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Damages for Oppression: an Illusory Remedy?

26 November 2013

Federal Court rules that damages may be granted as a remedy in section 181 oppression petitions.


Section 181 of the Companies Act 1965 is a well-known and frequently-invoked provision of the Act in the sphere of corporate litigation. The said section allows the court, on the application of an aggrieved minority shareholder, to make such orders as it thinks fit to remedy any oppression caused where:-

(a) the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the shareholders of the company or in disregard of the applicant's interests as shareholder of the company; or
(b) some act of the company has been done or is threatened or that some resolution of the shareholders has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the shareholders (including the applicant).

Major common law jurisdictions invariably have in their respective companies legislation provisions comparable to section 181 of the Companies Act, all of which are directed towards a legitimate policy concern namely the protection of the interests of minority shareholders in a company. As the Privy Council observed in the leading Malaysian case of Re Kong Thai Sawmill [1978] 2 MLJ 227, section 181 of the Act envisages a situation where there is "a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect", with an awareness of the interests of the monitory shareholders and "an evident decision to override it or brush it aside or to set at naught the proper company procedure".

Section 181(2) of the Act allows the courts to make such orders as it thinks fit with the view to bringing to an end or remedying the matters complained of, which orders include without limitation: (a) direct or prohibit any act or cancel or vary any transaction or resolution; (b) regulate the conduct of the affairs of the company in future; (c) buyout of the shares of the minority (or even majority); (d) reduction of capital; and (e) winding up of the company. The court has a wide discretion as to the relief which it may grant: Re Kong Thai Sawmill.

Section 181(2) is however silent as to whether a Malaysian court has the jurisdiction to award damages or monetary compensation in cases where minority oppression has been established. This issue was addressed by the Federal Court in the recent decision of Ki Tak Seng @ Kee Tak Sang v Koh Jui Hiong @ Koa Jui Heong and Others (Rayuan Sivil No. 02-84-11/2012(M), 29 October 2013), where the Federal Court has held that the courts did have such jurisdiction to award damages as a remedy under section 181 of the Companies Act 1965.

At the outset, it should be noted that on the facts of Ki Tak Seng, the Federal Court held that the award of damages to the Petitioners was not justified. According to the court, the action was brought by the 1st to 8th Petitioners in respect of alleged wrongdoings committed by the majority shareholder against the 9th Petitioner, which was the company itself. Damages were awarded to the 9th Petitioner to compensate it for losses caused by the misconduct of the majority shareholder. The parties had by consent set aside an an order to buyout the shares of the minority, leaving damages as the sole remedy granted in respect of the "oppression". In such circumstances, the Federal Court effectively held that the section 181 petition was an abuse of process as the proper course of action was for the Petitioners to pursue a derivative action in the name of the 9th Petitioner against the majority shareholder. However, the Federal Court proceeded to consider the issue of the jurisdiction of the courts to award damages under section 181 of the Act.

After reviewing numerous authorities from common law jurisdictions such as England, Singapore, Australia and Hong Kong, the Federal Court held that although damages is not a relief specifically mentioned in section 181(2), the said sub-section "is a non-exhaustive list that does not limit other types of relief that the court could fashion, with the view to bringing to an end or remedying the matters complained of", and that "relief of a compensatory nature to an oppressed member is within the discretion of the court to award." The Federal Court concluded that:-

An order of a compensatory nature can be made in a petition under section 181(1) of the Companies Act 1965, if the order is with the view to bring an end or to remedy the matters rightly complained of under section 181(1)(a) or (b).

This statement of law by the Federal Court is uncontroversial as far as it goes, but it seems to ultimately beg the question, as the Federal Court does not appear to have given any clear guidance as to when damages by itself will be an appropriate remedy to "to bring an end to or to remedy" the oppression complained of.

On the one hand, where the true victim of the legal wrong is the company itself, and the ultimate objective is to seek compensation or restitution in respect of such legal wrong, it is difficult to envisage circumstances in which a section 181 petition, as opposed to a derivative action, would be appropriate. Indeed, it has been held by high authority that the circumstances in which an order of compensation or restitution to the company itself could properly be made would in any case of complexity, be rare and exceptional: Re Chime Corp Ltd (2004) 7 HKCFAR 546.

On the other hand, where the minority shareholders of a company are seeking compensation for legal wrongs done to them which has occasioned loss, there are formidable obstacles to the recovery of damages in a section 181 petition. For example, the Federal Court has held that breaches of fiduciary duties by themselves do not amount to oppression (Pan-Pacific Construction Holdings Sdn Bhd v Ngiu-Kee Corporation (M) Bhd [2010] 6 CLJ 721), and that breaches of shareholders agreements do not constitute oppression (Jet-Tech Materials Sdn Bhd v Yushiro Chemical Industry Co Ltd & Ors [2013] 2 MLJ 297). It is also well-established that it is not open to shareholders to claim for losses which are merely reflective of the losses suffered by the company: Johnson v Gore Wood & Co [2002] 2 AC 1, a point which was not considered by the Federal Court in Ki Tak Seng.

The irony is that the numerous difficulties with awarding compensation or restitution to either the minority shareholders or the company itself in a section 181 petition arguably demonstrate or explain why section 181(2) of the Companies Act 1965 did not contain specific provision for the award of damages as relief for oppression in the first place.

The difficulty with awarding damages as a relief under section 181 lies in the fact that damages are a specific remedy responding to a specific legal wrong done to a specific person which has occasioned specific loss. It is directed towards remedying legal wrongs committed in the past, but is in its nature inherently incapable of putting an end to ongoing oppressive conduct, or preventing future mismanagement of the company, or resolving deadlocks or breakdowns in the relationship between shareholders. On the contrary, the broad means by which minority oppression may in most cases be effectively ended or remedied appear to have already been adequately provided for by section 181(2) of the Act.

The cases in which damages or compensation have been awarded in section 181 petitions (as discussed by the Federal Court in Ki Tak Seng) are perhaps best explained by the observation of Lord Scott of Foscote NPJ in Re Chime Corp Ltd as being cases in which "the jurisdiction to do so has been assumed, that many orders of that sort have been made and that it is highly convenient that they should have been made." One suspects that a closer examination of these authorities will reveal the reality that this confusion of principle is invariably caused by the determination of the courts not to allow a defendant majority shareholder who has been guilty of wrongful conduct to escape liability.

Although the discretion to grant relief under section 181 of the Companies Act 1965 is undoubtedly wide, the truth is that this discretion is arguably not as wide as we think it to be, and certainly is not unlimited in scope. Although it has now been authoritatively held that damages may be awarded under a section 181 petition, it remains to be seen whether in practice this will amount to no more than the recognition of an illusory remedy.



 
 


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