Authored By: KASHMEERAN SURESH
MULTIMEDIA UNIVERSITY, MALAYSIA
FACTS
The plaintiff, a director of the defendant company—a private maritime firm jointly owned by Azimuth Marine Sdn Bhd and Nautical Supreme Sdn Bhd—sought court permission under Section 347 of the Companies Act 2016 to initiate negligence proceedings on behalf of the company against Azimuth Ship Management Sdn Bhd. This arose after one of the defendant’s tugboats, leased under a Harbour Tugs Services Agreement (HTSA) with Vale Malaysia Minerals Sdn Bhd and managed via a BIMCO Standard Ship Management Agreement, sank. The defendant company had not pursued legal action over the incident, prompting the plaintiff’s application. The defendant objected to the plaintiff’s reliance on arbitration-related documents, asserting confidentiality due to lack of consent and demanding their exclusion. The plaintiff countered that directors Captain Suresh and Azimuth Marine faced a conflict of interest, alleging their impartiality was compromised during a board meeting investigating the sinking.
Following the board’s refusal to authorize an independent inquiry, the plaintiff issued a Section 181 notice to sue the company and its directors, citing negligence highlighted in Vale’s incident report, which revealed the crew’s lack of emergency training or SOP adherence. The plaintiff later commissioned an expert report from Alan Loynd, while the defendant relied on a report by M3 Marine Expertise Pte Ltd. After the board continued to reject action, the plaintiff served a Section 348 statutory notice, prompting the board to resolve on appointing a single surveyor (with authority delegated to the Chairman) for an inquiry. The plaintiff and a minority director opposed this, proposing instead the appointment of two independent experts—one selected by majority directors and another by minority directors—to ensure impartiality. However, the board rejected this proposal, leading to a procedural deadlock centered on conflicting expert analyses, allegations of bias, and disputes over the fairness of investigative processes.
ISSUES
In conjunction with the facts, the main issue that arose was whether or not leave is to be granted to the plaintiff to commence proceedings against Azimuth Ship Management. From that there are two sub-issues that were addressed. Firstly, was whether the plaintiff was acting in good faith and whether it appeared prima facie to be in the best interest of the company that leave be granted.
JUDGEMENT
Ultimately the court held that it was not proven that the plaintiff acted in the required good faith. Furthermore, there was no proof showing the planned lawsuit against Azimuth Ship Management was for the defendant’s best interests.
CASE ANALYSIS AND COMMENTARY
DERIVATIVE PROCEEDINGS UNDER THE COMPANIES ACT 2016
LOCUS STANDI
Pursuant to Section 347(1) read with S 345 of the Companies Act 2016, the complainant’s coverage is fairly broad as it includes a director, a member, and even a person who is entitled to be registered as a member. This would refer to shareholders who are yet to be registered in the company’s register of members, in a way, helping the shareholders as well. In the present case, the court was wise to first consider the locus standi of the plaintiff to ensure he is one who is qualified to bring the case to court. Since the plaintiff here represents a minority shareholder and minority director of the defendant company, he therefore had requisite locus standi as a ‘complainant’ under S 345 to raise S 347 for the application of leave under S 348.
BROAD SCOPE OF APPLICATION
Even though our laws do not expressly specify the situations when a derivative claim is available, as in Section 260(3) of the UK Companies Act 2006, it renders benefits where judges are open to apply on their discretion based on the circumstances of the case. This is evidenced where Darryl Goon J in this case held that S 347 of CA 2016 is wide enough to cover derivative claims against a third party, namely Azimuth Ship Management, for negligence in causing the sinkage of D’s harbour tugboats. Additionally, the landmark case of
Celcom (Malaysia) Bhd v Mohd Shuaib Ishak also extended application to actions which fall outside the scope of directors’ fiduciary duties, for example, where it is alleged that directors were negligent or in breach of their duties of care, skill and diligence.1 Thus, these decisions show that it helps not just the minority shareholders but any applicants by extending the scope of derivative action to third parties.
APPLICATION FOR LEAVE OF COURT
BALANCE OF RIGHTS BETWEEN BOTH PARTIES THROUGH STATUTORY NOTICE
While helping the minority shareholder to take derivative action, Darryl Goon J also does not forget to balance the right between the plaintiff and defendant by affirming the requirement of 30 days’ notice in writing from the plaintiff to the company’s director under S 348(2) of CA, and this has been fulfilled by the plaintiff through his solicitors. However, this does not mean that a shorter notice will strip off the minority shareholder’s right of derivative action. Alternatively, this will be considered a mere irregularity, provided that the defendants do not suffer any unfairness due to the abbreviated notice, as established in the case of Ng Hoy Keong v Chua Choon Yang, wherein a notice of only nine days was given.2 Again, there is always a balancing of rights between both parties in derivative claims, not necessarily siding the minority shareholders per se.
COURT’S CONSIDERATION WHETHER TO GRANT LEAVE – GOOD FAITH
Applying Celcom (Malaysia) Bhd v Mohd Shuaib Ishak3, which in turn followed Swansson v RA Pratt Properties Pty Ltd4, the learned judge Darryl Goon J gave serious consideration to the two-fold test of good faith. Firstly, the judge assessed whether the applicant genuinely believed that there was a valid cause of action and a reasonable likelihood of success. Secondly, the judge considered whether the applicant’s intention to bring the derivative suit was motivated by a collateral purpose that would amount to an abuse of the legal process.
In the first test, the court deftly peeled down the layers of facts in this case. First, the plaintiff has failed several times to persuade the Board to conduct an investigation independently into the incident the way he wanted. Second, up to the date of hearing, there is no investigation conducted independently that made him satisfied. Third, he only relied one expert opinion by Mr Alan Loynd’s opinion which was only a preliminary view without complete investigation despite cogent evidence by three other reports suggesting that there was no negligence. Fourthly, the plaintiff claimed that all previous indemnification was insufficient to cover the entire loss suffered which was not agreed by the experts. On these grounds, the court ruled that the plaintiff lacked a good cause of action and reasonable prospect of success.
Next for the second test, the court referred to Pang Yong Hock and another v PKS Contracts Services Pte Ltd’s ratio that a disagreement per se does not conclude a collateral purpose or bad faith.5 By meticulously analysing the facts, Darryl Goon J discerned that the backdrop of the present ongoing suit is between the plaintiff and the majority directors who are the opposing factions, and had made allegations against each other. Therefore, it is probable that the plaintiff’s primary intention was to advance an underlying dispute or to disrupt the majority director’s control and administration of the company. Thus, this can be a collateral purpose contrary to ‘good faith’ under S 348(4)(a) of CA 2016.
2.2.3 COURT’S CONSIDERATION WHETHER TO GRANT LEAVE – PRIMA FACIE BEST INTEREST OF COMPANY
It was determined the following phrase “the best interest of the company” in Section 347(4)(b) of the Companies Act 2016 is a tougher formulation compared to the interpretation in Canada or Singapore by citing the case of Ong Keng Huat v Fortune Frontier (M) Sdn Bhd & Anor6. Both countries only interpret “in the interest of the company”. In contrast, in Celcom (Malaysia) Bhd v Mohd Shuaib Ishak7, the COA adopted and followed the standards established in Pang Yong Hock v PKS Contracts Services Pte Ltd in Singapore and Ontario Ltd v Bernstein in Canada. In both cases, the assessment does not examine the presence of a valid cause of action as it does not consider the merits of the claim. In the current case, it was determined that pursuing the action on behalf of the plaintiff is not in the company’s best interest unless supported by evidence or a determination that there exists a reasonable cause of action with a viable likelihood of success.
Due to the lack of proof showing the defendant had been put under pressure financially to file a lawsuit and the absence of evidence of the defendant’s negligence, there was no proof that the proposed lawsuit against Azimuth Ship Management would be, prima facie, in the defendant’s best interests. This was in line with the decision as being held in S. Vigneswaran A/L M. Sanasee v Maju Institute Of Educational Development (Mied)8, where there needs to be a presence of negligence on the part of the director of a defendant company.
The court determined that the goal of the application filed under S 347 of CA cannot be to compel an inquiry into a corporation since the court’s ancillary powers under S 350 are to commence, intervene in, or defend a matter on the company’s behalf. In the Celcom case, it appears indeed that directors’ negligence and breaches of their responsibilities of care, skill, and diligence are within the purview of S 181A of CA. Presently, there can be no presumption that the other directors will fail to uphold duties which are fiduciary in nature and make a decision on any recommended steps for the fulfilment of the defendant’s best interests. Thus, it does not fall under the scope under s 181A.9
The court determined that the plaintiff had not presented the board of directors with a request to file a lawsuit against Azimuth Ship Management or gathered evidence of a strong cause of action, therefore the leave application was dismissed. This is a principle which was also being held in Abdul Rahim bin Suleiman & Anor v Faridah bt Md Lazim & Ors10, where the complainant shall give thirty days’ notice in writing to the directors of his intention to apply for the leave of Court under section 181A. Additionally, the COA ruled in the Celcom’s case that the petitioner must sincerely believe that a good cause of action exists.11
CONCLUSION
The Companies Act 2016 enables directors, members, and eligible parties to file statutory derivative claims against third parties, including non-fiduciary breaches. Claimants must prove a legitimate belief in a viable case, subject to judicial review to deter procedural misuse, and provide a 30-day notice to directors. Courts grant leave based on factual merits and the company’s best interests, with no success guarantee. This framework empowers minority shareholders to enforce accountability while phasing out common law derivative actions, fostering legal clarity, equitable protections, and transparent governance.
REFERENCE(S )
PRIMARY SOURCES
STATUTES
- Companies Act 2016, ss 181A, 347, 348
CASE LAWS
- Abdul Rahim bin Suleiman (suing as the director and minority shareholder of Semangat Motor Sdn Bhd and in the interest of Semangat Motor Sdn Bhd) & Anor v Faridah bt Md Lazim & Ors [2016] 6 MLJ 449
- Celcom (Malaysia) Bhd v Mohd Shuaib Ishak [2011] 3 MLJ 636
- Dato’ Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd [2019] 10 MLJ 693 4. Ng Hoy Keong v Chua Choon Yang [2011] 4 CLJ 545
- Ong Keng Huat v Fortune Frontier (M) Sdn Bhd & Anor [2015] 11 MLJ 604 6. Pang Yong Hock v PKS Contracts Services Pte Ltd [2004] 3 SLR 1
- S. Vigneswaran A/L M. Sanasee v Maju Institute of Educational Development (Mied) [2010] MLJU 428
- Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583
1[2011] 3 MLJ 636.
2[2011] 4 CLJ 545.
3Ibid (n.1).
4[2002] NSWSC 583.
5[2004] 3 SLR 1.
6[2015] 11 MLJ 604.
7Ibid (n.1).
8[2010] MLJU 428.
9 Companies Act, s 181A.
10 [2016] 6 MLJ 449.
11 Ibid (n.1).
