Can Directors A Company Or Third Parties Be Personally Liable In An Oppression Action?

The short answer is yes. The long answer can be found in the recent Federal Court decision of Auspicious Journey Sdn Bhd v Ebony Ritz Sdn Bhd & Ors. We will briefly look at the case below.

Generally, can you bring an action against a director of a company?

In most circumstances, the courts are very reluctant to allow others to sue (by lifting the corporate veil) the members of the company. This reluctance ensures that the members of the company (especially its directors and shareholders) are able to make decisions (provided that the decisions are made in good conscience/ good faith) for the company without being constantly harassed with lawsuits from the members of the public, encouraging the members of the company to take bold steps to advance the company for the benefit of the company as a whole.

However, this is not a blanket ban. In order to sue members of the company, the person suing the members of the company must prove that:

1. The piercing or lifting of a corporate veil is in the interest of justice; and
2. There exist special circumstances to pierce or lift the corporate veil.

Next, can you raise oppression in court?

Yes, you can. However, just like the above, the courts usually do not intervene with how the company is being run unless there is a clear indication that the company shareholders are being oppressed by the company. As noted by the court:

“Mismanagement of the company does not necessarily constitute oppression or disregard of a member’s interests. Nor, indeed, does the fact that a member is consistently outvoted mean that he is oppressed or that his interests are being disregarded. It should be remembered that the majority also has rights. Section 216 (the Singapore counterpart of section 346 of our Companies Act) does not give jurisdiction to the court to interfere with the internal management of companies which are being managed honestly and in accordance with the law.”

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

Yes. This was confirmed in Auspicious Journey, where the court dissected section 181 (1)(a) of the Companies Act and stated that directors and third parties, as the backbone of the company, can be indeed held for oppression. As noted by the court:

“…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 the oppression of 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 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.”

What are the considerations needed to be factored in before a director/ third party can be held liable in an oppression action?

The test for this is  (in the context of section 181 of the Act) simply this: whether 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 regard:

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:
3. 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
4. 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.
5. 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 goes the long answer. Hopefully, you have learned something new today!!

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