The Court of Appeal has decided on an important and novel point of law regarding derivative actions. In Petroships Investment Pte Ltd v Wealthplus Pte Ltd and others [2016] SGCA 17, the Court of Appeal held for the first time that derivative actions are not available where the company in question is in liquidation.

In the landmark judgment, the Court of Appeal also made a number of important observations in relation to the continued applicability of the common law derivative action. The issue is significant as the statutory derivative action is already provided for under s 216A of the Companies Act.

The 2nd and 3rd Respondents in the case were successfully represented at both the High Court and the Court of Appeal by Chandra Mohan Rethnam, Khelvin Xu, and Tan Ruo Yu of Rajah & Tann Singapore LLP. For our client update on the High Court’s judgment, please refer to this link.

Material Facts

In shareholder disputes, it is not uncommon for the minority  shareholders  of  a  company to  allege that (a) wrongs have been committed against the company by its directors and/or majority shareholders; but (b) the company is prevented from commencing an action against these alleged wrongdoers, precisely because they control the company. In such a situation, the minority shareholders often apply to the court under s 216A to seek leave to commence a derivative action in the name of the company against the alleged wrongdoers.

In this case, the Appellant was a minority shareholder in an investment company (the “Company”). The Appellant alleged that the 2nd and 3rd Respondents, who were the majority shareholders, caused the Company to enter into transactions which were not in the Company’s interests. The Appellant applied for leave under s 216A to commence a statutory derivative action in the Company’s name against the 2nd and 3rd Respondents. The relevant provisions of s 216A are as follows:

Derivative or representative actions

216A. ... (2) Subject to subsection (3), a complainant may apply to the Court for leave to bring an action or arbitration in the name and on behalf of the company or intervene in an action or arbitration to which the company is a party for the purpose of prosecuting, defending or discontinuing the action or arbitration on behalf of the company.

(3) No action or arbitration may be brought and no intervention in an action or arbitration may be made under subsection (2) unless the Court is satisfied that —

  1. the complainant has given 14 days’ notice to the directors of the company of his intention to apply to the Court under subsection (2) if the directors of the company do not bring, diligently prosecute or defend or discontinue the action or arbitration;
  2. the complainant is acting in good faith; and
  3. it appears to be prima facie in the interests of the company that the action or arbitration be brought, prosecuted, defended or discontinued.

After the Appellant took out its application, but before the application was heard by the court, the Company was placed in members’ voluntary liquidation. The liquidators adopted a neutral stance towards the Appellant’s application for leave to commence its proposed derivative action. The 2nd and 3rd Respondents successfully applied to be joined as parties to oppose the Appellant’s application.

Holdings of the High Court

At first instance, the High Court dismissed the Appellant’s application. It held that the Appellant did not satisfy the requirements in s 216A(3)(b) and s 216A(3)(c).

In respect of s 216A(3)(b), the High Court found, among other things, that the Appellant had an illegitimate collateral purpose in seeking leave to bring the derivative action, which was to recover its loan to the Company and its share of the profits from its investment in the Company. The High Court also found that the Appellant’s representative was dishonest in the course of the hearing, and this lack of honesty was attributable to the Appellant.

Further, the Appellant’s representative had been a director of the Company when the bulk of the alleged transactions were entered into. However, the Appellant failed to name him as a defendant in the proposed derivative action.

In relation to s 216A(3)(c), the High Court held that the proposed derivative action was not prima facie in the Company’s interests. This was because the remedy which the Appellant was seeking – i.e., for its proposed derivative action to be given independent consideration which was untainted by the majority shareholders’ self-interest – was already available through the Company’s liquidators.

Holdings of the Court of Appeal

On appeal, the Court of Appeal agreed with the 2nd and 3rd Respondents’ submission that the fact that the Company was in liquidation rendered the Appellant’s case a non-starter. The Court of Appeal accepted the 2nd and 3rd Respondents’ submission that the purpose of derivative actions is to provide a remedy for minority shareholders when the directors of a company refuse to enforce its rights.

While the High Court had considered the fact that the Company was already in liquidation as relevant under s 216A(3)(c), the Court of Appeal took a different tack – in its view, the fact that the Company was already in liquidation raised a threshold issue as to whether s 216A was even applicable in the first place.

As this was a question for which no answer was available in directly relevant case law in Singapore, the Court of Appeal approached the question on first principles by considering the statutory text, legislative history, and case law from other jurisdictions.

The Court of Appeal held that the wording of s 216A suggests that applications for leave to commence derivative actions only apply in the context of going concerns. The scenario envisaged by s 216A is one where the directors remain in active management. However, when a company enters into liquidation, the board is functus officio, and the power to run the company vests with the liquidator.

The legislative history of s 216A also suggests that the provision was not intended to be available as a shareholder’s remedy when the company has been placed in liquidation. Further, there are authorities from other jurisdictions such as the UK, Australia, and New Zealand which state that leave to commence a statutory derivative action should not be granted when a company is in liquidation.

The Common Law Derivative Action

There had previously been some uncertainty as to whether the common law derivative action has been abrogated by s 216A. The Court of Appeal took the opportunity to clarify that since s 216A is only available to Singapore private companies and public-listed companies, the common law derivative action must necessarily remain for foreign companies.

However, can a shareholder who is able to avail itself of s 216A choose to rely on the common law derivative action? In practice, it would not be efficient or effective for a party to do so, since s 216A provides a more simplified procedure. The Court of Appeal held that the question can be conclusively determined when the issue next arises directly for decision before the Singapore courts. However, the Court of Appeal did decide that the common law derivative action would, in any event, not be available when the company is in liquidation.

The Appellant’s appeal was dismissed with costs in the 2nd and 3rd Respondents’ favour.

Concluding Words

Shareholder disputes and litigation are increasingly commonplace, and the Court of Appeal’s decision provides important guidance in this area of the law. In particular, while the derivative action is an important mechanism which is designed to protect minority shareholders, this case makes it clear that minority shareholders cannot seek leave to commence derivative actions once the company is in liquidation.

However, this does not mean that an aggrieved minority shareholder is left without any remedy. As the Court of Appeal emphatically held, the liquidator has a legal obligation to discharge his duties and is subject to the oversight of the court. There are alternative avenues for a minority shareholder to seek redress for wrongdoings when a company is in liquidation. For instance, under ss 302 and 315 of the Companies Act respectively, the shareholder can apply to the court to replace the liquidator and to seek a direction for the liquidators to commence an action. As the last resort, a shareholder can bring an action against a liquidator for breach of duty under s 341.