The necessity to establish wrongdoer control in derivative actions under the Companies Act, highlighting the need for concrete evidence of wrongful conduct and damages.

Introduction

[1]Via Originating Summons filed on 1 July 2020, pursuant to ss 347 and 348 of the Companies Act 2016 , the appellants prayed for among others, an order that:

(a) The appellants be granted leave by this Court to institute an action in the name of the respondent against Mohamed Kassim Oli Mohamed (Kassim) as director of the respondent and other companies connected/ related with Mohamed Kassim Oli Mohamed being Lumiere De Rubis Sdn Bhd, Rubyoli Sdn Bhd and Dazzle Jewel Sdn Bhd together with other ancillary orders and costs.

[2] The leave application was dismissed by the High Court on 9 November 2020. The decision of the High Court was unanimously affirmed by this Court on 13 October 2022.

[3] The High Court dismissed the appellants' application on the following grounds:

(a) Since Kassim resigned as a director of the respondent two (2) days after s 348 Notice was served on the respondent by the appellants, there was an absence of a wrongdoer (Kassim) being in control of the respondent. As such, it disentitles the appellants from maintaining the derivative action and concluded that the application is incompetent and not properly constituted.

(b) That the appellants have not been able to show a reasonable semblance of merit in their claim in that the appellants have failed to prove by concrete evidence that the respondent has suffered any damage by reason of Kassim and his related companies;

(c) That the appellants have only raised a suspicion of a possible breach of Kassim's duties but did not make out a prima facie case.

(d) From the minutes of meeting, the 2nd appellant knew of the Franchise Arrangement. Further, he was a party to the Franchise Agreement and cannot now blow hot and cold.

(e) The franchise and profit sharing agreements are within the business judgment of the directors of the respondent which the Court will not interfere.

(f) The 2nd appellant is estopped from claiming there is a wrongdoing on the part of Kassim concerning the Franchise and Profit Sharing Agreement based on the surrounding circumstances.

(g) There is an unacceptable delay of 10 years in bringing this action against Kassim as director.

(h) Since the 1st appellant is carrying out a similar business in Bangsar Shopping Centre, it is akin to the pot calling the kettle black.

(i) That there is a lack of good faith on the part of the appellants.

Brief Facts

[4] The respondent, KM Oli Mohamed Sdn Bhd was incorporated in 1984. It carries on the business of selling gem jewellery and precious metals.

[5] The appellants are minority shareholders of the respondent. The 1st appellant holds 25,001 shares and the 2nd appellant holds 41,094 shares of the respondent.

[6] The directors of the respondent at the material times are Mohamed Kassim Oli Mohamed (Kassim), Mior Idris Mior Jaafar (Mior), Rahmatullah Oli Mohamed (Rahmat) and Shah Jehan s/o KM Oli Mohamed (Shah Jehan).

[7] The main directors responsible for managing the respondent at the material times are Kassim and Rahmat.

[8] Due to a misunderstanding with his family members, the 1st appellant resigned as director of the respondent on 30 November 1997. He then took over a company called Faiq Jewel Sdn Bhd, carrying on similar business as the respondent and on the same floor with the respondent at Bangsar Shopping Centre. After his resignation, the 1st appellant no longer involved himself with the respondent.

[9] Beginning with the year 2008, Kassim set up three companies carrying businesses similar to the respondent. The companies with their respective date of incorporation are set out below:

(a) 2008 - Dazzle Jewel Sdn Bhd;

(b) 2009 - Rubyoli Sdn Bhd; and

(c) 2019 - Lumiere De Rubis Sdn B