Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution

Court of Appeal discusses the “good faith” requirement in a section 216A derivative action, and approves the use of the “abuse of process” test in determining whether an applicant’s collateral purpose amounts to bad faith.

This case before the Court of Appeal also involved an action brought by a minority shareholder of a company. Here, the Appellant and Respondent were both minority shareholders, while a third party, Gan, held the remainder of the shares as the majority shareholder. Gan was convicted of making fraudulent claims on the company’s expenses, and was eventually declared bankrupt. The Respondent then sought to bring a statutory derivative action on behalf of the company under s216A of the Companies Act against the Appellant, alleging that the Appellant had acted in concert with Gan.

Two of the requirements of a derivative action are that (i) the complainant must be acting in good faith, and (ii) the action must be prima facie in the interests of the company. This judgment focused on the test of good faith The Court of Appeal explained that while any questionable motivations of the applicant might not, in and of themselves, amount to bad faith, bad faith may be established where they constitute a personal purpose which indicated that the company’s interest would not be served. The Court expressed approval of the “abuse of process” test to determine whether the applicant’s collateral purpose for bringing the derivative action amounts to bad faith.

The Court determined from the evidence that the Respondent had several motives in bringing the derivative action, and that he was using the claim to forward his own interests rather than those of the company. The elements of disgruntlement, spite, self-preservation, and pure personal gain led the Court to believe that the derivative action was an abuse of process, and that the Respondent was not acting in good faith.

These same elements also led the Court to conclude that the action was not in the interests of the company, as they undermined the legitimacy of the application. Further, the company would not receive much practical gain if the action were to proceed. The Respondent’s application was thus dismissed.

For further information, please contact:

Francis Xavier SC, Partner, Rajah & Tann
[email protected]

 
Lai Yew Fei, Partner, Rajah & Tann
[email protected]

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