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19 January 2021
Section 346 of the Companies Act 2016 provides the courts with broad powers to grant remedies as they deem necessary to bring an end to the complaints raised in an oppression action. In Lee Kai Wuen v Lee Yee Wuen,(1) the Federal Court refused leave to appeal the Court of Appeal's decision which had found that the courts' powers in an oppression action are broad and unfettered. This includes the power to order restitution to a company, a remedy traditionally seen as belonging to companies.
The subject company had two shareholders. The plaintiff (the majority shareholder) filed an oppression action against the other shareholder and a third party (the oppressors), anchored on, among other things, an allegation of misappropriation of company funds. According to the plaintiff, upon the hospitalisation and eventual death of the previous majority shareholder, the oppressors had conspired to have the creditors pay them monies which were supposed to be paid to the company. The plaintiff successfully obtained a Mareva injunction to freeze the oppressors' bank accounts in order to preserve the misappropriated funds while the court action was pending.(2)
Separately, the oppressors filed an application to summarily strike out the plaintiff's oppression action, chiefly on the ground of abuse of the court process. Basically, the oppressors argued that since the plaintiff was asking for the monies to be returned to the company, the company should sue for the monies by way of a derivative action and not the plaintiff, who was the company's majority shareholder. Therefore, it was an abuse of process for the plaintiff to have initiated the oppression action in order to bypass the notice requirement in a derivative action.
At first instance the high court allowed the oppressors' application, thereby striking out certain requests of the oppression action which asked for the funds to be returned to the company.(3)
The high court allowed the application principally on the premise that, since the requests therein were relief for the company, they were essentially derivative claims, which meant that the plaintiff had been wrong to commence an oppression action instead of a derivative action. In this regard, the high court placed a heavy reliance on the distinction between personal wrong and corporate wrong, or between personal loss and company loss. Namely, when the relief sought concerns a company loss (ie, misappropriation of the company's funds), the company is the proper plaintiff to sue, not a shareholder.
Accordingly, the high court struck out the requests for the funds to be returned to the company.
The plaintiff appealed to the Court of Appeal. The Court of Appeal reversed the high court's decision, thereby reinstating the request for an oppression action for hearing in the high court.(4)
Broad powers to grant remedies
In its grounds of judgment, the Court of Appeal considered a plain or natural interpretation of the clear wording in Section 346 of the Companies Act 2016, which provides the courts with the discretion to choose from a wide array of remedies and grant the appropriate relief. The Court of Appeal went further and held that such extensive power even includes the discretion to grant "relief which has not even been prayed for". The Court of Appeal used phrases such as "unfettered" and "no limits" to further illustrate the extent of such power.
On the facts, the Court of Appeal considered it to be trite law that misappropriation of monies can constitute an act of oppression. The same applies when the misappropriation is committed against a family company. Otherwise, the Court of Appeal held that it was "illogical" and "incomprehensible" that while misappropriation can constitute oppression, the court cannot thereafter grant restitutionary relief for the monies to be repaid to the company.
Reflective loss principle inapplicable
Having held that restitutionary remedies are not prohibited by Section 346 of the Companies Act 2016, the next main issue was whether the reflective loss principle operated to prevent the granting of such remedies. Based on this principle, a shareholder cannot bring a claim for the diminution in value of its shares which results from a loss suffered by the company (company loss) in relation to a wrong done to the company (corporate wrong). The primary justification for this principle is to avoid double recovery.
In delivering its judgment, the Court of Appeal discussed several appellate pronouncements from Commonwealth jurisdictions, including the Federal Court's decisions in Re Kong Thai Sawmill (Miri) Sdn Bhd(5) and Rinota Construction Sdn Bhd v Mascon Rinota Sdn Bhd,(6) the Singapore Court of Appeal's decision in Ho Yee Kong v Sakae Holdings(7) and the UK Supreme Court's decision in Marex Financial Ltd v Sevilleja.(8)
In Marex, Sevilleja owned and controlled two companies. Marex Financial Ltd obtained a judgment against the companies. Sevilleja moved assets from the companies, thereby disabling them from satisfying the judgment debt. Marex sued Sevilleja for tort of causing the companies to suffer losses by unlawful means. The UK Supreme Court held that the reflective loss principle applied to shareholders but not to the company's creditors. As such, the reflective loss principle did not prevent Marex from suing Sevilleja.
While recognising that the reflective loss principle remains in the United Kingdom with respect to shareholders, the Malaysian Court of Appeal questioned its survivability in the future. Nonetheless, for the purpose of this case, the Malaysian Court of Appeal held that the reflective loss principle does not apply to an oppression action where restitutionary remedies are sought for the misappropriated monies to be repaid by the wrongdoer to the company, provided that there is no risk of double recovery. In this regard, the Court of Appeal relied on the pronouncement in Rinota that the principle has no application to an oppression action where the diminution in share value is due to oppressive acts. The principle also does not apply when the complainant in an oppression action is not seeking a remedy for itself, but rather for a company.
Hence, the Court of Appeal concluded that the plaintiff's requests that the misappropriated funds be returned were not unsustainable or entirely hopeless. Those requests were reinstated for hearing in the high court.
The oppressors applied for leave to appeal to the Federal Court and proposed 12 questions of law to challenge the Court of Appeal's decision. The Federal Court dismissed the leave application in total and did not alter the Court of Appeal's decision.
The broad language used in the oppression provision is crucial in providing the courts with the necessary discretion to formulate remedies which are appropriate and just in the circumstances of a particular case. The outcome of this series of legal battles safeguards such flexibility and judicial discretion. The right of an oppressed shareholder to bring an oppression action is not denied simply because certain remedies sought are for the benefit of the subject company.
For further information on this topic please contact Foo Joon Liang or Lee Xin Div at Gan Partnership by telephone (+603 7931 7060) or email (firstname.lastname@example.org or email@example.com). The Gan Partnership website can be accessed at www.ganlaw.my.
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