Malaysia Federal Court holds liability for statutory oppression action may extend to directors and third parties

29 June 2021

Auspicious Journey Sdn Bhd v Ebony Ritz Sdn Bhd [2021] 4 CLJ 721

In Auspicious Journey Sdn Bhd v Ebony Ritz Sdn Bhd, Auspicious Journey Sdn Bhd (“plaintiff”) and Hoe Leong Corporation Ltd (“Hoe Leong”) formed a joint venture company known as Ebony Ritz Sdn Bhd (“Ebony Ritz”). The plaintiff and Hoe Leong respectively held 20% and 80% of the shares in Ebony Ritz, which was formed specifically to acquire 49% of the shares in Semua International Sdn Bhd. Sumatec Resources Bhd held the remaining 51%.

Unbeknown to the plaintiff, Hoe Leong had entered into a conditional sale and purchase agreement (“conditional SPA”) with Setinggi Holdings (“Setinggi”), Ebony Ritz and Sumatec for the disposal of the entire retained 51% equity interest of Sumatec in Semua International. The effect of the conditional SPA was that 2% was to be purchased by Hoe Leong for RM1.8 million and 49% was to be purchased by Setinggi for RM17 million. Pursuant to the conditional SPA, the entire retained 51% would be held by Hoe Leong as Setinggi was, in effect, its nominee.

The plaintiff, as minority shareholder of Ebony Ritz, brought an action for oppression against the defendants. Hoe Leong was one of the defendants. The plaintiff claimed, under section 181 of the Companies Act 1965 (“section 181”) (now section 346 of the Companies Act 2016), that Hoe Leong had utilised its majority powers to cause Ebony Ritz to enter into the conditional SPA for its own benefit. The High Court found that liability under section 181 was established against the majority shareholder alone and dismissed the claim against the other defendants, who were directors and third parties. The Court of Appeal upheld the findings of the High Court. Dissatisfied, the plaintiff appealed the dismissal of the claims against the other defendants.

In dismissing the appeal, the Federal Court held as follows:

• Section 181 targets conduct or acts of the company at both the directors and shareholders’ levels. Parliament’s intention in enacting section 181 was to provide a wide and broad remedy encompassing, not only the majority or the company, but also the directors and third parties where necessary, with a view to bringing the oppressive or prejudicial conduct to an end or remedying it. Hence, it is a remedial provision to arrest the mischief of the inadequacies of the common law in protecting the interests of the minority shareholders.
• The statutory oppression action is a minority shareholder remedy against those controlling the company. That will naturally include the directors who manage the company at the behest of the majority, as well as the majority itself. This is so by reason of the express provisions of section 181.
• It is open to the courts to impose liability against directors or third parties provided there is a sufficiently close nexus between the oppressive or unfairly discriminatory conduct, or disregard of the minority's interests or otherwise prejudicial conduct and that party. The imposition of liability should be fair or just in all circumstances of a particular case. It requires something more than the mere fact of their being directors who had conduct of the affairs of the company at the material time. It requires deliberate involvement in the impugned transactions, or a sufficiently close nexus, participation or connection to warrant the imposition of liability to directors or third parties.