Before Or After? Vesting A Company’s Land In The Hands Of A Liquidator

Can directors of a company and/ or third parties can be held personally liable for oppression action? This issue was dealt with recently in the Federal Court in Auspicious Journey Sdn Bhd v Ebony Ritz Sdn Bhd & Ors. We shall briefly discuss the question posed.

(we have previously dealt with the issues of bringing an action against a director of a company and whether oppression can be raised in court in multiple of our articles, so we will skip it in this article, and deal directly with the question at hand.)

So can directors of a company and/ or third parties be held personally liable for oppression action? 

Yes. In coming to its decision, the court in Auspicious Journey dived into section 181 (1)(a) of the Companies Act and gave a succinct answer to the question: 

“…it is clear from the use of the words in limb (a) that the section envisages oppressive conduct as being established where either the “affairs of the company are being conducted” or where the “powers of the directors are being exercised in a manner oppressive…..” The fact that the words namely the “exercise of powers by the directors in a manner that is oppressive to its members” are expressly stipulated is of significance. The words cannot be mere surplusage. The words envisage the court scrutinizing how the powers of the directors of the company in issue are exercised. The directors are expressly identified in the section to enable the court to make a finding that particular directors for the majority have utilized their powers in a manner that has resulted in oppression to the minority or is in disregard of the minority’s interests.

When limb (a), which expressly identifies the directors’ exercise of powers as a basis for establishing oppression, is read with section 181(2) which in turn gives the Court very wide powers to bring such conduct to an end or to remedy the minorities’ grievance, it follows that there is no prohibition against the Court granting a remedy which encompasses the directors of the company personally. On the contrary, a construction of section 181(1)(a) and (2) reveals that the intention of the legislature was to allow the court the freedom to fashion a remedy it thought fit. That would encompass liability devolving on a director directly in circumstances where the director exercised his powers to (a) oppress the minority shareholder/s, or (b) disregard their interests as members. 

Further, a reading of limb (a) of section 181(1) refers expressly to the “conduct of the affairs of the company “, which is a matter which falls within the management duties and powers of the directors, as they manage the company on behalf of the shareholders as a whole. Limb (a) therefore focuses on the acts of the directors expressly in the conduct of the affairs of the subject company.”

So what are the factors needed to be considered before holding a director/ third party liable in an oppression suit?

In such a case, the court in Auspicious Journey noted that in deciding whether a director/ third party can be liable for an oppression suit is whether the conduct of the director/ third party was so connected to the oppressive, detrimental, or prejudicial conduct that it would be fair and just to impose liability against the director/ third party for such conduct. In this regards:

1. There must be evidence of deliberate involvement or participation/ sufficiently close nexus to the oppressive or detrimental or prejudicial conduct that the minority complains of.
2. The imposing of liability on the director/ third party should be fair and just. In this regard:
   1. The facts and factual matrix of each particular case will determine whether or not the imposition of liability on directors and/or third parties is justified. Such an assessment is undertaken on an objective basis; and
   2. It must be circumspect, going no further than is necessary to remedy the breach complained of or to stop the oppressive or prejudicial conduct i.e. must be reasonable and serve to alleviate the legitimate concerns of the shareholders of the company in question.
3. General corporate law principles must be taken into account, such that director liability does not become a substitute for other statutory relief or under the common law.

And there you have it, a brief update on the issue. Hope you find it useful. 

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