Case Study: Awarding Damages To A Co-Petitioning Company In A Derivative Action?
Can a company be joined as a co-petitioner in a derivative action against the company itself? Let us briefly look at the case of Koh Jui Hiong @ Koa Jui Jeong & Ors v Ki Tak Sang @ Kee Tak Sang And Another Appeal and determine the question above.
Brief facts of the case
One of the majority shareholders/ the managing director of CIN Holdings Sdn Bhd was caught disposing of a certain amount of shares that the company owns without the company’s approval. On top of that, he was also caught committing irregular financial transactions during his term of office.
Stemming from the above, the minority shareholders decided to commenced an oppression suit and a derivative action suit under the previous Companies Act against the managing director. The company itself, CIN Holdings, was also roped in as a co-petitioner despite the fact the matters they sought to be remedied were the affairs and/ or acts of the company itself.
The majority shareholder objected to joining the company as a co-petitioner, and the matter (amongst many others) were fought all the way to the federal court.
The court’s decision
The federal court noted that a company cannot be joined as a co-petitioner and must be made a co-respondent instead in a derivative claim. In arriving at the decision, the court states that:
“It is all very well to say that the company must sue to enforce duties owed to it. But a company has no physical existence. The question is, which person or body of persons is the company to initiate litigation? The question may be answered by reference to the articles of association…(where not specifically stated) the right to commence a corporate belongs to the person or body in whom the function of management is vested (usually board of directors) … if the board of directors refuses to commence litigation, the members in general meeting may do so…If the board and general meeting do not wish to commence an action or if they neglect to do so, a minority who feels that a wrong has been committed against the company will have no choice but to commence an action himself against the defendants. Such action is known as a derivative action…We emphasize that it is not permissible for a plaintiff in a derivative action to sue in his own name, without indicating that he is bringing the action in a representative capacity and for the benefit of the company of which he is a shareholder…”
In essence, in cases where some members of the company refuse to sue (because of their own wrongdoing) and the company has suffered loss, other members of the company can bring an action against the wrongdoers, joining the company as a co-respondent, co-defendant.
By doing so, it would allow the court to order discovery of certain documents against the company that may/ may not help with the case and in such a scenario (where the shares have been sold without consent), the court may order the company to buy back the shares- this cannot be done if the company is made a co-petitioner.
In conclusion, no, the company cannot be joined as a co-petitioner in a derivative action against the company itself.
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