TEE KENG EING v 1. ) FAMILY OPTOMETRY SDN BHD 2. ) YONG YIT TUNG

Case Significance

Illustrates that leave for a statutory derivative action under sections 347 and 348 of the Companies Act 2016 may be refused where, in a deadlocked 50-50 company riven by mutual cross-allegations, the litigation would consume the company's resources rather than serve its best interests.

This decision of the High Court of Malaya at Shah Alam concerns an application for leave to commence a statutory derivative action on behalf of a company under sections 347 and 348 of the Companies Act 2016. The plaintiff, a shareholder and director, sought leave to sue the second defendant, a fellow director, on the company's behalf for alleged breaches of fiduciary duty. The court noted at the outset that this was not the obvious case of a wrongdoer in control: the plaintiff and the second defendant were 50-50 shareholders and deadlocked directors, each levelling similar cross-allegations of breach of fiduciary duty against the other, so that neither could freely sue the other in the company's name. The court had to consider whether the statutory 30-day written notice of intention to apply for leave under section 348(2) was valid and adequate, whether the application was made in good faith, and whether it appeared prima facie to be in the best interest of the company to grant leave.

Applying the statutory criteria, the court was not satisfied that leave should be granted. Central to its reasoning was the best-interest requirement: drawing on authority (including the "money's worth" analysis) that this criterion is concerned less with the bare merits of the claim than with whether it is genuinely expedient for the company to pursue it, the court observed that in a deadlocked, 50-50 company riven by mutual cross-allegations, granting leave to the plaintiff would in all likelihood be followed by a mirror application by the second defendant, generating claims and cross-claims that would drain the company's resources rather than benefit it. In those circumstances it did not appear prima facie to be in the best interest of the company for the derivative action to proceed. The court accordingly dismissed the application with costs of RM7,500. The judgment illustrates that leave for a derivative action may be refused where, in a deadlocked quasi-partnership, litigation would consume rather than serve the company's interests.