Petroships Investment Pte Ltd v Wealthplus Pte Ltd & Ors  SGHC 145
In Petroships Investment Pte Ltd v Wealthplus Pte Ltd & Ors, the plaintiff sought leave of court to commence a derivative action under section 216A of the Companies Act. The Singapore High Court declined to grant such leave and in doing so, provided guidelines on determining whether an applicant was acting in good faith in taking out such an application, which is a factor that the court typically looks at.
The plaintiff (“Petroships”) was a minority shareholder of the first defendant (“Wealthplus”) and sought the court’s leave under section 216A of the Companies Act to commence a statutory derivative action against two groups of defendants. The first group comprised Wealthplus’ ultimate holding company and its related companies. The second group comprised the two current directors of Wealthplus, both of whom were the appointees of its ultimate holding company. Petroships contended that the defendants had caused Wealthplus to enter into a number of wrongful transactions.
Prior to the current action, Petroships had commenced four suits against, varyingly, Wealthplus and its other related companies (the “previous suits”). The previous suits had been struck out primarily for being vexatious and frivolous. In addition, Wealthplus had entered voluntary liquidation by the time the current application was filed and liquidators had been appointed.
There were two live issues for the court to decide upon:
- Was the plaintiff acting in good faith?
- Was it in the interests of the company, Wealthplus, that action be brought?
The court found that the evidence before it demonstrated that Petroships, in seeking leave to bring the derivative action, was not acting in good faith within the meaning of section 216A because its purpose in doing so was to advance its own private interests rather than those of Wealthplus as a company. The court came to this conclusion by setting out how a court could determine whether the plaintiff was acting in good faith in a section 216A application.
The court noted that Petroships did not begin its submissions by addressing its good faith. Instead, it began by focusing on the merits of its derivative action and by pointing out that all Petroships was trying to do was to help Wealthplus recover assets. The court’s view was that Petroships was inviting the court to infer that it was acting in good faith primarily from the fact that the derivative action had merit.
The court noted that the legal and evidential burden of proof lies on the applicant to establish on a balance of probabilities that it is acting in good faith. Good faith on the part of the applicant is not presumed. In discharging its burden of proof, the applicant has the duty to produce evidence to establish its own good faith. The court held that it was insufficient for Petroships to merely point out the merits of its derivative action.
The court found that meeting the evidential burden on the issue of good faith required the applicant to produce or point to evidence from which its good faith could be inferred. The court stressed that it is important that the subjective test of good faith be kept analytically distinct from the objective test of whether it appears to be prima facie in the company’s interests to bring the derivative action. The court stated that an applicant who meets its evidential burden on the “prima facie interests of the company” test in section 216A(3)(c) also meets in a practical sense, albeit incidentally, its evidential burden on the “good faith” test also in section 216A.
The court derived the following four principles on determining good faith from the Singapore Court of Appeal’s decision in Ang Thiam Swee v Low Hian Chor  2 SLR 340:
- The test of good faith always considers two interrelated, but non-exhaustive, factors:
- Whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success; and
- Whether the applicant is seeking to bring the derivative action for such a collateral purpose as would amount to an abuse of process.
- On the second of these factors, the focus is on the applicant’s purpose in bringing the proposed derivative action rather than its motive in doing so. Thus, an applicant may nevertheless be acting in good faith even if it is motivated by hostility, personal animosity, or malice or even by self-interest in maximising the value of its shares so long as its purpose is to advance the interests of the company as a whole.
- Even if the applicant has a collateral purpose, it will nevertheless act in good faith if that “collateral purpose” is sufficiently consistent with the purpose of “doing justice to a company”. Such a collateral purpose does not render its action an abuse of section 216A or of the company.
- However, an applicant whose judgment has been clouded by purely personal considerations or who is abusing section 216A, and by extension also the company, as a vehicle to advance its own interests and aims will not be acting in good faith. Examples include an applicant whose collateral purpose in bringing the derivative action is to pursue a private vendetta or to damage or destroy the company out of sheer spite or to benefit a competitor.
Where a minority shareholder pursuing a derivative action has multiple purposes in doing so, it will be acting in good faith if its dominant purpose is to benefit the company. In the present case, despite the derivative action not being an abuse of the process of the court, the court found that it was an attempt to circumvent the striking out of the previous suits.
The court also found that Petroships’ collateral purpose was to pursue its private interests by seeking a remedy for itself and to correct apparent wrongs committed against it rather than for the purposes of correcting wrongs committed against the investment company.
Interests of the company
To determine if the derivative action is prima facie in the interest of company, the applicant must satisfy two requirements. First, the derivative action is legitimate and arguable, and secondly, the action is in the overall interest of the company. Petroships failed to satisfy the second requirement as the redress it sought was available by a means which did not require the company to be brought into litigation against its will.
Evidence provided by plaintiff’s representative
Generally, applications under section 216A are commenced by way of originating summons and do not involve the cross-examination of witnesses. However, the defendants were of the view that the cross-examination of the plaintiff’s representative would aid in deciding if the plaintiff was acting in good faith. The defendant successfully applied to cross-examine the plaintiff’s representative (“MrChan”) on his affidavit. The court found that Mr Chan was an unconvincing, untruthful witness and this revealed the plaintiff’s dominant purpose which was to recover for its own personal interest rather than that of the company’s.
The plaintiff’s application was dismissed on two grounds. First, it was not acting in good faith in seeking leave to bring its derivative action thus not fulfilling the requirements of section 216A of the Companies Act. The court found that the preponderance of evidence before it led to the conclusion that the application was being pursued in an attempt to circumvent the previous suits and was for the plaintiff’s own benefit. Secondly, the application was not in the prima facie interest of the company as it was now under the control of liquidators and the rationale for a derivative action was no longer applicable.