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Paying For Past Cins: Damages as a Remedy in Oppression Actions”

PAYING FOR PAST CINS: DAMAGES AS A REMEDY IN OPPRESSION ACTIONS

 

Lee Shih analyses the Federal Court decision in CIN Holdings Sdn Bhd

Section 181 of the Companies Act 1965 ("Section 181") allows an aggrieved member of a company to apply for Court relief where there is oppressive conduct affecting that applicant's interests as a member. In granting relief, the Court is empowered to make any Order to bring that oppressive conduct to an end.

The Federal Court in Koh Jui Hiong @ Koa Jui Heong & 8 others v Ki Tak Sang @ Kee Tak Sang (Federal Court Civil Appeal No. 02-83-11/2012(M)) has confirmed that an award of damages can be made in an action under Section 181, if the order is with the view to bring to an end or to remedy the matters rightly complained of under Section 181.

BACKGROUND FACTS

The High Court Proceedings

The dispute involved shareholders in a company named CIN Holdings Sdn Bhd ("CIN"). CIN was an investment holding company and held shares in public listed companies, including 1,346,100 shares in Polymate Holdings Berhad ("Polymate Shares").

A Section 181 Petition was filed by a director of CIN (the 1st Petitioner), several minority shareholders of CIN (the 2nd to 8th Petitioners) and CIN itself (the 9th Petitioner) against the majority shareholders who collectively held 74% of the shareholding of CIN (the Respondents).

The complaints raised in the Section 181 Petition were in respect of, inter alia, irregular financial transactions, including the disposal of 446,100 Polymate Shares without Board or members' approval, and the purported removal of the 1st, 4th and 6th Petitioners as directors of CIN.

The High Court allowed the Section 181 Petition (see the case of Koh Jui Hiong @ Koa Jui Heong & Ors v Ki Tak Sang @ Kee Tak Sang & Ors [2009] 8 MLJ 818). This was despite the challenges raised against the standing of the 1st Petitioner (who was a director but not a shareholder) and CIN to bring such an action.

The High Court granted various Orders including a share buyout order where the 1st Respondent would purchase the 2nd to 8th Petitioners' minority shareholding and also awarded damages to CIN, the 9th Petitioner.

The damages were assessed based on the loss suffered by CIN being the difference between the quoted value of the 1,346,100 Polymate Shares as at two specified dates. The High Court awarded the difference in value of approximately RM2.8 million as the quantum of damages to CIN.

The Court of Appeal Proceedings

At the Court of Appeal, a consent Order was entered to set aside the share buyout Order. Thus, the sole issue before the Court of Appeal was the quantum of damages awarded to CIN.

The Court of Appeal held that CIN was only entitled to damages for the 446,100 Polymate Shares disposed of without authority. The Court of Appeal accordingly reduced the quantum of damages. Leave to appeal to the Federal Court was granted on the issue of the award of damages to CIN.

THE DECISION OF THE FEDERAL COURT

CIN's (Lack of) Standing

Before considering the question of law raised in the appeal, the Federal Court highlighted an unusual aspect of the case in that damages were awarded to CIN qua petitioner in the same petition in which the affairs within CIN were sought to be remedied. The Federal Court therefore needed to ascertain whether CIN could be a nominal petitioner in a Section 181 action and whether the action was in fact a derivative claim.

The Federal Court first considered the issue of CIN's standing. Section 181 provides that only a member of a company has standing to invoke that provision. There may be circumstances where a person who claimed membership, albeit disputed by the other parties, may still have the requisite standing (and the Federal Court referred to its own decision in Owen Sim Liang Khui v Piasau Jaya Sdn Bhd & Anor [1996] 1 MLJ 113). However, this did not extend to allowing for the company itself to have standing to bring a Section 181 action.

The second consideration was that to obtain relief, a petitioner must prove, essentially, that the affairs of the company are being conducted oppressively against him. This requirement could not apply to the company qua petitioner.

The Federal Court concluded that CIN had no standing to bring an action under Section 181. CIN could have been joined as a nominal respondent but it could not be a nominal petitioner. CIN was pursuing what could only be called a derivative action. The action was brought by the minority in the name of CIN against the majority and the complaint concerned the alleged wrongdoings by the majority against CIN. The award of damages was also to compensate CIN for loss caused to CIN.

Damages as a Remedy

Nonetheless, the Federal Court proceeded to consider the leave question on "whether an award of damages can be made in a petition under section 181(1) of the Companies Act 1965".

It was noted that damages to members is not among the reliefs expressly provided for under Section 181 but the Federal Court affirmed the settled principle that Section 181 gives wide discretion to make any order the Court thinks fit with a view to bringing to an end the matters complained of.

The Federal Court referred to Singapore case law where that wide discretion extended to allowing for compensation to be made to the company. The Federal Court took note that the Hong Kong Companies Ordinance allows the Court to order payment by any person of such damages and interest on those damages as the Court may think fit to any members. The Federal Court was of the view that such a provision was merely a codification of the common law position.

The Federal Court therefore concluded that the authorities it had referred to would allow for relief of a compensatory nature to an oppressed member. In a suitable case, the Court could even award relief to the object company.

On the facts, however, it was held that since the share buyout order had brought to an end all the matters complained of, there was nothing further to be remedied by that order of damages. The Federal Court further considered the circumstances of the 1st Petitioner (as director) and CIN (the subject company) had no standing and that, in effect, the claim by CIN was either a common law derivative action or a statutory derivative action, both of which were defective.

The Federal Court confirmed that an award of damages can also be made in an action under Section 181, if the order is with the view to bring to an end or to remedy the matters rightly complained of under Section 181. Nonetheless, based on the facts, the Federal Court allowed the appeal and set aside the award of damages.

COMMENTARY

The Federal Court has provided a useful confirmation that Section 181 allows a wide discretion in the reliefs that can be granted and that damages can be awarded if it is done with the view to bring an end to the oppressive conduct.

While the door is open for aggrieved members to seek for damages to be paid to them in a Section 181 action, in practice, it may be difficult to demonstrate what damage that they have personally suffered. The company itself may have been the actual party that incurred the loss and in appropriate circumstances, may then be compensated with damages.

This decision also highlighted the fatal defects in this Section 181 Petition in that non-members were listed as Petitioners. The 1st Petitioner was only a director and had no standing to bring himself within Section 181. In terms of CIN, it also had no standing to be a Petitioner but CIN should have been listed as a Respondent instead. That could have then preserved the possibility of CIN being awarded damages.

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WRITER' NAME : LEE SHIH

WRITER'S PROFILE:

Lee Shih is a Partner in the Dispute Resolution Division of SKRINE. His main practice areas are Corporate Litigation, Corporate Insolvency and International Arbitration.

 

 
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