Lee Sng Eder v Wee Kim Chwee & Ors [2013] SGHC 287

The Singapore High Court in Lee Sng Eder v Wee Kim Chwee & Ors considered the requirements to commence a derivative action in the name and on behalf of a company pursuant to section 216A of the Companies Act (the "Act"). The decision highlights that the notice requirement under section 216A must be strictly complied with. In this case, the applicant's failure to give the requisite notice resulted in the dismissal of his application for leave to commence a derivative action.

Facts

The plaintiff ("Lee") was a shareholder of Neu-Movers Logistics Pte Ltd (the "Company"), and the Company's managing director until his resignation in March 2012. The defendants ("Wee" and "Tien") are directors and shareholders of the Company.

Lee sought leave to bring a derivative action under section 216A of the Act in the name and on behalf of the Company against Wee and Tian, as he alleged that Wee and Tien had allowed certain other parties to appropriate the Company's assets and goodwill.

However, Lee had commenced the action without first giving 14 days' notice to the directors of the Company of his intention to apply to the court for the said leave as required under section 216A(3)(a) of the Act (the "Notice Requirement").

Requirements for grant of leave for derivative action

The court considered whether the circumstances of this matter met the requirements to grant leave to bring a derivative action under section 216A: (a) the Notice Requirement; (b) the action must be prima facie in the interests of the company (the "Interests of the Company Requirement"); and the complainant must be acting in good faith (the "Good Faith Requirement").

Notice Requirement

The court noted that Lee had not complied with the Notice Requirement. Lee had submitted that it was not expedient to provide the notice required as he had reasonable concerns that Wee and Tien would destroy or tamper with the evidence of their conspiracy to deplete the assets of the Company while diverting its goodwill and customers to other parties. The court disagreed with Lee's reasoning, noting that this risk could have materialised once the originating summons was served on Wee and Tien regardless of whether Lee had given the required notice. The court was therefore of the opinion that there was no reason for Lee not to comply with the Notice Requirement. The court also indicated that Lee could also have sought an Anton Piller order while applying for leave to commence a derivative action under section 216A to prevent the destruction of evidence, but chose not to do so.

The court held that section 216A(4) of the Act does not altogether dispense with the Notice Requirement, despite a passage in Walter Woon on Company Law suggesting otherwise. Notice would still be required to be provided as the section only provides that the court may make an interim order pending the complainant giving notice as required. The court noted that strict compliance with the Notice Requirement accorded with the intention of Parliament to prevent abuse of section 216A of the Act.

The court therefore held that Lee had not met the Notice Requirement under section 216A, and his application must fail. However, for the sake of completeness, the court went on to consider whether the other requirements were met.

Interest of the Company Requirement

The court was also satisfied that Lee would not have met the Interest of the Company Requirement. In this respect, the Company seemed to be unable to repay its creditors. The court found it likely that the Company would have soon gone into liquidation, and upon winding up, the liquidator would be vested with the authority to bring any action against the directors if required. Even if Lee was granted leave to pursue a derivative action, such an action could be subsequently discontinued by a liquidator. It would still be possible for Lee to raise the issue of commencing proceedings against Wee and Tien to the liquidator. It would therefore not be in the interest of the Company to expend considerable sums of money to bring the action before liquidation.

Lee's application for leave to bring a derivative action under section 216A failed and was dismissed for the reasons set out above.

Practical applications

The decision of the court makes it clear that it will only be in the rarest of cases that a party may dispense with the Notice Requirement when seeking leave to commence a derivative action pursuant to section 216A of the Act. If a party is concerned that evidence will be destroyed, then it is incumbent on the party to apply for a search order, and not to simply dispense with the requisite notice.

In addition, the decision also underscores the need for a party seeking leave to  commence a derivative action to review the Company's financial situation so as to ensure that the derivative action will be in the interests of the Company. In particular, it will be necessary to review whether the Company could be the subject of winding up proceedings. If possible, the potential plaintiff should seek to commence derivative proceedings before the Company is in such a position.