Beyond the Boardroom: High Court Affirms Right to Seek Contribution in Derivative Actions

In a significant ruling for corporate governance, the High Court has clarified the boundaries of third-party proceedings in derivative suits. Justice Moses Susayan dismissed an application by a representative director to strike out a third-party notice, affirming that directors accused of financial mismanagement are entitled to seek contribution from fellow board members who allegedly participated in the impugned transactions.

Setting the Scene: The Derivative Dispute

The case involves Atlantis Engineering & Construction Sdn Bhd, a company currently caught in the crossfire of a derivative action. One of its directors, Chai Sin Fah, obtained leave from the Court of Appeal to sue two other directors—Tan Yu Ping and Hee Kah Pau—for alleged breaches of fiduciary duties and financial mismanagement.

Following the commencement of this suit, the defendant directors issued a third-party notice against Chai Sin Fah. They argued that because the representative director was a joint signatory to the bank accounts and deeply involved in the transactions now alleged to be fraudulent, he should share the financial burden if they are found liable.

The Argument for Striking Out

Chai Sin Fah moved to strike out the notice, arguing that: * The notice was an abuse of process and legally unsustainable. * Directors, as a matter of law, owe fiduciary duties only to the company, not to each other, and therefore no claim for indemnity can arise between them. * The third-party notice was an attempt to undermine the leave previously granted for the derivative action.

The Court’s Reasoning: A Matter of Fact, Not Just Duty

Justice Moses Susayan rejected the attempt to truncate the proceedings. Central to the Court's reasoning was the distinction between a claim based on fiduciary duty and a claim based on joint tortfeasance. The court noted that while directors may not owe duties to each other , they are subject to statutory contribution claims under the Civil Law Act 1956 if they act as joint tortfeasors.

"The defendants' claim for contribution is not premised on the existence of any fiduciary duty owed by one director to another," the Judge noted. "Rather, the claim is founded on the allegation that the third party participated in the same transactions that are now said to have caused loss to the company."

Key Observations

The Court emphasized that the threshold for striking out a pleading is exceptionally high: * On the drastic nature of striking out: "The power to strike out is a drastic one, which must be exercised sparingly and only in plain and obvious cases where the claim is clearly unsustainable on its face." * On the role of evidence: "Whether or not the appellants succeed in proving their pleaded case is a matter to be decided by the court after considering the evidence adduced in court during trial." * On the purpose of third-party rules: "The third-party procedure is a mechanism to avoid a multiplicity of actions and to ensure that all parties responsible for a loss are before the court." * On joint responsibility: "The correct legal position is that whilst it is the company's prerogative to choose who they wished to sue, it is nevertheless open to a defendant to bring as third-parties, all parties who in the defendant's view share or bear responsibility."

The Verdict and Its Implication

The court concluded that the third-party notice was not a "backdoor" attack on the derivative leave, but a procedural necessity to settle the full score of accountability. By allowing the third-party proceedings to continue, the court has signaled that derivative actions cannot be used to shield from scrutiny the conduct of directors who may have been intricately involved in the financial decisions of the company.

This judgment serves as a vital reminder for corporate directors: oversight and management decisions have consequences. When a company seeks to claw back losses, the court will ensure that all participants—not just the defendants chosen by the complainant—face the tribunal for their contributions to financial outcomes. The case will now proceed to a full trial to tease apart the complexities of the company's financial history.