INDEPENDENT OIL TOOLS LIMITED v RAMLI BIN MD NOR & ORS

CaseAnalysis
| [2018] MLJU 133

Independent Oil Tools Ltd v Dato' Ramli bin Md Nor & Ors
[2018] MLJU 133
Malayan Law Journal Unreported

HIGH COURT (KUALA LUMPUR)

Azizul Azmi Adnan J:

[1]The applicant in this case, Independent Oil Tools Limited (a company incorporated in the United Arab
Emirates) made an application under section 348 of the Companies Act 2016 to obtain leave of court to commence
a derivative action for and on behalf of the third respondent, Independent Oil Tools Malaysia Sdn Bhd (the “JV
Company”), to recover sums due on unpaid invoices from a company known as Olio Resources Sdn Bhd (“Olio”).
Olio is the majority shareholder in the JV Company.

[2]I allowed the application.

[3]The applicant holds 30% of the issued shares in the JV Company, with the remaining shares being held by Olio.
The rights and obligations between the applicant and Olio qua shareholders are governed by a Joint Venture
Agreement dated 27 November 2012. There are four directors in the JV Company. Each of the applicant and Olio
has two nominees to the board.

[4]The applicant supplies equipment for use in the oil and gas industry.

[5]Under the commercial terms of the joint venture between the parties, the applicant supplied equipment to the JV
Company, which equipment was then supplied or rented to Olio, to be utilised in Petronas-related projects in
Malaysia.

[6]The applicant contended that the JV Company was owed money by Olio under invoices issued by the JV
Company to Olio. The JV Company, however, has not taken any action to recover the sums owed. The managing
director of the JV Company is a nominee of the applicant, and therefore it would have been quite possible for the
managing director to have exercised his executive powers to commence a suit for and on behalf of the JV Company
against Olio. Nonetheless, the applicant has, in an abundance of caution, commenced the originating summons to
obtain leave of court to commence the derivative action. This, according to Mr Saranjit for the applicant, was to
forestall any argument being raised in the subsequent writ action that the JV Company lacked locus or authority to
prosecute its claim.
The requirements under the Companies Act 2016

[7]Prior to 2007, there was no statutory right to commence a derivative action on behalf of a company. Aggrieved
parties had therefore to rely on the common law in order to commence an action to seek redress for a wrong done
to a company or to recover debts or damages that were claimed to be due to a company. A putative plaintiff had to

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show that it came within one of the accepted exceptions to the “proper plaintiff” rule in Foss v Harbottle (1843) 2
Hare 461.

[8]The Companies (Amendment) Act 2007 introduced many new provisions, chief among which were substantial
(and much needed) modifications to directors’ duties. A new section 181A was also introduced, which created a
statutory right to commence a derivative action. The common law right was however preserved.

[9]The recently introduced Companies Act 2016 maintains the substance of the previous sections 181A to 181E of
the Companies Act 1965, with one critical difference: the common law right to commence or defend a derivative
action has now been abrogated.

[10]The right to initiate, intervene in, or to defend a proceeding on behalf of a company is granted (and granted
exclusively) under section 347 to a “complainant”. Section 345 defines a complainant to include a member of a
company, 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 person ceased to be a member), a director of a company
and the Chief Executive Officer of the Companies Commission of Malaysia in the case of companies whose affairs
are under investigation under section 590.

[11]Leave of court must first be obtained before a derivative action may be commenced. The proceedings that were
before this court were to obtain the leave that was required under section 347(1) of the Companies Act 2016. Under
section 348(2), the complainant must give 30 days’ notice in writing to the directors of his intention to apply for leave
of court. Once leave has been obtained, the complainant has 30 days from the date on which leave was granted to
commence the proceedings in the name of the company.

[12]In exercising its discretion whether or not to grant leave to the complainant to commence a derivative action,
the court must consider whether the complainant is acting in good faith and whether it appears prima facie to be in
the best interest of the company that the application for leave be granted: section 348(4).
Is the applicant a “complainant”?

[13]The applicant in this action, Independent Oil Tools Limited, is a shareholder in the JV Company. As such, it is
a “complainant” within the meaning of section 345 of the Companies Act 2016.
The requirement for notice

[14]The applicant exhibited a letter Exhibit AE-5 in Enclosure 4 signed by its nominee directors giving notice
pursuant to section 348(2). This letter was given to the company secretary of the JV Company. The company
secretary then forwarded this letter via email to the other directors of the JV Company, namely the first and second
respondents here.

[15]The respondents raised a number of reasons as to why this notice was defective:
(a) the first and second respondents denied having received the notice issued through the company secretary;
(b) the letter signed by the directors nominated by the applicant was not dated; and
(c) because the letter was attached to an email sent on behalf of the company secretary purportedly to the first
and second respondents, the letter in fact was not sent by the applicant but rather by someone acting for
the company secretary of the JV Company. This, it was submitted, was in contravention of section 348(2),
which requires the notice to be sent by the complainant itself.

[16]The function of the notice provision is to give an opportunity to the company to consider, and to respond and
accede to a request by a complainant for proceedings to be commenced in the name of the company. Thus, if a
notice is sent to a company, and the company then responds by stating that it has taken note of the contents of the
letter in which the notice is comprised, and will be commencing legal action in the manner suggested or requested,
there would be no further need for the complainant in such a case to proceed to make the application to obtain
leave of court pursuant to section 348.

[17]Even if it is contended that the notice had not been duly given, the company would nonetheless become aware
of the proposal for a derivative action to be commenced when it is served with the cause papers for the application
under section 348. The company would then be able to consider the facts underlying the application and it would be
open to the company after due consideration to either agree to commence the litigation action (in which case the

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application would be withdrawn), or to agree to the application itself (in which case the application would be
approved by the court on the basis that it is unopposed).

[18]Here, the respondents have taken the course of opposing the application. From the time the cause papers were
served on the JV Company on 1 August 2017 and the date of the hearing on 9 October 2017, the respondents
would have had ample opportunity to consider the reasons put forth by the applicant to support the application for
derivative action. They could have acceded to the request to commence the litigation action against Olio, in which
case the application would have been wholly unnecessary, and they would have been entitled to costs if the court
was of the view that the requirements for notice had not been strictly complied with. Having instead opposed the
application, it would not lie in their mouths to then state that there has been inadequate notice. That particular
horse, in my respectful view, has long since bolted.

[19]Even if were contended that the notice requirement must be strictly complied with in all cases, I am satisfied
that there had been adequate written notice given, as evidenced by the documentary trail in Exhibit AE-5. The
averment contained in paragraph 25 of the respondents’ affidavit in reply in Enclosure 7 is, in my view, nothing
more than a bare denial. I was satisfied that, on balance, the notice had indeed been given to the first and second
respondents through the email sent on behalf of the company secretary. That the letter itself was undated is of no
particular consequence, as what matters is the date on which the notice was sent and received.

[20]I am also of the view that the fact the letter was sent through the company secretary was immaterial. The
company secretary was a mere conduit through whom communications were routed, in much the same way that
communications routed through common carriers such as the postal service do not detract from the fact that in the
eyes of the law, the writer of the communications is the person from whom they emanate.
The requirement of good faith

[21]The Court of Appeal in the case of Celcom (M) Bhd v Mohd Shuaib Ishak [2011] 3 MLJ 636 explained the
requirement of good faith in connection with an application for leave to commence a derivative action in the
following terms:

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.181B(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.

[22]The affidavits affirmed on behalf of the applicant, not unexpectedly, put forth the contention that the application
had been made in good faith. Nonetheless, the honest belief on the part of the applicant is not by itself sufficient.
The application must also not be one that is made for a collateral purpose. Of course, the bringing of the suit may
also ultimately be in the interests of the applicant, but the simple fact that the interests of the applicant is congruent
with the interests of JV Company does not prevent it from seeking and obtaining leave to commence a derivative
action: See, for example, Richardson Greenshields of Canada Ltd v Kalmacoff (1995) 22 Or (3d) 577 (Ont CA).

[23]The respondents put forward three reasons why I ought to find that the application was not made in good faith:
(a) the court was not seised with the jurisdiction to hear the matter, as there existed an arbitration agreement
in the terms of the Joint Venture Agreement between Olio and the applicant; and
(b) the application was intended to allow the applicant to be paid in preference to all other creditors of the JV
Company upon its liquidation; and
(c) the applicants have secretly been misappropriating profits of the JV Company.

[24]I deal with each of these contentions in turn.

[25]The Joint Venture Agreement was entered into between Olio and the applicant for the purposes of establishing
the JV Company and to regulate their rights inter se in their capacity as shareholders. The JV Company was not a
party to the Joint Venture Agreement.

[26]In my view, the arbitration agreement contained in the Joint Venture Agreement does not apply to the present
dispute. Here, the applicant was seeking to obtain leave in order that the JV Company initiates a suit against Olio
for debts that were contended to be due from Olio to the JV Company. The dispute does not concern any rights and

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obligations accrued between Olio and the applicant in their capacity as shareholders in the JV Company. Indeed,
the simple fact that the JV Company is not a party to the Joint Venture Agreement means that the arbitration
agreement in clause 15 of the Joint Venture Agreement does not bind the JV Company and has no application in
the present case.

[27]The contention that the derivative action will result in the applicant being paid in advance to the other creditors
of the JV Company has not been made out. In the event that the JV Company is successful in recovering any debts
that may be due from Olio, that money will accrue to the JV Company, and not to the applicant. If the applicant is a
creditor of the JV Company and the JV Company is wound up, then the applicant will simply have to claim as an
unsecured creditor of the JV Company in its liquidation. Its debts would rank pari passu with those of the general
body of creditors.

[28]In relation to the contention of misappropriation of profits of the JV Company, it was advanced for the
respondents that applicant had caused the JV Company to enter into agreements to rent equipment from a
company known as Drill Stem Middle East LLC (“Drill Stem”). These equipment were then supplied to various
customers. It was contended that this arrangement was carried out without the approval of the board of directors of
the JV Company. The arrangement came to light when Drill Stem sued the JV Company for overdue rental
payments. Eventually the dispute was settled by the payment of USD800,000 by the JV Company to Drill Stem.

[29]In the Singapore case of Fong Wai Lyn Carolyn v Airtrust (Singapore) Ltd [2011] 3 SLR 980, the plaintiff Ms
Fong, who was a director of Airtrust (Singapore) Ltd, sought leave of court to commence an action against Ms Kao,
the managing director of the company, for breach of fiduciary duties. It was contended that Ms Kao had diverted
business opportunities away from the company and had also entered into agreements and transactions in which
she or her relatives had interests. It was advanced on behalf of Ms Kao that Ms Fong had herself been guilty of
breaches of fiduciary duty by letting her father, who had founded the company, run it with Ms Kao. After setting out
the basic facts relating to these contentions, Judith Prakash J held:

75 However, even if I accepted that both of the above arguments had some evidential basis, I did not see how Ms Fong’s
conduct was relevant to the inquiry of good faith. This was because the law indicates that only conduct that related to the
commencement of the derivative application would be relevant to substantiate any alleged lack of good faith. Woon’s
Corporations Law at para 603 pointed out:

Note that the good faith needed under s216A(3)(b) is good faith with respect to commencing the derivative action, not good
faith generally in all past conduct of the applicant…

[30]Returning to the present case, the allegations relating to Drill Stem, whatever their merits might be, do not in
any way relate to the amounts said to be owed by Olio to the JV Company, which formed the basis for the
application for leave to commence the derivative action. As such, I was unable to agree with learned counsel for the
respondents that the lack of good faith (if any) on the part of the applicant relating to the Drill Stem incident
precluded its application here.
Whether the action was prima facie in the interests of the company

[31]The final requirement to be fulfilled in connection with an application for leave to commence a derivative action
is that the applicant must satisfy the court that the action is prima facie in the best interest of the company. It is
sometimes said that the applicant has the additional burden of showing that he has a reasonable basis for his
complaint. I am of the respectful view that these requirements are one and the same: if it cannot be shown that the
action has some semblance of merit, then it would follow that pursuing the action would not be in the best interest of
the company.

[32]In the present case, the applicant contended that Olio owed the JV Company an amount in excess of USD1
million. The respondents did not dispute that there existed debts due from Olio to the JV Company, but argued
instead that:
(a) the final amount owed by Olio to the JV Company had yet to be ascertained, due to an ongoing
reconciliation exercise in respect of the accounts of the JV Company; and
(b) Olio was owed commissions by the applicant.

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[33]In my judgment, the fact that the internal accounting and record-keeping affairs of the JV Company had not yet
been completed was no bar for a claim to be commenced against Olio. Indeed, it would be for the court to
determine what actually and truly was owed.

[34]On the issue of the commissions owed by the applicant to Olio, such commissions would have no bearing on
the debts due from Olio to the JV Company. Such commissions were not owed by the JV Company, and hence
there was no question of any set off arising.

[35]I was therefore satisfied that the putative claim was not wholly devoid of merit and that it would be in the best
interests of the JV Company for the debt to be pursued against Olio.
Whether the application may validly be made in an abundance of caution

[36]It was advanced for the respondents that the managing director of the JV Company (whom it will be recalled is
a nominee of the applicant) was already vested with wide powers of management, and that accordingly the
managing director could proceed to commence legal action against Olio without the need to either obtain board
approval or to make an application for leave of court to commence a derivative action. It was further argued that the
applicant’s position that the application was made “in an abundance of caution” did not constitute good grounds to
support an application under section 348 of the Companies Act 2016. There was no evidence—according to the
respondents—that the directors nominated by Olio would oppose the decision to file an action against Olio. For
these reasons, learned counsel urged the court that the application ought to be dismissed in limine.

[37]I am of the view that there was nothing to prevent the applicant from seeking leave of court to commence a
derivative action in the circumstances of this case. It would be entirely proper for the applicant to anticipate any
potential defence that Olio may raise in the subsequent action.

[38]On the contrary, I was of the view that the argument raised on behalf of the respondents to be disingenuous. If
indeed the Olio-nominated directors (being the first and second respondents here) would not have resisted any
proposal to commence a recovery action against Olio, then why have they opposed the application?

[39]There also remains a possibility that the argument put forth on behalf of the first and second respondents that
the managing director has the requisite authority to commence the action against Olio would give rise an estoppel
that would prevent Olio from raising any objection on any lack of authority in the subsequent proceedings. However,
I see no necessity for me to rule on this point.

[40]For the reasons explained, the application was allowed with costs.

End of Document

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