Legal Bulletin April 2013

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Published date: 25 Apr 2013

Singapore High Court grants leave for action under section 216A of Companies Act to 50% shareholder

Kwee Lee Fung Ivon v Gordon Lim Clinic Pte Ltd & Anor [2013] SGHC 65
 
The Singapore High Court in Kwee Lee Fung Ivon v Gordon Lim Clinic Pte Ltd & Anor considered an application pursuant to section 216A of the Companies Act (“section 216A”) for leave to commence an action on behalf of a company. The court found that the applicant was not acting in bad faith in seeking leave to pursue a derivative action. In granting the application, the court made it clear that an applicant who acts out of self-interest need not be lacking in good faith so long as that self-interest coincides with the interests of the company.
 
Facts
 
The applicant (“Dr Kwee”) in this action was married to the respondent (“Dr Lim”) and together they incorporated a company providing medical services (the “Company”). Dr Kwee and Dr Lim were the Company’s only shareholders. The Company operated out of premises at the Gleneagles Medical Centre (the “Clinic”), where Dr Lim practised and Dr Kwee did not. Dr Kwee commenced divorce proceedings against Dr Lim in January 2010 and, a few months later, Dr Lim incorporated another company, also a medical clinic (the “Rival Company”). Dr Lim was the sole shareholder of the Rival Company, ceasing to work under the Company’s banner in order to run the Rival Company. The Rival Company used the Gleneagles property as its registered address, paying the Company a monthly rent of S$8,000.
 
Dr Kwee commenced this section 216A action on the basis of her allegation that Dr Lim had breached his fiduciary duties to the Company as he did not disclose his conflict of interest in relation to the Rival Company to the Company’s board of directors. She alleged that Dr Lim had converted the Company’s business from that of running a successful clinic to that of a landlord collecting a below market monthly rental, without the knowledge of the Company’s board.
 
Good faith
 
The court noted at the outset that although Dr Kwee held 50% of the Company’s shares, she was still entitled to rely on section 216A because she is not able to get the Company to sue Dr Lim as he also holds 50% of the Company’s shares. Dr Lim resisted Dr Kwee’s action on various grounds, including that she was not acting in good faith.
 
In considering this assertion, the court acknowledged that the relationship between the parties was hostile. However, the court noted that hostility in and of itself was insufficient to prove bad faith. It is for the applicant to prove good faith and, in attempting to do so, Dr Kwee argued that Dr Lim should answer to the Company for wrongly transforming it from a profitable medical practice into a rent collecting company as a result of his alleged breach of fiduciary duties. The Company’s revenue fell to S$24,000 in the last quarter of 2010, after the Rival Company took over the Gleneagles premises. The Company had previously earned in excess of a million dollars for the previous two years. Dr Kwee alleged this loss was due to Dr Lim’s alleged breach of his fiduciary duties.
 
The court noted that if Dr Kwee succeeded in proving Dr Lim was in breach of his fiduciary duties, the Company’s worth would be increased and thereby so would her share. This self-interest coincided with the Company’s interest in recovering lost profits and hence did not prove bad faith.
 
Dr Lim argued that Dr Kwee was acting in bad faith as the application for leave was duplicitous in view of the forthcoming division of their matrimonial assets. The court disagreed and observed that as the value of each spouse’s assets is taken into account in the division of matrimonial property, Dr Lim would be able to contend that the profits from the Rival Company were part of his assets if Dr Kwee was denied leave to commence a derivative action. For this reason, the proposed derivative action should be commenced as soon as possible so that the question of whether Dr Lim had breached his fiduciary duties to the Company could be determined so that the true worth of Dr Kwee’s stake in the Company could be determined for the purpose of division of matrimonial assets.
 
In light of the above, the court found that Dr Kwee was not acting in bad faith in seeking leave to pursue a derivative action.
 
In the interests of the Company
 
In considering whether a section 216A derivative action would be prima facie in the interests of the Company, the court found that the Company had a legitimate and arguable case against Dr Lim. The court noted that while a doctor is entitled to choose how and where he practises his trade, a doctor who is practising in a clinic owned by a company of which he is a director must also ensure he fulfills his fiduciary duties. The court found that the allegations that Dr Lim caused the Company to close the clinic and was responsible for the loss of income suffered by the Company due to it being turned into a landlord collecting rent from the Rival Company, without disclosing these actions to the Company’s board, were allegations which merited a hearing.
 
Judgment
 
For the reasons discussed above, the court granted Dr Kwee leave to commence a section 216A derivative action. The court also ordered that Dr Kwee was to have conduct of the proceedings as Dr Lim could not have conduct of proceedings against himself.
 
Conclusion
 
The High Court has reaffirmed the principles that a court will apply in determining an application for leave to bring a derivative action under section 216A of the Companies Act. In particular, as regards the issue of good faith, the court has made it clear that an applicant who acts out of self-interest need not be lacking in good faith so long as that self-interest coincides with the interests of the company. The general principle which emerges from the court’s judgment is that good faith is more dependent on the purpose of the derivative action, which must serve the interests of the company, rather than the motives of the applicant in seeking leave to commence the action.
 
 
If you would like to discuss the impact of this case on your business, please contact:
 
Tel: +65 6890 7832
 
Tel: +65 6890 7143

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