Company directors and their duties (Part 3)

What happens when a company director, or directors of a company together, conspire to breach their duties? The answer depends on the course of action you, as a shareholder, especially as a minority shareholder, intend to persue.

If you want a personal remedy, then the answer lies in Section 181 of the Companies Act 1965. Section 181(1)(a) allows the court to provide a remedy to a member where the court finds that the affairs of the company are being conducted or the powers of the directors are being exercised either in an oppressive manner to one of the members including yourself or in disregard of your or another shareholder’s interest. Section 181(1)(b) concerns the actual or proposed act by or on behalf of the company or a resolution, or a proposed resolution, of shareholders, debenture holders or a class of shareholders of the company and allows the courr to provide a remedy to you where the court finds that the proposed act or resolution is either unfairly discriminatory to a shareholder or to debenture holders including yourself or is prejudicial to a shareholder or a class of shareholders or debenture holders, including yourself as well.

As long as you are a shareholder of the company intending to do the aggrieved act and it affects you in your capacity as a shareholder (or even otherwise) you can apply for this remedy, as was held in Re Tong Eng Sdn Bhd [1994] 1 MLJ 451 and Re Chi Liung & Son Ltd [1968] 1 MLJ 97.

Usually when personal remedy is applied for the courts would look for a conduct that is a visible departure from standards of fair dealing or whether the conduct was “burdensome, harsh and wrongful” as said in the case of Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324. In that case a co-operative society diverted the profits of the company to a new department of theirs, after failing to purchase the shares of the petitioners in the company. This was held to be wrongful conduct.

When a court finds that there is merit to your application, the court would have the power to either direct or prohibit the act or omission complained of, and if it involved the increase of shares, the company may be directed to reduce its capital accordingly.

Alternatively, you could petition to wind up the company under the just and equitable ground provided for under Section 218(1)(i) of the Companies Act 1965. However in Ng Eng Hiam and Ng Ke Wei & Ors [1965] 1 MLJ 238 it was said that courts are reluctant to wind up companies that are solvant and have a future merely because some shareholder complains of an oppressive conduct. In such circumstances, using the oppression action is preferable. 

What about when you want to claim on behalf of the company and not yourself? Usually, as per the rule in Foss v Harbottle (1843) 2 Hare 461 only the company itself may sue for any damages claimed, and usually by the articles of association, the power to institute legal proceedings lie with the board of directors. This is known as the “proper plaintiff” rule. However in this kind of circumstance the directors themselves would be the wrongdoers. Thus in Wallersteiner v Moir (No. 2) [1975] 1 QB 373 it was held that this rule would be excepted in such a circumstance, a circumstance where there is fraud on the minority as said in the case of Edwards v Halliwell [1950] 2 All ER 1064. In such a circumstance any damage awarded would be given to the company and not the shareholder, for it is an action by the company against its directors for the breach of their duties. In the past, in accordance with Order 15 rule 12 of the Rules of the High Court 1980, the company would be added as a nominal defendant so that enforcement could be made against the directors, but this has change for the recent Companies (Amendment) Act 2007 has added sections 181A to 181E to the Companies Act 1965. The effect of these sections is that now a minority shareholder may, with leave of the court, bring an action in the name of the company against any wrongful conduct by the company’s board of directors. The court is also now vested with the power to allow the shareholder in question control the conduct of any proceedings for this purpose as well as cancel any ratification of the act or ommission complained of by the company.

This concludes our 3 part series on company directors and their duties. Thanks for reading!