Secret Profits Claim Against a Former Director Defeated: Leave Refused on Appeal

Case Background & Strategy

A secret profits claim against a director in Malaysia must be backed by evidence of wrongdoing and of real loss to the company. The Court of Appeal dismissed the minority shareholders’ appeal, upheld the refusal of leave for their derivative action against our client, and awarded RM10,000 in costs.

Case at a Glance

The Problem: Old Arrangements Recast as Wrongdoing

Our client, a former director, faced allegations from minority shareholders that he had set up a competing business and diverted opportunities through a franchise arrangement. Yet they had known about the business for years, one of them had signed a relevant agreement, and their claimed losses lacked concrete financial details.

Our Strategy: Exposing the Gaps in the Evidence

We focused on the gaps in the evidence, the shareholders’ earlier knowledge of the arrangements and their unexplained delay before suing. The real question was whether the allegations justified permission to sue on the company’s behalf at all.

The Court of Appeal’s Decision

The Court of Appeal dismissed the shareholders’ appeal and upheld the refusal of leave for the derivative action, with RM10,000 in costs. The secret profits claim could not proceed in the form proposed.

The Law in Brief: When Is a Secret Profits Claim Justified?

Section 218 of the Companies Act 2016 prohibits a director from improperly using company property, information or position to gain a benefit or to cause detriment to the company. A director who profits from a conflict without proper disclosure and approval may have to account for that profit to the company.

But a secret profits claim brought as a derivative action must still pass the leave test in section 348 of the Companies Act 2016: good faith, and a claim that appears prima facie to be in the company’s best interest. Long delay, prior knowledge and the absence of any real evidence of loss all count against an applicant.

Key Takeaways for Business Owners

• A secret profits claim needs evidence of wrongdoing, relevant control and demonstrable harm to the company.
• Long delay and prior knowledge can be fatal to a shareholder’s complaint.
• Directors should disclose interests in related businesses and keep records of approvals.
• Signed agreements and correspondence often decide what the shareholders knew and when.

Frequently Asked Questions

Related NZSK case results: Director misappropriation oppression claim; Defective derivative action struck out.

Facing a secret profits claim or director conflict allegations in Malaysia? Book a consultation with NZSK so we can review your documents and advise on the available remedies and the right procedure. Learn more about our corporate litigation practice and our appellate advocacy work.

Messrs Ng, Zainurul, Seke & Khoo (NZSK) is a Malaysian law firm with offices in Mont Kiara, Kuala Lumpur and Puchong, Selangor. Partner Khoo Ai Theng, an Advocate & Solicitor of the High Court of Malaya since 2014, acts in corporate and commercial litigation, including shareholder, director and company disputes.