YAP CHUNG KWAN v 1. ) KHO KOK LIM 2. ) KHO CHEE KIAT

Case Significance

Illustrates the threshold for leave to bring a statutory derivative action under section 348 of the Companies Act 2016 — in particular the requirement to show the action is genuinely in the best interests of the company — and the refusal of leave where that interest is not made out and the claim rests on unverified material.

This High Court decision at Temerloh, delivered by Roslan bin Mat Nor J, concerns an application for leave to bring a derivative action under seksyen 348 Akta Syarikat 2016 (section 348 of the Companies Act 2016). The applicant, a shareholder of Pink Zone Sdn Bhd, sought leave to sue in the company's name in respect of the alleged failure to pay to Pink Zone Sdn Bhd the proceeds of the sale of timber logs belonging to the company from forest compartments in the Kuantan district. The proposed defendants were two individuals sued as partners of a firm, Swan Yik Enterprise, and the application also invoked the related provisions of sections 345, 347 and 350 of the Companies Act 2016 governing statutory derivative actions.

To obtain leave for a derivative action, an applicant must satisfy the court, among other things, that the application is made in good faith and that it appears prima facie to be in the best interests of the company that the action be brought. The Court focused on whether pursuing the proposed action would in fact be in the interests of Pink Zone Sdn Bhd. It observed that the first defendant was himself a shareholder of Pink Zone Sdn Bhd and also had an interest in Swan Yik Enterprise, so that requiring Swan Yik Enterprise to pay the disputed sums to Pink Zone Sdn Bhd would in turn affect the first defendant and, ultimately, the company itself. Significantly, the alleged sums said to be due rested on timber-sale documents that had not yet been verified by either Swan Yik Enterprise or Pink Zone Sdn Bhd.

Because the applicant had not shown that the proposed action was in the company's interest, and because the underlying claim depended on unverified sale documents, the Court held that leave should not be granted. It dismissed the application, with costs. The judgment is a useful illustration of the threshold for leave to bring a statutory derivative action under section 348 of the Companies Act 2016 — in particular the requirement to demonstrate that the proposed action is genuinely in the best interests of the company — and of the refusal of leave where that interest is not made out and the underlying claim rests on unverified material.