The separate legal entity doctrine means that a company can sue in its own name for a wrong done to it. Where a solvent company is unable to bring an action, its members can apply to do so. This was set out by the courts in several long standing decisions that set out the circumstances under which this would be allowed. This is known as the common law derivative action. In Singapore, the Companies Act was amended to provide for what has become known as a statutory derivative action where a private company incorporated in Singapore is involved. However, modern businesses are organised in groups of companies so that investors are shareholders in a holding company and businesses are run in wholly-owned subsidiaries. A deceptively simple question then arises – can a member of a holding company apply to court to take out a derivative law suit in the name a subsidiary where the member has no direct shareholding (termed a "double derivative action")?

The academic and theoretical debate on the possibility of such a proceeding has a judicial answer from the English High Court in Universal Project Management Services Limited v Fort Gilkicker Limited, Mr Ian Pearce, Fort Gilkicker Properties Limited [2013] EWHC 348 (Ch). The Court held a double derivative action is permissible at common law. Importantly for the purposes of Singapore private companies, the English Court disagreed with the reasoning in an earlier Hong Kong decision (Waddington Ltd v Chan Chun Hoo Thomas [2008] HKCU 1381) that the possibility of a statutory derivative action did not bar the double derivative action in common law.

The case

The facts in Fort Gilkicker are disturbingly common in joint venture relationships. Two parties entered into a corporate joint venture (JV) to carry out property development business using separate single purpose vehicles (SPVs). The business involved the acquisition of property from Hampshire County Council (the Project). For unclear reasons, the option granted to the relevant SPV expired and one of the joint venture parties then incorporated another new company to purchase from the Hampshire County Council.

The claimant alleged misappropriation of a business opportunity. However, the claimant could not sue because it was not a shareholder in the SPV which was to acquire the option. It also did not have control over the JV and could not compel the JV to apply for the derivative action. The claimant applied for a double derivative action in common law.

Two issues were presented:

  1. Whether a multiple derivative action was known to English common law before the coming into force of the Companies Act 2006; and,
  2. If so, whether the multiple derivative action (of which the double derivative action is a sub-species) has survived the coming into force of the Companies Act 2006.

The English High Court ruled in the affirmative on both issues and allowed the claimant to sue in the name of the SPV.

The rationale for the English High Court is important. The Court held that it is unsurprising that the courts extend legal standing to members of a wronged company’s holding company, where the holding company is itself in the same wrongdoer control. The Court stated that:

"[24]… The would-be claimant is not exercising some right inherent in its membership, but availing itself of the court’s readiness to permit someone with a sufficient interest to sue as the company’s representative claimant, for the benefit of all its stakeholders."

The Court also ruled that the Companies Act 2006 did not remove the power of the courts to allow such reliefs under common law as such Act only provided a statutory mechanism and was never intended to supplant the common law.

Concluding remarks

The decision of the English High Court is currently on appeal. When it comes to be considered in a Singapore court proceeding, it would be persuasive authority for permitting a double derivative action. It remains to be seen if the courts here will accept this for private companies incorporated in Singapore given the Court of Appeal’s reservations in

Ting Sing Ning (alias Malcolm Ding) v Ting Chek Swee (alias Ting Chik Sui) and others [2008] 1 SLR(R) 197; [2007] SGCA 49 as to the availability of the common law action where the statutory derivative regime applies. Moreover, the wording of the Singapore provision is similar to the English statute and appears to preclude a double derivative action. How the Singapore courts respond to how businesses have chosen to structure themselves is a matter of interest and importance.