Atlantis Engineering & Construction Sdn Bhd v Tan Yu Ping (AA-22NCC-10-05/2024)

TAN YU PING

HEE KAH PAU (NRIC NO.: 630617-05-5981) … DEFENDANTS AND 20 CHAI SIN FAH (NRIC NO.: 570407-08-6171) … THIRD-PARTY LEOW SUAN YANG (NRIC NO. 760912-08-5885) …PROPOSED INTERVENER 25 GROUNDS OF JUDGMENT Introduction [1]. This judgment concerns the plaintiff’s application (Enclosure 46) to 30 strike out the third-party notice issued by the defendants against S/N ctQn1RR7Fk61yT/yFktjg the proposed third-party. The plaintiff contends that the third-party proceedings are legally unsustainable, constitute an abuse of process, and are inconsistent with the nature of the present derivative action. The application raises the issue whether the 35 defendants are entitled to bring into the proceedings another director who is alleged to have participated in the impugned financial transactions and from whom contribution or indemnity may be sought. [2]. Having considered the affidavits, written submissions, and oral 40 arguments of counsel, this court finds no basis to summarily strike out the third-party notice. Background Facts [3]. This action arises from a derivative claim brought in the name of Atlantis Engineering & Construction Sdn Bhd (“the Company”) 45 against its directors, namely Tan Yu Ping and Hee Kah Pau, who are the defendants herein. The claim concerns alleged breaches of fiduciary duties and financial mismanagement of the company’s funds over a period of time. The suit is prosecuted in the name of the company, but is carried and controlled by one Mr Chai Sin Fah 50 in a representative capacity after obtaining leave to commence a derivative action. Mr Chai Sin Fah is the proposed third-party against whom the defendants issued the third-party notice. [4]. The present proceedings can be traced to an earlier leave application filed on 8 May 2020, in which Chai Sin Fah sought leave 55 from the High Court to initiate a derivative action on behalf of the company against the defendants. The High Court dismissed that S/N ctQn1RR7Fk61yT/yFktjg application on 10 June 2021, prompting Chai Sin Fah to file an appeal to the Court of Appeal. [5]. The Court of Appeal subsequently allowed the appeal on 13 March 60 2024 and granted leave for the derivative action to be commenced. In granting leave to the applicant Chai Sin Fah, the Court of Appeal was satisfied that the applicant had established a sufficient basis to bring the action in the name of the company to investigate alleged financial irregularities involving substantial sums which 65 were said to have been withdrawn from the company’s accounts without satisfactory explanation. [6]. Following the grant of leave, the present suit was filed on 6 May 2024, by way of writ and statement of claim against the defendants. The plaintiff alleges that the defendants, in their capacity as 70 directors, breached their fiduciary duties and misused the company’s funds in the course of managing the company’s financial affairs. [7]. After the commencement of the suit, the defendants issued a third-party notice dated 19 June 2024, against Chai Sin Fah. The 75 defendants contend that Chai Sin Fah, who is also a director of plaintiff had been involved in the company’s financial management and was a signatory to the company’s bank accounts and cheques. On that basis, the defendants claim that if they are found liable in the main action, they are entitled to indemnity or contribution from 80 Chai Sin Fah, who they allege participated in the financial transactions complained of. S/N ctQn1RR7Fk61yT/yFktjg [8]. Chai Sin Fah subsequently filed the present application under enclosure 46, seeking to strike out the third-party notice, contending that the third-party proceedings are unsustainable in 85 law and constitute an abuse of the court’s process. The application is made pursuant to Order 16 rule 6 and Order 18 rule 19 of the Rules of Court 2012. [9]. It is within this procedural context that the court is called upon to determine whether the third-party notice issued by the defendants 90 ought to be struck out or whether the issues raised therein disclose matters that should properly be determined at trial. Applicable Principles [10]. The principles governing a striking out application are well settled. In Bandar Builder Sdn Bhd & Ors v United Malayan Banking 95 Corporation Bhd [1993] 3 MLJ 36; [1993] 1 MLRA 611; [1993] 4 CLJ 7; [1993] 2 AMR 1969, the Supreme Court held that 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. This principle applies equally to an 100 application to set aside a third-party notice under Order 16 rule 6, as recognised in Common Ground TTDI Sdn Bhd v Ken TTDI Sdn Bhd; Common Ground Works Sdn Bhd & Ors (Third Party) [2021] CLJU 1709; [2021] MLJU 2202; [2021] MLRHU 1716, where it was held, relying on Sime Darby Bhd v Dato’ Seri 105 Ahmad Zubair @ Ahmad Zubir bin Hj Murshid & Ors [2012] 9 MLJ 464; [2012] 2 MLRH 466, that the test for setting aside a third-party notice is the same as that governing a striking out application S/N ctQn1RR7Fk61yT/yFktjg under Order 18 rule 19. Accordingly, unless it can be shown that the third-party claim is plainly and obviously unsustainable, the 110 matter ought to proceed to trial. In this regard, Lee Swee Seng JC (as he then was) observed in Sime Darby Bhd (supra) as follows: "[136] It was held in Lee Kuan Yew v. Devan Nair (Straits Times Press (1975) Ltd & Anor, third parties) [1993] 1 SLR 723 that the principles applicable to an application to set aside a third party 115 notice are the same as those governing the determination of an application to strike out a plaintiff's claim under O 18 r 19 or inherent jurisdiction of the court. The Supreme Court in Bandar Builder Sdn Bhd & Ors v. United Malayan Banking Corporation Bhd [1993] 1 MLRA 611; [1993] 3 MLJ 36; [1993] 4 CLJ 7; [1993] 120 2 AMR 1969 held that striking out for no reasonable cause of action is only appropriate in cases which are plain and obvious so that a judge can say at once that a statement of claim as it stands is insufficient, even if proved, to entitle the plaintiff to the relief which he asks for.” 125 (underlined is emphasised) [11]. The court does not conduct a mini-trial at this stage. If the pleading discloses a prima facie basis and raises issues requiring factual determination, the matter ought to proceed to trial. 130 Whether the third-party claim is plainly unsustainable [12]. The defendants’ third-party notice is premised on the allegation that the proposed third-party was directly involved in the financial management of the plaintiff company and served as a joint signatory to the very transactions now disputed as wrongful. The 135 defendants contend that, should they be found liable, the proposed S/N ctQn1RR7Fk61yT/yFktjg third-party ought to bear responsibility by way of contribution or indemnity. [13]. The third-party’s involvement in the alleged wrongful financial management of the plaintiff is expressly pleaded in the defendants’ 140 statement of defence. The defendants aver that the third-party participated in the plaintiff’s financial affairs and possessed knowledge of the transactions undertaken by the company. It is also pleaded that the third-party insisted on being the second signatory to all cheques drawn from the plaintiff’s account and was 145 a joint signatory to the cheques connected with the transactions now alleged by the plaintiff to be fraudulent or improper. Significantly, these allegations were not specifically denied in the plaintiff’s reply to the statement of defence. In these circumstances, the pleadings raise serious issues regarding the third-party’s 150 participation in the impugned transactions which ought properly to be determined at trial. Accordingly, the third-party notice cannot be said to be plainly and obviously unsustainable. [14]. Under the Bandar Builder test, the court must determine if this plea is "obviously unsustainable." The defendants have pleaded a 155 factual matrix involving joint participation in the impugned transactions. Whether these allegations are true is a matter of evidence to be determined at trial. As emphasised by the Court of Appeal in Sathish Kumar Ayyaswamy & Anor v. Peeran Syed Mohamed Syed Mahaboob [2025] 5 CLJ 385; [2025] MLJU 33; 160 [2025] 2 MLRA 863, it would be "plainly wrong" for a Judge to consider the merits of the case during a striking out application. The Court of Appeal expressed as follows: S/N ctQn1RR7Fk61yT/yFktjg "[33] ... Whether or not the Appellants will succeed in proving the facts pleaded depends on the evidence adduced during the trial 165 of the action: it is not for the Court’s consideration in an application for striking out under O 18 r 19(1)(a)." … "[38] Whether or not the Appellants succeed in proving their pleaded case is a matter to be decided by the Court after 170 considering the evidence adduced in Court during trial. As held by the Supreme Court in Bandar Builder (supra) and the Federal Court in Owen Sim Liang Khui (supra), the fact that a plaintiff's case is weak is no reason for Courts to strike out his pleadings." 175 [15]. The pleadings disclose a sufficient factual nexus between the defendants’ potential liability in the main action and the alleged involvement of the third=party. In these circumstances, it cannot be said that the third-party notice is plainly and obviously unsustainable. As emphasised by the Federal Court in Seruan 180 Gemilang Makmur Sdn Bhd v Kerajaan Negeri Pahang Darul Makmur & Anor [2016] 3 MLJ 1; [2016] 2 MLRA 263; [2016] 3 CLJ 1; [2016] 2 AMR 795, a claim should only be struck out where its unsustainability is apparent on its face without the need for lengthy and mature consideration of the issues of fact or law. 185 Where the determination of the matter would require the court to examine disputed facts or resolve conflicts of evidence, such an exercise would effectively amount to a mini-trial, which is inappropriate in summary proceedings and must properly be determined at trial. His Lordship Ramli Ali FCJ (as he then was), in 190 Seruan Gemilang Makmur Sdn Bhd (supra) puts it in these words: S/N ctQn1RR7Fk61yT/yFktjg “The basic test for striking out as laid down by the Supreme Court in Bandar Builder is that the claim on the face of it must be ‘obviously unsustainable’. The stress is not only on the word 195 ‘unsustainable’ but also on the word ‘obviously’ ie the degree of unsustainability must appear on the face of the claim without having to go into lengthy and mature consideration in detail. If one has to go into lengthy and mature consideration in detail of the issues of law and/or fact, then the matter is not appropriate 200 to be struck out summarily. It must be determined at trial.” (Underlined emphasised) [16]. This court finds, the third-party notice discloses triable issues 205 arising from the pleaded involvement of the third-party in the impugned transactions. The claim is not plainly unsustainable and must properly be determined at trial. Effect of the Derivative Leave [17]. A significant portion of the plaintiff’s argument rests on the fact that 210 the Court of Appeal has already granted leave for this derivative action. Therefore, the plaintiff contends that the third-party notice is inconsistent with that leave and constitutes a collateral attack on the Court of Appeal’s decision. [18]. I cannot agree with the plaintiff on this point. The principles 215 governing leave for derivative actions, as discussed in Dato' Seri Timor Shah Rafiq v. Nautilus Tug & Towage Sdn Bhd and another appeal [2024] 4 CLJ 499; [2024] MLJU 496 and Celcom

(M) Bhd v. Mohd Shuaib Ishak [2011] 3 MLJ 636; [2010] 2 MLRA 202; [2010] 3 CLJ 808, concern a limited inquiry into "good faith" 220 S/N ctQn1RR7Fk61yT/yFktjg and the "best interests of the company." The leave court does not determine final issues of liability, nor does it adjudicate on the apportionment of responsibility among various alleged wrongdoers. [19]. As noted in Celcom (M) Bhd (supra), leave is a filtering process. 225 Once leave is granted and the action is commenced, the procedural rules of the court apply, including the right to issue a third-party notice under the Rules of Court 2012. 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. 230 [20]. The defendants contend that the plaintiff’s argument misconceives the nature and purpose of the leave stage in a derivative action. At that stage, the court’s inquiry is limited to whether the complainant is acting in good faith and whether the proposed action appears to be in the best interest of the company. Issues of liability, 235 contribution, or indemnity between alleged wrongdoers do not arise at that stage. [21]. Third-party proceedings can only arise after the action has been commenced and the defendants have been served with the statement of claim, when the precise allegations and reliefs 240 claimed become clear. It is only then that the necessity to seek indemnity or contribution from another party becomes procedurally relevant. [22]. Accordingly, the defendants submit that there was no procedural basis to pursue third-party proceedings at the leave stage, as there 245 S/N ctQn1RR7Fk61yT/yFktjg was no writ, no statement of claim, and no opportunity to invoke the procedure under Order 16 of the Rules of Court 2012. [23]. The issuance of the third-party notice in the present proceedings therefore does not constitute a backdoor attempt or a second bite of the cherry. Rather, it represents the defendants’ legitimate 250 procedural right to bring before the court all parties who may have participated in the impugned transactions, so that questions of liability and contribution can be determined in the same action. [24]. The defendants further submit that allowing the third-party notice serves the purpose of the third-party procedure, namely, to avoid 255 multiplicity of proceedings and to ensure that all related issues arising from the same transactions are determined together at trial. [25]. Accordingly, the grant of derivative leave does not bar the defendants from issuing a third-party notice. Leave determines only whether the action may proceed, not liability. The third-party 260 procedure properly ensures all potentially responsible parties are before the court for determination. Fiduciary Duty and Joint Liability argument [26]. The plaintiff further contends that directors owe fiduciary duties only to the company, not to each other, and that no claim for 265 indemnity can arise between them. In Dato’ Abul Hasan Mohamed Rashid v Multi-Code Electronics Industries (M) Bhd & Anor [2012] 5 MLJ 176; [2012] 2 MLRA 613; [2012] CLJU 258, His Lordship Abdul Malik Ishak JCA, stated: S/N ctQn1RR7Fk61yT/yFktjg “[22] The law is quite simple. A director owes no duty to his fellow 270 director. His duties as a director are owed to the company. The duties of a director are amply set out in s 132 of the Companies Act 1965 and it reflects the common law position.” Based on this principle, the plaintiff submits that since the fiduciary 275 duty of directors is owed solely to the company, no claim for indemnity or contribution can arise between directors themselves. This court is unable to accept the plaintiff’s submission. It is correct that directors owe fiduciary duties to the company and not to fellow directors. However, it does not follow that no claim for indemnity or 280 contribution can arise between directors at all. Contribution may still arise if the directors are joint tortfeasors in respect of the same loss. [27]. The primary legal basis for contribution is Section 10(1)(c) of the Civil Law Act 1956. This section allows a tortfeasor who is liable for damage to recover contribution from any other tortfeasor who 285 is, or would if sued have been, liable in respect of the same damage. Append below Section 10(1)(c) Civil Law Act 1956: "(c) any tortfeasor liable in respect of that damage may recover contribution from any other tortfeasor who is, or would if sued have been, liable in respect of the same damage, whether as a 290 joint tortfeasor or otherwise, so, however, that no person shall be entitled to recover contribution under this section from any person entitled to be indemnified by him in respect of the liability in respect of which the contribution is sought." 295 [28]. The plaintiff’s argument overlooks the true nature and purpose of third-party proceedings. The defendants’ claim for contribution is not premised on the existence of any fiduciary duty owed by one S/N ctQn1RR7Fk61yT/yFktjg director to another. Rather, the claim is founded on the allegation that the third party participated in the same transactions that are 300 now said to have caused loss to the company. [29]. In Sime Darby Bhd & Ors v Dato’ Seri Ahmad Zubair @ Ahmad Zubir Hj Murshid & Ors (supra), the court explained that liability as a joint tortfeasor arises where there is active participation or procurement of the wrongful act, and that mere presence or 305 passive knowledge would be insufficient. Justice Lee Swee Seng states: “To be liable as a joint tortfeasor, the person must have been involved in the commission of the wrongful act, whether by procuring it, inducing it, or by participating in a common design 310