Shoon Wui Chin v 1. ) Chan Kien Woh (BA-24NCC-5-01/2023)

CHAN KIEN WOH (No. K/P: 621220-10-7857)

SANJUNG CEKAP SDN BHD [(No. Syarikat: 200901030375 (873481-K)] …DEFENDAN-DEFENDAN GROUNDS OF JUDGMENT

This is the Plaintiff’s application for leave to initiate derivative proceedings under section 348 of the Companies Act 2016 (CA 2016) on behalf of the Second Defendant, a company, against the First Defendant, pursuant to section 347 of the CA 2016 (the Application).

At the hearing on 1 April 2024, the learned counsel for the Plaintiff informed the Court that the Plaintiff is withdrawing prayers 2, 3, 4, 5, 6, 7, and 8 of the Originating Summons. Consequently, the Court granted the Plaintiff’s oral application to withdraw these prayers. Thus, the Court only needs to decide whether to grant leave to the Plaintiff to initiate the derivative action on behalf of the Second Defendant against the First Defendant as per prayer 1 of the Originating Summons.

Sanjung Cekap Sdn Bhd, the Second Defendant, is incorporated in Malaysia, with the Plaintiff and the First Defendant serving as Directors and equal Shareholders.

The Plaintiff discovered that the First Defendant committed various breaches and abuses of his fiduciary and statutory duties to the Second Defendant, acting against its interests by engaging in illegal, wrongful, and unlawful activities.

Consequently, a Notice in accordance with section 348(2) of the CA 2016 was issued on 6 December 2022 to the First Defendant, informing him of the various breaches he committed.

Hence, on 19 January 2023, the Plaintiff filed the present Originating Summons, seeking leave under section 347 of the CA 2016 to initiate derivative proceedings against the First Defendant and/or other individuals on behalf of the Second Defendant.

The Plaintiff raised the following grounds in support of her contention that the First Defendant had breached and abused his fiduciary duties owed to the Second Defendant: a. The First Defendant had made an unauthorised transaction of RM1,186,000.00 to his personal account. b. The First Defendant had misused the assets and resources of the Second Defendant’s company for the business of the First Defendant’s other company known as Kiara Kenali Sdn. Bhd. (Kiara Kenali) c. The First Defendant had failed, refused and/or neglected to take necessary actions for the best interest of the Second Defendant in an Industrial Court matter filed by the ex-employee of the Second Defendant. d. The First Defendant had failed and/or neglected to return the Second Defendant’s money in the sum of RM47,000.00.

The law relating to leave to initiate derivative action is stated in sections 347 and 348 of the CA 2016.

Section 347 of CA 2016 states as follows: “347. Derivative proceedings

A complainant may, with the leave of the Court initiate, intervene in or defend a proceeding on behalf of the company.

Proceedings brought under this section shall be brought in the company’s name.

The right of any person to bring, intervene in, defend or discontinue any proceedings on behalf of a company at common law is abrogated.”

Section 348 of CA 2016 states as follows: “348. Leave of Court

An application for leave of the Court under section 347 shall be made to the Court without the need for an appearance to be entered.

The complainant shall give thirty days’ notice in writing to the directors of his intention to apply for the leave of Court under section 347.

Where leave has been granted for an application under section 347, the complainant shall initiate proceedings in Court within thirty days from the grant of leave.

In deciding whether or not the leave shall be granted, the Court shall take into account whether –

the complainant is acting in good faith; and

it appears prima facie to be in the best interest of the company that the application for leave be granted.

Any proceedings brought, intervened in or defended under this section shall not be discontinued, compromised or settled except with the leave of the Court.” [emphasis added]

Section 345 of the CA 2016 defined a “complainant” as follows: “For the purposes of this Division, "complainant" means-

a member of a company, or a person who is entitled to be registered as a member of a company;

a former member of a company if the application relates to the circumstances in which the member ceased to be a member;

any director of a company; or

the Registrar, in the case of a company declared under section 590.” [emphasis added]

Hence, the Plaintiff must comply with the following requirements under section 348 of the CA 2016 to obtain leave to commence the derivative action against the First Defendant: a. the Plaintiff shall give thirty (30) days notice in writing to the directors of his intention to apply for such leave; b. leave will only be granted if the Plaintiff is acting in good faith and if it is prima facie in the best interest of the company.

Upon examining the cause papers and considering the written and oral submissions by the parties, I am satisfied that the Plaintiff has met the requirements for leave to initiate a derivative action on behalf of the Second Defendant against the First Defendant. Accordingly, I granted the Plaintiff’s Application. a. The First Defendant had made an unauthorised transaction of RM1,186,000.00 to his personal account.

The Plaintiff contended that at the material time, there was an ongoing arbitration matter between R.N. Const & Dev JV Sanjung Cekap (R.N. Const & Dev JV) and SPP Development Sdn. Bhd., whereby R.N. Const & Dev JV was a joint venture company of the Second Defendant.

In the said arbitration against SPP Development Sdn. Bhd., the total Arbitration Award granted to R.N. Const & Dev JV was RM2,642,923.72. This award was to be paid first to R.N. Const & Dev JV, which would then transfer the money to the Second Defendant's account.

The award was paid by SPP Development Sdn. Bhd. in two tranches: the first payment of RM1,480,975.23 and the second payment of RM1,186,000.00. The Second Defendant received the first tranche on 27 March 2019, as evidenced by the bank-in slip in exhibit SWC-18.

However, the Plaintiff discovered that the second tranche of RM1,186,000.00 was not transferred by R.N. Const & Dev JV to the Second Defendant.

The Plaintiff stated, instead, the First Defendant made an unauthorised transaction, wrongfully transferring the balance of the arbitration award, RM1,186,000.00, to his personal account via Cheque No. 0814512, as shown in exhibit SWC-2, R.N. Const & Dev JV's Statement of Account for January 2020.

Therefore, the Plaintiff contended that the First Defendant unlawfully took RM1,186,000.00, breaching and abusing his fiduciary duties owed to the Second Defendant.

In response, the First Defendant asserted that exhibit SWC-2 pertains to the bank statement of another company, R.N. Const & Dev. JV Sanjung Cekap Sdn Bhd, and not Sanjung Cekap. Thus, exhibit SWC-2 is completely irrelevant to this case. b. The First Defendant had misused the assets and resources of the Second Defendant’s Company for the business of the First Defendant’s other Company known as Kiara Kenali Sdn Bhd

The Plaintiff further contended that the First Defendant engaged in actions contrary to the interests of the Second Defendant by misusing its assets and resources to benefit his other company, Kiara Kenali.

The Plaintiff outlined the following actions by the First Defendant that had caused significant harm to the Second Defendant’s business:

Both the Second Defendant and Kiara Kenali operate in the same industry, namely Building and General Construction. The Plaintiff noted that Kiara Kenali operates from the same address as the Second Defendant.

Kiara Kenali has been occupying and operating in the same office premises as the Second Defendant without paying rent, despite the Second Defendant covering the rental costs since 2015 as in exhibit SWC-4.

Thus, the First Defendant misused the Second Defendant’s assets by using its rental payments to support Kiara Kenali.

Additionally, the First Defendant used courier services paid for by the Second Defendant to send documents related to Kiara Kenali.

Exhibit SWC-5, specifically the consignment slip from City Link, shows documents sent to CK Yap & Associates, the auditors for Kiara Kenali, demonstrating this misuse.

Therefore, it is evident that the First Defendant misused the Second Defendant's resources to benefit Kiara Kenali.

Moreover, the First Defendant instructed employees of the Second Defendant to perform tasks for Kiara Kenali, using the Second Defendant's assets such as computers, printers, WiFi, and other office equipment.

Exhibit SWC-6 includes screenshots from the Second Defendant’s computer, showing employees working on tasks for Kiara Kenali during the Second Defendant’s working hours.

Thus, it is clear that the First Defendant misappropriated the Second Defendant’s assets by directing its employees, who are paid by the Second Defendant, to perform tasks for Kiara Kenali.

The First Defendant contended that the Plaintiff’s claim that Kiara Kenali was established as a competitor to Sanjung Cekap is completely misleading. Sanjung Cekap was incorporated on 30 September 2009, whereas Kiara Kenali was incorporated on 20 August 2003, six years before Sanjung Cekap's incorporation. Therefore, Kiara Kenali could not have been created as a competitor since Sanjung Cekap did not exist at that time. Additionally, Kiara Kenali is not currently operating, thus Kiara Kenali’s revenue is zero, indicating it is no longer in business. c. The First Defendant had failed, refused and/or neglected to take necessary actions for the best interest of the Second Defendant in an Industrial Court matter filed by the ex-employee of the Second Defendant

The Plaintiff further stated that a former employee of the Second Defendant filed a suit at the Industrial Court alleging constructive dismissal. Despite being a Director of the Second Defendant, the First Defendant failed, refused, and/or neglected to take necessary actions in the best interest of the Second Defendant.

The Plaintiff claimed that she had to take all necessary actions, including appointing solicitors to represent the Second Defendant in the suit. Additionally, the Plaintiff personally paid the legal fees amounting to RM18,000.00 on behalf of the Second Defendant (see exhibit SWC-7).

Not only did the First Defendant fail to take the necessary actions to defend the Second Defendant, but he also sent a notice to the solicitors acting for the Second Defendant, instructing them to cease representation due to an alleged lack of a Board of Directors resolution (see exhibit SWC-10). Consequently, the solicitors discharged themselves, and the Plaintiff had to appoint new solicitors to represent the Second Defendant.

The Plaintiff alleged that the First Defendant’s actions clearly demonstrated a lack of regard for the best interest of the Second Defendant and were aimed at preventing the Plaintiff from taking necessary actions.

The First Defendant also failed and refused to attend as a witness for the Second Defendant in the suit.

Furthermore, the Plaintiff paid the legal fees for the solicitors representing the Second Defendant out of her pocket, as the First Defendant refused to sign and approve the Second Defendant’s cheque for legal fees, claiming it was a personal liability of the Plaintiff.

The solicitors for the former employee sent several notices to the Second Defendant demanding the Award of RM85,725.00 granted by the Industrial Court. Payment could not be made because the First Defendant failed and refused to sign and approve the Second Defendant’s cheque, asserting it was the Plaintiff’s personal liability (see exhibit SWC-8).

The Plaintiff contended that the suit was brought against the Second Defendant and not personally against the Plaintiff. Therefore, the First Defendant’s claim is misleading, and his refusal to sign and approve the cheque clearly prejudices the Second Defendant, exposing the company to execution proceedings.

Based on the above, the Plaintiff claimed that the actions of the First Defendant clearly demonstrate his failure, refusal, and/or neglect to act in the best interest of the Company.

The First Defendant denied the Plaintiff’s contention and asserted that the Plaintiff's actions led to Sanjung Cekap becoming entangled in Industrial Court Case No. 19/4-1776/20 (IR Case), indicating that the IR Case was a direct consequence of the Plaintiff’s conduct in handling Sanjung Cekap’s former employee. d. The First Defendant had failed and/or neglected to return the Second Defendant’s money in the sum of RM47,000.00

The Plaintiff further stated that the First Defendant failed and/or neglected to return RM47,000.00 to the Second Defendant, thereby abusing his power as a Director of the Second Defendant.

The brief chronology of the First Defendant’s failure to return the Second Defendant’s money is as follows:

Via letters dated 17.05.2018 from Sabah Electricity Sdn. Bhd. to the Second Defendant, Sabah Electricity requested the Second Defendant to pay deposits of RM47,000.00 and RM76,000.00 respectively.

The First Defendant initially advanced the money on behalf of the Second Defendant, and on 21 August 2018, the Second Defendant reimbursed the First Defendant for the advanced amounts.

However, when Sabah Electricity refunded the deposits to the First Defendant, he returned only the sum of RM76,000.00 and failed and/or neglected to return the remaining RM47,000.00 to the Second Defendant (see exhibit SWC-15).

The Plaintiff noted that the First Defendant took the RM47,000.00 and has yet to return it to the Second Defendant.

Based on the above-mentioned facts and evidence, the Plaintiff contended that the First Defendant clearly failed, refused, and/or neglected to carry out his fiduciary duties as a Director of the Second Defendant and failed to act in the best interest of the Second Defendant.

It is undisputed that the Plaintiff is both a shareholder and a director of the Second Defendant. Therefore, the Plaintiff has the locus standi to apply for leave under section 348 of the CA 2016.

It is also undisputed that the Plaintiff provided the requisite 30-day notice to the First Defendant via a notice dated 6 December 2022, prior to filing this Application.

Therefore, this Court only needs to determine whether the leave sought is made in good faith and is prima facie in the best interest of the Second Defendant.

In determining ‘good faith’, the test is twofold: it is an honest belief on the part of the complainant, and the leave application is not brought for a collateral purpose. This was decided in Celcom (M) Bhd v. Mohd Shuaib Ishak [2011] 3 MLJ 636. The Court of Appeal held as follows: “[15] The second crucial requirement for the determination of the court in granting leave is the need for the respondent to show that he was acting in good faith in making this application (s 181 B(4)(a)). The onus of proof here is on the respondent on a balance of probabilities. The test of good faith is two-fold. One is an honest belief on the part of the respondent, and two, that this application is not brought up for a collateral purpose….” … [16] This second requirement will depend on the factual circumstance which comes before the court. This was stated by Palmer J in Swansson with these words: Nevertheless, in my opinion, there are at least two interrelated factors to which the courts will always have regard in determining whether the good faith requirement of s 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds this belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.”

Furthermore, in Salina Bt Mohamad Sukor v MVD International Sdn. Bhd. & Anor [2019] 9 MLJ 762, it was held that the existence of an arguable case indicates that the complainant is not acting in bad faith. The presence of a private interest does not necessarily undermine good faith if it coincides with the interests of the company. The Court stated as follows: “[20 ] Further in Mohd Shuaib Ishak v Celcom (M) Bhd [2008] 5 MLJ 857; [2008] 1 LNS 314, Ramly Ali J (as he then was) in considering the issue of good faith adopted and applied the following principle: The test for good faith was dealt with by the Supreme Court of British Columbia in Primex Investments Ltd v Northwest Sports Enterprise [1995] CanLII 717 (BC SC), where the court considered the requirement under section 225 of the BC Company Act in an action where the petitioner applies for leave to bring a derivative action in the name of Northwest Sports Enterprise Ltd against several of its current directors, together with companies in which some of them have an interest. Mr Justice Tysoe in finding the applicant acted in good faith appears to tie the requirement of ‘good faith’ to the test of the ‘interest of the company’. He stated that were there is an arguable case, the applicant cannot be said to be acting in bad faith because he wants the company to pursue what he genuinely considers to be a valid claim. In that case, there was no evidence the applicant was using the prospect of a derivative action as a threat in order to extract some advantage from the company. Tysoe J also indicates that an applicant advancing self-interest is not necessarily acting in bad faith. Hence, where there is an arguable case, it cannot be gainsaid that the plaintiff is acting in bad faith, even if the applicant is advancing self interest, if the applicant’s greater objective is to further the interest of the company as a whole. The presence of a private interest does not necessarily negate good faith if the same coincides with that of the company (see Ong Keng Huat v Fortune Frontier (M) Sdn Bhd & Anor [2015] 11 MLJ 604). The plaintiff has shown genuine and honest concerns about the wrong doings of Paramjeet, which would have dire consequences for the company if left unchecked. The plaintiff has clearly set out Paramjeet’s wrong doings and breaches of fiduciary duty and have produced documentary evidence in support of her allegations. Despite the other directors being notified of Paramjeet’s alleged breaches of fiduciary duty, the other directors have not taken any action to enquire into the complaint or take any action to safeguard the company’s interest. Instead, the other directors have sought to appoint Paramjeet to the board of directors. Thus, I find that the plaintiff has shown an arguable case against the putative defendants, which is prima facie in the interest of the company." [emphasis added]

In the present case, the Plaintiff’s main contention is on the first ground. The evidence shows that SPP Development Sdn. Bhd. made a payment of RM1,480,975.23 to R.N. Const & Dev JV. This payment was later transferred to the Second Defendant on 27 March 2017.

There is also evidence indicating that a payment of RM1,186,000.00 was withdrawn from R.N. Const & Dev JV. Furthermore, there is also a transfer of RM1,186,000.00 made to the First Defendant. These are documented in exhibits SWC-2 and SWC-28.

In his reply, the First Defendant merely claimed that the Statement of Account referenced in SWC-2 does not pertain to the Second Defendant.

It is undisputed that R.N. Const & Dev JV secured a construction contract from SPP Development Sdn. Bhd., with the project subsequently subcontracted to the Second Defendant. The first tranche of payment was made by SPP Development Sdn. Bhd. to R.N. Const & Dev JV, and then transferred to the Second Defendant. Consequently, the First Defendant’s assertion that the two companies are unrelated and that the statement of account shown in SWC-2 is irrelevant does not diminish the need for further investigation into this matter.

In Tang Kwor Ham & Ors v Pengurusan Danaharta Nasional Bhd & Ors [2006] 5 MLJ 60, the Court of Appeal explained what the High Court needs to consider in a leave application. The Court of Appeal held as follows: “[10] To paraphrase in less elegant language what has been said in these cases, the High Court should not go into the merits of the case at the leave stage. Its role is only to see if the application for leave is frivolous. If, for example, the applicant is a busybody, or the application is made out of time or against a person or body that is immunised from being impleaded in legal proceedings then the High Court would be justified in refusing leave in limine. So too will the court be entitled to refuse leave if it is a case where the subject matter of the review is one which by settled law (either written law or the common law) is non-justiciable, eg, proceedings in Parliament (see art 63 of the Federal Constitution) ...” [emphasis added]

Thus, when considering a leave application, the Court's role is not to assess the merits of the case at this preliminary stage but to determine if the application is frivolous (See: Abdul Rahim bin Suleiman & Anor v. Faridah bt Md Lazim & Ors, [2016] 6 MLJ 449, CA). The Plaintiff must show that there is some substance in the grounds supporting the application, which the Plaintiff has successfully demonstrated. Additionally, the Court should grant leave if it is clear that there is a point warranting further investigation on a full inter partes basis, with all necessary evidence and legal arguments (see: Salina Bt Mohamad Sukor [supra]).

Having reviewed the grounds and evidence presented by the Plaintiff, I am convinced that the Plaintiff has provided credible evidence or at least sufficient material to warrant an inquiry through trial. This supports an honest belief that the Second Defendant is entitled to the sums in question, which the First Defendant should pay. Therefore, the intended action, aimed at recovering these sums for the Second Defendant, is in the best interest of the Second Defendant.

I find that the Application and the intended action are made in good faith and are prima facie in the best interest of the Second Defendant.

Furthermore, there is no evidence before this Court indicating that the Plaintiff has a collateral purpose that would undermine the good faith necessary for initiating proceedings on behalf of the Second Defendant against the First Defendant.

For the reasons stated above, I allowed the Plaintiff’s Application for leave to initiate a derivative action on behalf of the Second Defendant against the First Defendant as per prayer 1 in Enclosure 1 with costs of RM25,000.00. Dated: 26 July 2024 -sgd-JAMHIRAH ALI JUDICIAL COMMISSIONER High Court of Malaya at Shah Alam (NCVC 1) To the parties’ solicitors: For the Plaintiff : Ravinder Singh Sodhi (Messrs Gurmit Sodhi Chambers) For the Defendant : Cheong Ai Dee (Messrs Justin Wee)