Can A Director/ Third Party Be Held Personally Liable In An Oppression Suit?
The Federal Court in Auspicious Journey Sdn Bhd v Ebony Ritz Sdn Bhd & Ors recently dealt with the issue of whether directors of a company and/ or third parties can be held personally liable for oppression action.
To cut the long story short, the Federal Court held in the positive.
The long answer is this: In Auspicious Journey, the court dissected section 181 (1)(a) of the Companies Act, and state that directors and third parties who are the backbone of the company, can be indeed held for oppression:
“…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 find 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 sections 181(1)(a) and (2) reveals that the legislature intended 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.”
How to hold a director/ third party liable?
To hold a director/ third party liable, the court must ask itself whether in the context of section 181 of the Act the action 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 him for such conduct. In this regards:
- 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.
- The imposing of liability on the director/ third party should be fair and just. In this regard:
- Each particular case’s facts and factual matrix 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
- 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.
- 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.
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