Case Summary

Companies and Corporations Members' rights Petition under Companies Act 1965 ('the CA 1965'), s 181 (now s 346 of the Companies Act 2016) Whether directors could be held personally liable for oppressive acts carried out by majority shareholder company upon the minority Whether third parties who collaborated with the directors could also be held liable Whether language used in s 181 of the CA 1965 (s 346 of the CA 2016) empowered court to order compensatory reliefs against directors and third parties Whether imposition of liability against directors and third parties should only be made if facts and circumstances warranted it and it was fair and just in all the circumstances Whether in an oppression petition court was not bound to grant only the reliefs set out in s 181(2) of the CA 1965 (s 346(2) of the CA 2016) but had power to fashion the relief to fit the circumstances

The question in the instant appeal was whether in a petition filed by a minority shareholder under s 181 of the Companies Act 1965 (now s 346 of the Companies Act 2016) for relief against the oppressive, discriminatory or prejudicial manner in which the affairs of the company were run, the directors of the company and third parties who had collaborated with them could be held accountable. In the instant case, the majority shareholder in the subject company was itself a company and the majority directors in the subject company were also directors in the majority shareholder company. Both the courts below held that even in the case of a s 181 CA 1965 (s 346 CA 2016) petition, the general principle applied that a director was an agent of the company and could not be liable for its acts and breaches. The appellant ('AJ') and the second respondent ('HL') a Singapore-registered entity had formed a joint-venture company, namely, the first respondent ('ER'), for the purpose of acquiring 49% of the shares of another company ('Sumatec') in the latter's wholly-owned subsidiary ('SI') for RM44.1m so that ER could gain a significant foothold in the oil-tanker chartering business that SI was involved in. AJ was the minority shareholder in ER, holding 20% of the shares, whilst HL was the majority shareholder, holding 80% of the shares. In proportion to their shareholding, AJ contributed 20% and HL 80%, towards payment of the said share acquisition price. Two of the three directors in ER were also directors in HL, namely, the third and fourth respondents ('the Kuah brothers'). The[*550]

remaining director was AJ's nominee. On the same day that ER signed the agreement to buy Sumatec's 49% shares in SI, the two parties together with AJ signed another agreement ('OFRA') under which, inter alia, Sumatec unconditionally and irrevocably guaranteed to ER that it would make good any shortfall if SI's audited profit after taxation fell short of the financial representations that Sumatec had made. If Sumatec failed to make good the shortfall, ER was given the call option to require Sumatec to sell not less than 2% of its shares in SI to ER, while AJ was given the call option to require Sumatec to sell not less than 49% of its shares in SI to AJ. SI's business subsequently suffered badly and Sumatec, which was also in financial distress, could not make good the profit shortfall under the OFRA guarantee thereby entitling ER and AJ to exercise their respective call options. However, AJ discovered that without its knowledge HL had entered into a conditional sale and purchase agreement ('conditional SPA') with the fifth respondent ('Setinggi'), ER and Sumatec under which Sumatec's balance 51% shareholding in SI was to be acquired by both HL and Setinggi in the proportions, 2% and 49%, respectively. The conditional SPA did not materialise, but if it had, HL would have acquired total control of Sumatec as Setinggi was its nominee. AJ also discovered that under the conditional SPA, ER had waived or relinquished its rights under the OFRA profit shortfall guarantee as well as its right to exercise the 2% call option. ER had also provided Sumatec an indemnity indemnifying it against all claims while dividends payable to ER had been reassigned. AJ filed the s 181 CA 1965 petition against the respondents contending that HL had exercised its majority powers in ER through the Kuah brothers to cause ER to enter into the conditional SPA solely to benefit HL to the detriment of AJ and ER since, among other things, their entitlements under the OFRA had been compromised. AJ sought a declaration that HL as the majority shareholder in ER and the Kuah brothers as directors had conducted the affairs of ER in a manner oppressive, discriminatory and prejudicial to AJ and in disregard of AJ's interests as a member. In response, HL said the conditional SPA was intended to save the joint venture from breaking apart because AJ had wanted to opt out of the venture when Sumatec and SI ran into financial difficulties. HL contended that it wanted to keep the joint venture alive but AJ refused to invest any further monies in the venture, even for the purpose of exercising its 49% call option. HL contended that the true purpose of AJ's petition was to extricate itself from a bad bargain and recover its investment by having the court order HL to buy over AJ's 20% shareholding in ER. The High Court held that HL, as the majority shareholder, had conducted ER's affairs in a manner oppressive/prejudicial to AJ as the minority shareholder. AJ's claims against the Kuah brothers, Setinggi and the sixth respondent ('Teh') were dismissed. Setinggi had never purchased the shares under the conditional SPA. Teh was Setinggi's sole director and shareholder at all material times. The High Court found the Kuah brothers not liable both on the principle that they were agents of the company, and therefore not personally liable for its acts/breaches, but

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also for the reason that the Kuah brothers had at all times acted in the best interests of ER. The court also decided that the winding up of ER was the most appropriate remedy given ER's poor financial state, the fact that the relationship between its shareholders had completely broken down and that the purpose of the joint-venture was no longer achievable. No buy-out of AJ's shares in ER by HL was ordered since, inter alia, that would have resulted in ER breaching the Merchant Shipping Ordinance 1952 ('the MSO') which required any company involved in the oiltanker industry to be majority-Malaysian in composition. AJ appealed to the Court of Appeal ('COA') against the dismissal of its action against the third, fourth and sixth respondents as well as the decision to wind up ER while HL appealed against the finding that it was liable. The COA upheld the findings of the High Court and dismissed all the appeals. The only issue in this appeal was whether the courts below were right in refusing to hold the Kuah brothers personally liable under the s 181 petition.

Held, unanimously dismissing the appeal and remitting the matter to the High Court to assess the damages payable to the appellant:

(1)The courts below erred in adopting the position that no liability could devolve upon directors as they were agents of the company and the independent corporate legal personality prevailed to preclude liability from devolving directly upon the directors. Whilst this might well be the general position, in the case of oppression, the legislature had provided specific statutory relief and that must necessarily prevail over the general corporate law position in relation to relief from oppression for shareholders. However, on the facts of the instant appeal the courts below were correct in not attaching liability to the Kuah brothers or to Teh (see paras 129-130 & 161-162).

(2)The language of s 181 of the Companies Act 1965 (now s 346 of the Companies Act 2016) was wide enough to encompass compensatory relief against directors and third parties in an appropriate case depending on the facts and circumstances. Pursuant to s 181(2) of the CA 1965 (s 346(2) of the CA 2016) the court was empowered to make such order as it thought fit to bring an end to, or remedy, the matters complained of. The court was not bound by the reliefs sought by the petitioner or restricted to the reliefs mentioned in s 181(2) of the CA 1965 (s 346(2) of the CA 2016) but was at liberty to fashion the remedy in accordance with the factual matrix of the case (see paras 136, 148 & 151).

(3)Both the courts below did not err in concluding that on the facts of the case an order that HL buy out AJ's shares should not be made as that would make ER wholly foreign-owned and it would not be able to carry out the business of oil-tanker chartering because the MSO required any company involved in such business to be a majority-Malaysian company.[*552]

The High Court had also reasoned that a buy-out would not yield a fair price as ER was a failed jointventure and insolvent. The courts below were also right in concluding that the winding up of ER was the most appropriate remedy given the breakdown in the relationship between the shareholders coupled with ER's insolvent state (see paras 152, 154-158 & 163).

(4)In seeking a buy-out of its shareholding in ER, AJ was seeking to escape from a bad bargain or to recoup its investment in the joint-venture with HL. There was always a risk that an investment might not pan out in the way it was intended. Ordering a share buy-out was tantamount to insulating AJ from the risk that its capital was subject to. This was certainly not what s 181 of the CA 1965 (s 346 of the CA 2016) was meant to protect against (see para 153).

(5)The courts below had rightly taken into account the fact that while the acts of salvage and warehousing undertaken by HL and the Kuah brothers and the manner in which they were carried out might in

themselves be categorised as prejudicial and detrimental to AJ, the conduct was ultimately related to salvaging ER. AJ refused to expend any further monies in the joint-venture to salvage ER's investment and was not even interested in exercising its call option. This was to be contrasted with the conduct of HL in injecting no less than RM38m into SI to keep it afloat. All these factors had to be taken into account in applying the 'fair and just' test to determine whether the directors should be held personally liable. The preponderance of factors militated against holding the Kuah brothers and Teh personally liable for their oppressive conduct (see paras 141-142).

(6)The following legal test was applicable in assessing whether in any given complaint of oppression, liability had been established against a director and/or a third party (see paras 127-128):

(a)whether there was evidence of the director's or the third party's deliberate involvement or participation in, or a sufficiently close nexus, to the oppressive or detrimental or prejudicial conduct that the minority complained of;

(b)an objective assessment should be made to determine whether in all the circumstances of the case the imposition of liability was fair and just;

(c)the imposition of liability should be circumspect, going no further than was necessary to remedy the breach complained of or to stop the oppressive or prejudicial conduct;

(d)the imposition of liability must be reasonable and serve to alleviate the legitimate concerns of the shareholders of the company in question; and[*553]

(e)in exercising its powers under s 181 of the CA 1965 (s 346 of the CA 2016) the court should bear in mind general corporate law principles such that director liability did not become a substitute for other statutory relief or under the common law.

please answer the questions regarding the case:

1.what can a plantiff claim,state the facts and provide the basis?

and 2.what can i ask defendant on an argument 2 questions as a plantiff and reply me with answer of two question