The basic premise of company law is that a company is a separate entity from its members. Accordingly, a shareholder may not sue to enforce a company’s rights – only the company itself has the right to sue. An aggrieved shareholder has however, several courses of action that is open to him if he feels that a wrong has been committed against the company, one of which is to apply to court under Section 216A of the Companies Act (Section 216A) for leave to commence a statutory derivative action.
Section 216A sets out the procedure by which a complainant may, with the leave of court, bring an action in the name and on behalf of a company, provided that:
(a) the complainant has given the directors of the company 14 days’ notice of his intention;
(b) the complainant is acting in good faith; and
(c) it appears to be prima facie in the interests of the company that the action be brought.
The requirement that the complainant is acting in good faith (the Good Faith Requirement) is an issue that turns on the facts of each case. The Singapore Court of Appeal (the CA) had in the recent case of Ang Thiam Swee v Low Hian Chor  SGCA 11 given further clarity in the determination of the Good Faith Requirement.
Ang Thiam Swee v Low Hian Chor involved an appeal against the decision by the High Court to allow Low Hian Chor (the Respondent) leave to commence an action under Section 216A in the name of Steel Forming & Rolling Specialists Pte Ltd (the Company) against Ang Thiam Swee (the Appellant) for breach of director’s duties by the latter.
The Appellant and the Respondent each held 10% of the Company’s shares and Gan Oh Boon (Gan) held the rest of the shares (which was subsequently transferred to the Official Assignee as Gan was declared bankrupt for misappropriating the Company’s funds).
The Respondent had sought leave under Section 216A to commence an action in the name of the Company against the Appellant for breach of director’s duties (the Application), maintaining that the Appellant had, as a co-signatory of the Company’s bank account, similarly misappropriated the Company’s funds.
The issues before the CA was whether limb (b) and (c) of Section 216A(3) were satisfied such that the Respondent should be granted leave to commence the statutory derivative action.
The Good Faith Requirement
Onus on the Applicant
The CA held that the onus was on the applicant to establish good faith on his part and that, no presumption of good faith applies in favour of the applicant where limb (b) was concerned.
Establishing “Good Faith”
While it is clear that the court ought to assess the motivations of an applicant in order to determine whether he is acting in good faith, the CA conceded that no test has been articulated as to the point at which an applicant’s motives will impugn his good faith.
The CA considered the Canadian and Australian approaches and found that (i) the Canadian courts typically look to the applicant’s honest belief in the merits of the proposed statutory derivative action as a strong indicator of good faith, while (ii) the Australian courts look at on two interrelated factors, namely whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success, and whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.
The CA also found that good faith is less dependent on the motives which trigger the application, and more on the purpose of the proposed derivative action, which must have an obvious nexus with the company’s benefits or interests.
Ultimately, the key factor in the positive proof of an applicant’s good faith is whether the applicant honestly believes that a good cause of action exists. In addition, an applicant lacks good faith where his motive(s) for commencing the statutory derivative action amount to a collateral purpose unconnected with doing justice to the company. In establishing that the latter, the CA favoured the Australian test, i.e., an applicant lacks good faith where his collateral purpose amounts to an abuse of process.
Good faith & Legal Merits
It is also interesting to note that the CA rejected the notion that the objective legal merits of a proposed statutory action should be taken into account in the determination of an applicant’s good faith, as such an analysis “detracts from both the language and substance” of Section 216A(3)(b). This effectively overrules previous High Court decisions and the present understanding is that an applicant’s good faith and the objective legal merits of his application are not necessarily connected. Instead, considerations of objective legal merit may be more appropriately dealt with under Section 216A(3)(c) as there is a “natural affinity” between the interests of the company that the action be brought and the legal merits of that action.
The Prima Facie Interests of the Company
The CA held that the applicant must cross the threshold of convincing the court that the company’s claim would be legitimate and arguable, i.e., that it has a reasonable semblance of merit and is not one which is frivolous, vexatious or bound to be unsuccessful. The standard of proof required in this case is low, and only the most obviously unmeritorious claims will be culled under this limb.
The CA also recognised the overlap between limb (b) and (c) of Section 216A(3)(b) in that considerations that militate against the applicant’s bona fides will also undermine the legitimacy of an application.
Applying the above to the facts, the CA found that the Respondent had failed to discharge his burden of establishing that he was acting in good faith in making the Application. Instead, the Respondent had been animated by a compound of private motives which amounted to a collateral personal purpose (of seeking, inter alia, to secure sole control of the Company) and the Court was not persuaded that the Respondent had an honest belief in the merits of the Application. The Court was, for the same considerations which militated against the Respondent’s good faith, not convinced of the legitimacy of the Application.
The pre-requisites to a statutory derivative action constitute a screening mechanism to sift out cases that are frivolous or vexatious. This CA decision is timely in clarifying the considerations in the grant of leave to commence a statutory derivative action.
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