Defective Derivative Action Against a Former Director Struck Out on Appeal
Outcome
The Court of Appeal upheld the striking out of the derivative action against our client because the essential elements of a common law derivative action were not pleaded.
Case Background & Strategy
A defective derivative action against a former director in Malaysia will fail if it does not plead the essential elements that give the shareholder the right to sue for the company. The Court of Appeal upheld the striking out of the claim against our client because it never showed how the alleged wrongdoers controlled the company and prevented it from suing.
Case at a Glance
| Court | Court of Appeal |
| Our client | A former director sued for alleged breaches of duty |
| Key issue | Whether a derivative action that did not plead wrongdoer control could proceed |
| Outcome | Striking out upheld; proposed amendment could not cure the defects |
| Practice area | Directors’ duties and corporate litigation |
The Problem: A Company Claim Missing Its Essential Elements
Our client, a former director, was sued by a shareholder for alleged breaches of duty owed to the company. The claim was framed as a derivative action, but it failed to explain how the alleged wrongdoers had the control needed to stop the company from acting, as the procedure then applicable required.
Our Strategy: Targeting the Missing Elements
We targeted the missing essential elements of what was, in law, a defective derivative action, instead of debating allegations that had never been properly pleaded as a company claim. If the shareholder had no right to sue for the company, the allegations did not need to be tried.
The Court of Appeal’s Decision
The Court of Appeal upheld the striking out. The claim did not establish the basis for a common law derivative action, and its defects could not be cured by the proposed amendment.
The Law in Brief: Why a Defective Derivative Action Fails
Under the rule in Foss v Harbottle, the company is the proper plaintiff for wrongs done to it. At common law, a shareholder could sue on the company’s behalf only under recognised exceptions, the best known being fraud on the minority, and had to show that the wrongdoers controlled the company and prevented it from suing.
Malaysia introduced a statutory derivative action in 2007, and the Companies Act 2016 now requires the court’s leave under sections 347 and 348. Whichever route applies, a defective derivative action that does not plead the essential elements may be struck out, for example under Order 18 rule 19 of the Rules of Court 2012, and an amendment will be refused if it cannot cure the defect.
Key Takeaways for Business Owners
- A strong defence often begins with whether the claimant is entitled to sue at all.
- A derivative action must plead every essential element, including wrongdoer control where required.
- Former directors remain exposed to claims, but those claims must be properly brought.
- Amendment is not a cure for a claim that is defective at its root.
Frequently Asked Questions
Can a former director be sued for breach of duty?
Yes. Duties owed during the directorship can still be enforced after the director leaves, by the company or through a properly brought derivative action.
What is wrongdoer control?
Under the common law derivative action, the claimant had to show that the alleged wrongdoers controlled the company and prevented it from suing.
Can a defective derivative action be fixed by amendment?
Not always. Where the defect goes to the root of the claim, the court may refuse the amendment and strike the claim out.
When was the statutory derivative action introduced in Malaysia?
In 2007, by amendments to the Companies Act 1965. It is now governed by sections 347 and 348 of the Companies Act 2016.
What does striking out mean?
Striking out ends a claim without a full trial. Under Order 18 rule 19 of the Rules of Court 2012, the court may strike out a pleading that discloses no reasonable cause of action, is scandalous, frivolous or vexatious, may prejudice or delay the fair trial, or is otherwise an abuse of the court’s process.
Related NZSK case results: Anton Piller order and a defective company claim; Shareholder derivative action refused after a takeover.
Facing a derivative action or a breach of duty claim 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.
Khoo Ai Theng
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