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2020 MarsdenLR 3160
HIGH COURT MALAYA KUALA LUMPUR
FAZAL ELLAHI OLI MOHAMED & ANOR – Appellant
Versus
KM OLI MOHAMED SDN BHD – Respondent
[Originating Summons No: WA-24NCC-251-07/2020]
The court dismissed the derivative action application, citing lack of good faith, absence of wrongdoer control, and failure to establish a reasonable cause of action.
Headnote:(A) Companies Act 2016 – Sections 347, 348, and 350 – Derivative action – The Applicants sought leave to commence a derivative action against a director for breach of fiduciary duties and recovery of losses for the Respondent company – Application dismissed for lack of good faith and failure to establish wrongdoer control – Legal requirements for derivative action clarified. (Paras 11-12, 18-20, 35-36, 63-69)
(B)
Good Faith Requirement – The court highlighted that acting in good faith is essential in a derivative action, with the onus on the applicant to demonstrate honest belief in the merits of the claim. (Paras 30-32)
(C)
Delay in Action – An inordinate delay in bringing the claim suggested acquiescence by the Applicants and undermined their assertion of good faith. (Paras 50-52)
Facts of the case:
The Applicants, minority shareholders, claimed the Respondent's director breached fiduciary duties by establishing competing businesses, leading to secret profits, without disclosing material facts to shareholders. (Paras 6, 8)
Findings of Court:
The court found no evidence of wrongdoing or secret profits by the director, and the application lacked a reasonable semblance of merit. (Paras 38-40)
Issues
: Whether the application was properly constituted, if a reasonable cause of action existed, if the Applicants acted in good faith, and if the derivative action was prima facie in the best interest of the Respondent. (Paras 17-18, 27, 63)
Ratio Decidendi:
The court ruled that the Applicants failed to demonstrate a legitimate claim and lacked good faith, which is crucial in derivative actions. (Paras 36, 63-65)
Result:
The originating summons was dismissed. (Paras 69)
Introduction
[1] The Applicants by the Originating Summons ("OS") sought leave pursuant to s 347 of the Companies Act 2016 (" CA 2016") to commence a derivative action ("the intended action") on behalf of K M Oli Mohamed Sdn Bhd, the Respondent against Mohamed Kassim a/l Oli Mohamed ("Kassim") as a director of the Respondent, and other companies connected with Kassim namely, Lumiere De Rubis Sdn Bhd, Rubyoli Sdn Bhd and Dazzle Jewel Sdn Bhd together with other ancillary orders and costs.
[2] On 1 October 2020, I heard the OS, reserved decision to 9 November 2020 and dismissed the OS. These are the reasons in amplification of the grounds delivered on 9 November 2020.
Background
[3] The Respondent, incorporated in 1984, carries on the business of selling gem jewellery and precious metals.
[4] The First and Second Applicants are minority shareholders of the Respondent. The 1st Applicant holds 25,001 of the issued and paid up shares of the Respondent while the 2nd Applicant holds 41,094 issued and paid up shares of the Respondent.
[5] Other shareholders in the Respondent are family members (including the mother, Oli Mohamed Zaleha who had passed away wherein her estate is in the distribution process) namely:
[6] The 1st Applicant was a shareholder from the inception of the Respondent but had resigned as a director due to misunderstandings with his family members and he had taken over a company Faiq Jewels Sdn Bhd carrying on a similar business as the Respondent and on the same floor as the Respondent in Bangsar Shopping Centre. After he came a director of Faiq Jewels Sdn Bhd, he did not involve himself with the business of the Respondent.
[7] The directors of the Respondent at the material times were one Mohammed Kassim a/l Oli Mohamed ("Kassim"), Mior Idris Bin Mior Jaafar ("Mior") and Rahmatullah a/l Oli Mohamed ("Rahmat").
The Applicants' Case
[8] The Applicants asserted that:
(i) Since year 2008, "the directors mainly Kassim started setting up companies to carry on similar business as the Respondent and in doing so, breached his director's duties, diverted the Respondent business and made secret profits";
(ii) The companies incorporated or caused to be incorporated by Kassim are as follows:
DAZZLE JEWELS SDN BHD
(a) Dazzle Jewel Sdn Bhd ("Dazzle Jewel") was incorporated in year 2008 by Kassim to carry on a similar business as the Respondent wherein Kassim's wife, Shariffa Gayah and the other director of the Respondent, Mior were appointed as directors of the company;
(b) Kassim was a signatory of the cheques of Dazzle Jewels current account at Maybank Berhad, at Ampang Park branch together with Shariffa Gayah and Muhammad Irfan and the mandate was that anyone of the two can sign the cheques of Dazzle Jewel;
(c) Dazzle Jewel then bought jewellery from the Respondent's supplier on consignment and thereafter, sold it for a profit to the Respondent. However, when items purchased were not saleable, the costs of purchasing these items were borne by the Respondent;
(d) Kassim breached his director's duties when he caused Dazzle Jewel to be incorporated, caused Dazzle Jewel to buy jewellery from Respondent's suppliers and thereafter sold the jewellery to the Respondent and made secret profits together with his wife Shariffa Gayah and Mior who is a director of KM Oli Mohamed.
RUBYOLI SDN BHD
(e) Rubyoli Sdn Bhd was incorporated in year 2009 to carry on a similar business as the Respondent wherein Kassim was a director and shareholder of the Company. The other shareholders and directors were his family members.
(f) Kassim then moved the stock of the Respondent to Rubyoli's business place at Intermark, Jalan Tun Razak, Kuala Lumpur and sold them and enjoyed the secret profits;
(g) Further, he caused the Respondent to pay for the advertisements of Rubyoli and represented to the public that both KM Oli Mohamed and Rubyoli is one and the same.
(h) Kassim also moved the main server of the Respondent to the business place of Rubyol
