One of the cardinal rules in corporate law is that a company is a separate entity from its members and/or officer. Hence, a director who merely acting as an agent of the company could not be made personally liable for the acts of the company unless there are express provisions in the agreement or documents to the contrary.1 Recently, the Federal Court in the case of Auspicious Journey Sdn Bhd v Ebony Ritz Sdn Bhd & Ors [2021] MLJU 307 held that this principle does not apply in proceeding for minority oppression under Section 346 Companies Act 2016 (formerly S.181 Companies Act 1965) where the acts of oppression are derived from the mind and acts of the directors. In other words, directors or even a third party may be held liable for oppressive conduct in such proceedings.

Remedy in cases of oppression: Section 346 Companies Act 2016

As a starting point, Section 346 Companies Act 2016 afford protection to shareholders (often minority shareholders) and debenture holders (collectively referred to as the “Complainant”) against the abuse of majority rule. To succeed, the Complainant has to prove to Court either the following: –

  1. the affairs of the company are being conducted or the powers of the director are being exercised in a manner which is oppressive to him or in disregards of his interests as a shareholder; or
  2. some act or resolution of the company which has been done or proposed to be done is unfairly discriminates or is prejudicial to him as a shareholder.

Generally, there must be a clear violation of the standard of fair dealing which a shareholder was entitled to expect before a case of oppression can be made out. Similarly, “disregard of interest” involved something more than a failure to take account of the minority’s interest: there must be aware of that interest and an evident decision to override it or brush it aside or to set at naught the proper company procedure.2 Hence, whether there is “oppression” or “disregard of interest” is a question of facts that the Court will have to examine on a case-to-case basis based on the evidence available.

In regard to limb (b), the notion of fairness is to be examined in the context of a commercial relationship.3 The starting point is always to see whether the conduct complained was in accordance with the company’s constitution (if any) and/or the shareholders’ agreement.

Remedies that the Court could grant if oppression is established

The Court has wide discretion under Section 346 (2) Companies Act 2016 to grant remedies. The remedies under Section 346(2) are non-exhaustive4 and includes: –

  1. direct or prohibit any act or cancel or vary any transaction or resolution;
  2. regulate the conduct of the affairs of the company in the future;
  3. 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;
  4. in the case of a purchase of shares by the company, provide for a reduction of the capital of the company; or
  5. provide that the company be wound up.

The Court can devolve liability on directors based on express wording of Section 346

Reverting to the issue of personal liability of directors in proceeding for oppression, the Federal Court in the case of Auspicious Journey Sdn Bhd (supra) held that there is no prohibition against the Court in granting a remedy against the director personally. Section 346 expressly identifies the exercise of the power of directors as a basis of establishing oppression. Logically, the Court would have the power to grant relief against the director personally to correct the wrongdoing.

The Court further held that the statutory remedy which is enacted to protect the minority shareholder shall not be confused with matters of contract and tort where the action is brought by a third party against the company as an entity and general liability would devolve against the company, not the director. On the contrary, the dispute in oppression proceedings arises inter-se between the shareholders and/or director. Hence, the principle that the director shall not be liable as an agent of a company does not apply.

In regard to third parties, the Federal Court held that the facts that third parties may be made as respondents to an oppression action would naturally mean that relief should be available against them. It would be futility to allow them to remain as respondents if no redress is available against them.

Situations where the Court should impose personal liability on a director or a third party

The Federal Court has adopted the test enunciated in the Canadian Supreme Court’s case of Wilson v Alharayeri [2017] 1 SCR 1037 that there must be deliberate involvements in the impugned transaction, or a sufficiently close nexus, participation, or connection to warrant the imposition of liability to directors or third parties. The Federal Court has summarized the test for the imposition of liability against a director or a third party as follows: Whether the Defendant was so connected to the oppressive, detrimental or prejudicial conduct that it would be fair and just to impose liability against him for such conduct?

 

Closing Remarks

The law is now settled that directors and third parties may be personally liable for oppressive conduct. To begin with, companies shall avoid getting into shareholders disputes by entering into a Shareholders’ Agreement which sets out comprehensively the rights of the shareholders, the mechanism for breaking the deadlocks, and dispute/conflict resolutions without going to Court.

1 Abdul Manaf Mohd Ghows & Ors v Nusantara Timur Sdn Bhd [1997] 3 MLJ 661

2 Re Kong Thai Sawmill (Miri) Sdn Bhd v Ling Beng Sung [1978] 2 MLJ 227

3 Pan-Pacific Construction Holdings Sdn Bhd v Ngiu-Kee Corp (M) Bhd & Anor [2010] 6 CLJ 721

4 Auspicious Journey Sdn Bhd v Ebony Ritz Sdn Bhd & Ors [2021] MLJU 307.