The Companies Act 2016 provides the following statutory remedies where a shareholder/ member has been oppressed or unfairly treated. Briefly:-
- Oppression Remedy - Section 346
A shareholder/ member may seek relief under this section due to oppressive conducts - Winding Up Remedy - Section 465(1)(f) and (h)
A shareholder/ member may seek relief for the company to be wound up on just and equitable grounds - Derivative Action - Section 347
In appropriate circumstances, a shareholder/ member may initiate a derivative action in the company’s name, and all reliefs are sought on behalf of the company - Injunction - Section 351
A person whose interests are affected may apply to the court for an injunction due to contravention of the provisions under the Companies Act
(1) Section 346 (in pari materia with section 181 Companies Act 1965)
Section 346 is commonly known as the “oppression remedy”.
It allows any shareholder/ member to apply to the Court on the grounds that:-
- The affairs of the company are conducted, or the powers of the directors are exercised in a manner oppressive to the shareholder/ member, or in disregard to his interests as shareholder/ member of the company; or
- Some act of the company or some resolution which unfairly discriminates against or otherwise prejudicial to the shareholder/ member.
The Court has the power to make the following orders:-
- Direct or prohibit any act or cancel or vary any transaction or resolution;
- Regulate the conduct of the affairs of the company in the future;
- Provide for the purchase of the shares or debentures of the company by other members or debenture holders of the company or by the company itself;
- In the case of a purchase of shares by the company, provide for a reduction accordingly of capital of the company; or
- Provide that the company be wound up.
[See: Federal Court case of Auspicious Journey Sdn Bhd v Ebony Ritz Sdn Bhd & Ors [2021] 4 CLJ 721 – (1) It is open to the Court to impose liability against directors or third parties provided there is a sufficiently close nexus between the oppressive or unfairly discriminatory conduct, or disregard of the minority's interests or otherwise prejudicial conduct and that party; (2) The Court is not restricted to the reliefs mentioned in section 346 above, the Court is empowered to grant an open-ended range of remedies.]
Whether the conducts or acts complained of, are considered oppressive, unfairly discriminatory or prejudicial, depends on the specific facts of the case.
Generally, there must be a visible departure from the standards of fair dealing and a violation of the conditions of fair play.
Examples that MAY constitute oppressive conduct:-
- Diversion or misappropriation of company’s assets
- Diversion of business opportunities or profits
- Discriminatory or unfair treatment in distribution of dividends
- Manipulation of voting rights
- Breach of legitimate expectations (exclusion from management)
The Court will take cognizance of the majority rule (majority voting powers), and it is only when it becomes oppressive to the minority or disregard of their interests that Section 346 can be invoked.
Case Law
In determining whether a party alleging oppression, unfair discrimination or prejudice, is entitled to the claims made under Section 346, the Court is mindful of the internal company management and the majority rule, as held in the Court of Appeal case of Soh Jiun Jen v Advance Colour Laboratory Sdn Bhd & Ors [2010] 4 CLJ 897:-
[40] The appellant's complaints comprise mainly matters within the internal management of a company incorporated under the Companies Act 1965. Granting and withdrawal of perks to directors, company executives or employees are purely regulated within the company itself. Issuance of shares within a company as well as appointment and removal of directors are also matters to be decided and implemented by the company itself according to its memorandum and articles of association (M & A), either by the board of directors or the shareholders in general meeting. There are sufficient guidelines and rules to follow as provided in the M & A itself as well as in the relevant provisions of the Companies Act 1965 and the Companies Regulations. In making these decisions, generally, the majority rules. It is only when majority rule passes over into rule oppressive of the minority or in disregard of their interest, that s. 181 can be invoked. Persons who join a company (as shareholder) must learn to accept majority rule.
[41] As precisely explained by Lord Wilberforce in Re Kong Thai Sawmill (Miri) Sdn Bhd; Kong Thai Sawmill (Miri) Sdn Bhd & Ors v. Ling Beng Sung [1978] 1 LNS 170 (Privy Council):
The mere fact that one or more of those managing the company possess a majority of the voting powers and, in reliance upon that power, make policy or executive decisions which the complainant does not agree is not enough. Those who take interest in companies limited by shares have to accept majority rule.
[42] The rule in Foss v. Harbottle [1843] 2 Have 461 has laid down a well known principle which has resulted from the refusal of the court to interfere in the management of a company at the instance of a minority of its members who are dissatisfied with the conduct of the company affairs by the majority or by the board of directors. The court, under the pretext of minority protection under s. 181, should be slow from interfering or enquiring into the desirability or wisdom of the acts of those who control or manage the company's affairs. It cannot be the function of the court to take management decisions and to substitute its opinions for those of the directors and the majority of the members. If the thing complained of is a thing which in substance the majority of the company are entitled to do in accordance with the relevant rules, and regulations then it is only prudent that a meeting of the members be called and ultimately let the majority get their wishes. The justification for the rule is the need to preserve the right of the majority to decide how the company's affairs shall be conducted (see: Lord v. Copper Mines Co [1848] 2 Ph. 740 at 751 and Harben v. Phillips [1883] 23 Ch D 14 at 39 - per Cotton LJ).
(2) Section 465(1)(f) and (h) (in pari materia with section 218 Companies Act 1965)
Section 465(1)(f) and (h) are commonly known as the “winding up remedy”, which is a drastic measure, as the only remedy under Section 465(1)(f) and (h) is to wind up the company.
Although Section 346 allows the Court to wind up a company, the Court may grant other orders without granting an order to wind up the company.
- Under Section 465(1)(f), the Court may order the winding up if the directors have acted in the directors’ own interests rather than in the interests of the members as a whole or acted in any manner which appears to be unfair or unjust to members.
- Under Section 465(1)(h), the Court may order the winding up, if the Court is of the opinion that it is just and equitable that the company be wound up.
Examples that MAY resort to Section 465 (1)(f) and/or (h):-
- Deadlock in management
- Breakdown in mutual trust and confidence
- Fraud or misconduct in managing the company
- Failure of substratum (objective/ purpose of incorporation cannot be achieved)
- Breach of legitimate expectations (exclusion from management)
- Directors’ misconduct in management
Case Law
The Court of Appeal in the case of Ho Shen Lee (M) Sdn Bhd & Ors v Lim Shen Lee [2022] 6 MLJ 276 explained the general principles of Section 465(1)(f) and (h) as follows:-
Winding up pursuant to s 465(1)(f)
[21] Pursuant to s 465(1)(f) of the CA 2016, a company may be wound up in the event that the directors had acted in the affairs of the company for their own interest rather than the interests of the members as a whole or in any manner unjust or unfair to members.
[22] Section 465(1)(f) of the CA 2016 is in pari materia with s 218(1)(f) of the Companies Act 1965 (‘the CA 1965’).
[23] Section 218(1)(f) of the CA 1965 has been interpreted by Peh Swee Chin J (as he then was) in Foo Yin Shung & Ors v Foo Nyit Tse & Brothers Sdn Bhd [1989] 2 MLJ 369; [1989] 1 CLJ Rep 552 where His Lordship said this:
Section 218(1)(f) has two limbs—the first limb containing the phrase, inter alia, ‘interests of members as a whole’ and the second, the phrase, inter alia, ‘unfair and unjust to other members’. About the phrase ‘interests of members as a whole’, I have adopted respectfully the interpretation of Bowen CJ in Equity of New South Wales Supreme Court in Re Cumberland Holdings Ltd [1976] 1 ACLR 361 that the phrase means a situation where directors are shown to have preferred their own interests to the interests of one, or more or perhaps some significant section of the members so that the action of directors may be open to challenge notwithstanding that it coincides with the interests of the majority shareholder. The test in connection with such challenge seems to be that the said s 218(1)(f) or para (f) applies when the directors are seen not to have been acting in the interests of all the members and cannot be said therefore to have been acting in the interests of members as a whole.
It will be seen therefore that the scope of the para (f) is very wide indeed, it can cover a great number of situations which would lie outside, eg s 181 of the Companies Act 1965 in connection with ‘oppression’ or ‘disregard’ as judicially explained in a number of reported cases in Malaysia, notably Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227; [1978] 1 LNS 170 (PC). (Emphasis added.)
[24] As to the second limb of para (f) regarding the phrase ‘unjust or unfair to members’, Peh Swee Chin J considered that it should also be subject to equitable considerations, of a nature described by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd and others [1972] 2 All ER 492 at p 500, as:
…considerations that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
[25] As such, s 465(1)(f) is not expressed to be predicated upon conduct that is unlawful or illegal but is based on the standard of the directors’ conduct, that is to be viewed from the perspective of whether it was ‘unfair’ or ‘unjust’.
[26] Therefore, in order to establish his case, the respondent must raise serious allegation against the second and third appellants, in that they had acted against the interests of the company and were only concerned with their own benefits. The onus is on the respondent to establish the grounds/complaints raised in the petition, either individually or cumulatively, in order to seek the court’s discretion to make the winding up order.
Winding up pursuant to s 465(1)(h)
[53] There is no definitive approach to the categories of ‘just and equitable’. What is just and equitable varies from case to case. Thus, a company may be wound up where it is just and equitable that it should be wound up: Gulf Business Construction (M) Sdn Bhd v Israq Holding Sdn Bhd [2010] 5 MLJ 34; [2010] 8 CLJ 775.
[54] The meaning of ‘just and equitable’ is found in the case of Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL) where it was stated by Lord Wilberforce:
The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence — this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be sleeping members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company—so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.
[55] The common examples of when this jurisdiction has been invoked is where there is a deadlock in management (see Dato’ Ting Check Sii v Marine Utama Sdn Bhd & Anor [2013] 9 MLJ 527; [2013] 1 LNS 1351); or where there is a breakdown in mutual trust and confidence amongst the shareholders (see Varusay Mohamed Shaik Abdul Rahman v SVK Patchee Bros (M) Sdn Bhd [2002] 3 MLJ 674; [2002] 3 CLJ 741; Tai Hean Leng @Tek Hean Leng v New Future Capital Sdn Bhd [2018] MLJU 1599; [2018] 1 LNS 1647).
[56] However, in applying the ‘just and equitable’ ground, this court is reminded of the decision of the Federal Court in Tan Keen Keong @Tan Kean Keong v Tan Eng Hong Paper & Stationery Sdn Bhd & Ors and other appeals [2021] 3 MLJ 914; [2021] 2 CLJ 318 where the Federal Court had stated:
[92] The just and equitable jurisdiction must be exercised carefully and judiciously, with special regard for the irreversible and drastic nature of a winding up as a court-ordered remedy (see Perennial (Capitol) Pte Ltd & Anor v Capitol Investment Holdings Pte Ltd [2018] 1 SLR 763.
Case Law
In the Court of Appeal case of Cheah Chee Fong v Yah Kem Chui & Anor [2022] 6 MLJ 674, the appellate court found that it was a fit and proper case for the company to be wound up under Section 465 (1)(f) and (h):-
[18] The Appellant rightly brought to our attention several relevant authorities in point in Malaysia and other jurisdictions where a winding up order was granted on the just and equitable ground. For our purpose, we would refer to the following leading authorities as summarised by the Appellant. In the Malaysian Federal Court case or Perak Integrated Network Services Sdn Bhd v. Urban Domain Sdn Bhd & Anor [2017] 1 LNS 224; [2018] 4 MLJ 1 ("Perak Integrated"), the plaintiff and the 2nd defendant were the only two shareholders of the 1st defendant company, each holding 50% of the shares. The Federal Court held that there was a deadlock in the company as the board of the company was equally split between directors with opposing views (see paras. 58, 75, 76, 77 to 82 of the judgment).
[19] In the Court of Appeal case of Varusay Mohamed Shaik Abdul Rahman v. SVK Patchee Brothers (Malaysia) Sdn Bhd [2002] 3 CLJ 741, the alleged grievances by the petitioner who petitioned to wind up the company on the just and equitable ground were, amongst others, a rival business was set up by the managing director of the company and the petitioner/appellant was excluded from participating in the management of the company. The Court of Appeal allowed the petitioner's appeal to wind up the company (see pages 744c, 747a-c, 748f-h and 749e & to 750a-b of the judgment).
[20] Where there is a functional deadlock in the management of the company concerned and an irretrievable breakdown in trust and confidence between the only shareholders it would be sufficient ground to order winding up of the company. [See Privy Council case of Lau v. Chu [2020] 1 WLR 4656]. Our view is that this settled principle ought to be applied to the instant facts to determine the central question in this appeal whether the LJ had erred in failing to judicially appreciate the undisputed facts before him and applied settled principles to the present facts in dismissing the Petition for winding up of R.2.
[36] From our scrutiny of the facts and evidence relating to the 2 projects above, in particular the conduct of R.1 in seeking to bid for projects through his own company ('GC') where proposals were also submitted by R.2, we are inclined to agree with the Appellant's position that the circumstances alluded to have affected the trust and confidence that the Appellant had in R.1 and their relationship as partners for more than 20 years sharing a common pursuit.
[37] Our attention was drawn to several incidents that occurred between the Appellant and R.1 in the management of R.2. It was emphasized that the incidents clearly manifested the deterioration in their relationship such that it had become impossible for the Appellant to continue working with R.1 in managing R.2. Without the necessity of having to delve into the details of various acrimonious incidents, we agree with the Appellant that in gist, these incidents had caused an irretrievable breakdown of trust and confidence between the only two directors-cum-shareholders with equal shareholding and a complete functional deadlock in the management of R.2.
[40] We would emphasize that the evidence was overwhelming and convincing that R.1 had acted in his own interest to further the business interests of his own company, GC, and placed himself indisputably in a conflict of interest position to the detriment of R.1. To conclude that the relationship of trust and confidence between R.1 and R.2 that was necessary to sustain the company's management remained intact despite R.1's conduct was wholly unreasonable. Likewise, the LJ's conclusion that the acrimonious disputes between the only shareholders had been amicably resolved and there did not exist any communication deadlock between them was plainly misconceived and unsupported by the undisputed facts and the events that unfolded preceding the winding up Petition.
[42] The following was our decision at the conclusion of the present appeal:
We find merits in the appeal. There is a breakdown of mutual trust and confidence in the light of all that had happened which the Learned Judge had not fully appreciated. There were the KLIA 2 project and the Taman Wahyu project where the former was resolved after Respondent 1 had been confronted by the Petitioner. The Taman Wahyu project has not been resolved to date.
The parties are not communicating with each other to the extent that statutory meetings are not held and that important decisions were made unilaterally by Respondent 1.
Whilst there are still projects ongoing they are mainly that which the petitioner has brought in. We cannot see how the relationship of the parties can improve after the conduct of Respondent 1, including all the remarks written in the disputed minutes, by Respondent 1.
The substratum of the relationship of the parties have been so seriously eroded that there is no longer any basis for the Petitioner to continue to hope for the situation to improve.
This is a fit and proper case for the Company to be wound up under S.465(1)(f) and (h) and we hereby grant an Order in Terms of prayers (a), (b) and (c) of the Petition.
The order of the High Court is set aside and we order costs of RM 15,000 to be paid by Respondent 1 to the Appellant subject to allocator.
(3) Section 347 (in pari materia with section 181A Companies Act 1965)
In appropriate facts and circumstances, a shareholder/ member may resort to a “derivative proceeding” under Section 347.
Unlike Section 346 and Section 465(1)(f) and (h) above where such actions are brought by the member personally, a derivative action must be brought in the company’s name.
Where the complaints involve an infringement of a member's personal rights, actions may be brought under Section 346 or Section 465(1)(f) and/or (h). However, if the complaints affect the rights of the company and reliefs are sought on behalf of the company, an action may be brought under Section 347.
A derivative proceeding under Section 347 requires leave (approval) of the Court before such an action can be initiated.
Section 348(2) provides that the complainant shall give 30 days’ written notice to the directors of his intention to apply for leave of Court under Section 347.
Section 348(4) provides that in deciding whether leave shall be granted, the Court shall consider whether –
- the complainant is acting in good faith; and
- it appears prima facie to be in the best interest of the company that the application for leave be granted.
(4) Section 351 Injunction (in pari materia with section 368A Companies Act 1965)
Section 351 empowers the Court, on an application by the Registrar or any person whose interests are affected, to grant an injunction if a person engages in conduct that contravenes the Companies Act.
The injunction may either restrain the person from continuing the contravening conduct (restraining injunction) or require the person to perform an act or fulfil an obligation mandated by the Companies Act (mandatory injunction).
The complainant must expressly state how their interests are affected and identify the specific provisions of the Companies Act alleged to have been contravened.
Case Law
In the Court of Appeal case of Wong Kien Ching v Seng Kim Huat & Anor [2019] 7 CLJ 356, the Court construed section 368A Companies Act 1965 as follows:-
(2) Section 368A(1) of the Act may only be invoked by the Registrar or by a person whose interests was either affected or would be affected by such conduct. It was therefore imperative that the respondents state how the conduct of the appellant affected their interests. It was not expressed in the application or in the affidavit filed in support of the application, any information as required under s. 368A(1)(a) or (4) of the Act. There was no averment as to what interests, if any, of the petitioners that were affected, and how such interests were affected. The notice of motion merely stated that the court was moved to hear the application of the petitioners made pursuant to s. 368A(1)(a) and (4) of the Act for the orders already alluded to earlier; while the affidavit explained that it was to compel the appellant to deliver to the official receiver or the court appointed liquidators the issue documents of title pertaining to the 208 native titles and subleases as registered in the appellant's name.
(3) There must be an express averment of how the petitioners' interests were affected by the conduct of the appellant, after the particular conduct of the appellant had been identified. The court should not be left to infer or worse, second guess. Further, the respondents were required to identify what or which specific provisions of the Act that the appellant was said to have contravened, for it is where there was contravention of this Act, that was, the Companies Act 1965, and not some other legislation, that the reliefs under s. 368A were available. This court did not see the Companies Act 1965 as a piece of composite or umbrella legislation under which all wrongs, offences or breaches were addressed and determined. It was apparent that the terms of s. 368A of the Act did not make that claim, and this court could not accede to any submission along those lines.