What is the proper course of action: Oppression or Derivative?

There has been a long-standing interplay on the correct course of action between an oppression claim and a derivative action. This issue was recently discussed at length by the Federal Court.

In Low Cheng Teik & 3 Ors v Low Ean Nee (Civil Appeal No. 02(f)-30-04/2023), the Federal Court found that the Respondent’s oppression claim should have been pursued as a derivative action instead. In doing so, it was highlighted that it is important to identify whether a shareholder’s grievance/complaint is:

(a)     a personal wrong against the shareholder;

(b)    a corporate wrong against a Company; or

(c)     a case of an overlap between personal wrong and corporate wrong.

In essence, the Federal Court explained that: -

1.            For personal wrong - the proper course of action should be an oppression claim. A personal wrong means a particular shareholder has suffered loss or damage as a result of unfairly being singled out by the majority shareholders;

2.            For corporate wrong - the proper course of action should be a derivative action. A corporate wrong means those in control of the company have caused the company to suffer loss or damage.

In determining which course of action is suitable, the Federal Court has set out the following useful guidelines: -

Step 1 – Identify the act, series of acts or omissions?

Step 2 – Identify the characteristic of the acts or omissions – whether it is oppressive/disregard of interest/unfairly discriminatory against/prejudicial to one or more shareholders?

Step 3 – Whom does the cause of action vest in - the shareholder or the company?

Step 4 – Who has suffered loss or damage from wrong done – the shareholder himself or the Company?

Step 5 – Whether the loss is suffered by the plaintiff alone or by all the shareholders?

In this case, the Federal Court found that the correct recourse for the Respondent should be derivative action. This is because it is the Company who suffered loss by reason of the 1st Appellant’s wrongful assignment of the Company’s trademark to his related company.

Despite the Federal Court’s useful guidelines, it remains unclear as to what course of action should be taken if there is an overlap between personal wrong and corporate wrong.

Prior to the introduction of the statutory derivative right under s.347 of the Companies Act (“CA”) 2016, a shareholder could file a claim in his personal capacity (as an oppression claim) and in a representative capacity for and on behalf of a company (being a common law derivative action). However, given the strict demarcation between the different rights set out in s.346 and s.347 of CA 2016, there appears to be no avenue for a shareholder to commence a single claim when such overlap occurs.

We look forward to future jurisprudence to shed light on this legal conundrum.

See grounds of judgment at:

https://tinyurl.com/ms28zvft