysia.
 
The Court instead listed two reasons in support of the ability to file a multiple derivative action.
 
(i)      If there was no recognition of multiple derivative actions, the law would fail in its purpose and injustice would be done without redress. There may be occasions when multiple derivative actions are necessary in the interest of justice so as to safeguard the interests of the companies and their shareholders; and
 
(ii)     Multiple derivative actions may prevent a wrongdoer from benefiting from his own wrongdoing.
 
The Court went further to approve the approach of allowing a person who was neither a member of the subsidiary nor a member of the parent company to file a multiple derivative action. This was provided that such a person had sufficient interest to sue as the company’s representative claimant for the benefit of all its stakeholders or as a suitably interested representative of the wronged company. The Court adopted the approach taken in Fort Gilkicker on this point.
 
Requirement for the English Courts’ permission
 
The Court did not accept the argument that permission from the English Courts was required to file the multiple derivative action against Zavarco UK. Some of the reasons in rejecting this argument were:
 
(i)      There was nothing in the Malaysian Companies Act that required the English Courts’ permission to be obtained before the filing of the multiple derivative action against Zavarco UK;
 
(ii)     In relation to Zavarco Malaysia, section 181A(3) of the Malaysian Companies Act expressly preserves the right of a person to bring proceedings on behalf of a Malaysian incorporated company at common law. Therefore, there was no requirement for leave of a Malaysian Court for the Plaintiffs to file this common law derivative action against Zavarco Malaysia;
 
(iii)    The UK provisions requiring permission was confined to the filing of derivative actions in England, Wales and Northern Ireland. There was nothing in those provisions to indicate that they had extra-territorial effect on derivative actions filed outside the UK;
 
(iv)    The UK provisions envisaged a derivative action only in respect of a cause of action arising from negligence, default, breach of duty or breach of trust. On the other hand, this Malaysian action was based on, among others, the statutory right under section 44 of the Evidence Act 1950 to set aside an earlier judgment or order based on fraud or collusion;
 
(v)     The Court adopted the approach taken in Fort Gilkicker which held that the UK provisions did not apply to multiple derivative actions; and
 
(vi)    Even if the Court had erred in the above grounds, the Court found that these issues of law required serious argument and mature consideration at a trial. Hence, it was not appropriate to summarily strike out the suit.
 
The Court therefore dismissed the striking out applications.
 
CONCLUSION
 
This decision by Wong Kian Kheong, JC is a ground-breaking decision as it confirms the ability to bring a multiple derivative action in Malaysia. This brings Malaysia in line with the common law developments in Hong Kong and the UK.
 
This procedural device of a multiple derivative action would serve the interests of justice. In the face of wrongdoings carried out against a company or its subsidiary, the law would clothe a suitably interested representative with the necessary standing to bring an action on behalf of the wronged company and, in the words of Briggs J in Fort Gilkicker, to be the company’s champion.
 
It will also be interesting to see how this concept may be extended in the future. The Court was of the view that even a representative who is not a member of the parent company or the subsidiary may have the necessary standing to bring a multiple derivative action. For example, such a representative may be a former member of the wronged company and where the wrongdoings may have resulted in the representative ceasing to be a member.
 
 
Editor’s Note:
An article on the multiple derivative action, “Getting Away With Fraud: Defraud The Subsidiary?” was published in Legal Insights Issue 3/2015.