RATIONALISING THE NOTICE REQUIREMENT FOR STATUTORY DERIVATIVE ACTIONS

• Published date: 01 December 2015
• Author: Ronald J J WONG LLB (Hons) (National University of Singapore). Jeremy YEO Wen An BA (Hons) (Oxon).
• Date: 01 December 2015

Comparing Singapore and Canadian Perspectives

The statutory derivative action was introduced to ameliorate the harshness of the conditions for commencing a common law derivative action. One statutory mechanism to balance that liberalisation was the requirement that a complainant first gives notice to the directors of the company before applying to the court for leave to bring a statutory derivative action on behalf of the company. However, it is uncertain what is required of the nature and specificity of content in the notice. The various governing statutes do not explicitly address this and the authorities do not speak with one voice. This article seeks to clarify the company law principles underlying, and the policy rationales, viz, economic efficiency and corporate governance and accountability, for, the notice requirement and attempts to rationalise the incoherent authorities, arguing that the authorities can be best reconciled on the basis that the courts are exercising judicial pragmatism in attempting to uphold the policy objectives of the notice requirement.

I. Introduction

1 The statutory derivative action was introduced in the companies legislation in various jurisdictions as a response to the onerous requirements on shareholders for bringing common law derivative actions on behalf of the company. One limiting mechanism introduced in such legislation is the requirement that the complainant shareholder first gives notice of the intended derivative action to the company's directors. As will be explained below, the rationale for this limiting mechanism is to prevent an abuse of the statutory process. Yet, there appears to be no certainty as to what is necessary and sufficient for fulfilling the notice requirement: what is the nature and specificity of content in a notice to be furnished by a complainant to the directors of a company before the

former is entitled to commence a statutory derivative action? This issue has given rise to many different approaches and seemingly conflicting jurisprudence.

2 Since the statutory derivative action was introduced in the Singapore Companies Act1 (“CA”) in 1993, there has been a dearth of jurisprudence on the notice requirement in s 216A(3)(a) of the CA. This article critically analyses several recent Singapore High Court decisions which address the above issue in the context of s 216A of the CA, which was modelled after s 239(2) of the 1985 Canada Business Corporations Act2 (“CBCA”), as well as Canadian authorities, to offer doctrinal, jurisprudential and policy-based perspectives on the notice requirement in respect of statutory derivative actions. In Part II,3 authorities from Singapore, Canada and other jurisdictions will be analysed to elucidate the different approaches adopted in respect of the notice requirement. In Part III,4 the rationales for the notice requirement from the perspectives of company law doctrine and principle, and policy viz economic efficiency and corporate governance will be discussed. In Part IV,5 an attempt will be made to rationalise the seemingly incoherent authorities on the notice requirement, arguing that judicial pragmatism in upholding the policy objectives of the notice requirement is the thematic refrain in the various decisions on the issue. In Part V,6 an observation on the relationship between the requirement of specificity in the notice and specificity in the leave application will be made.

II. Incoherent authorities?

A. Singapore authorities

3 In the Singapore High Court case of Teo Seng Ho v IDV Concepts Pte Ltd7 (“IDV Concepts”), the plaintiff, Teo Seng Hoe (“Teo”), and the second defendant, Chew Choon Kong (“Chew”), were directors and equal shareholders in the first defendant, IDV Concepts Pte Ltd (“IDV”). The relationship between Teo and Chew became strained, resulting in a directors' resolution to wind up the company. Subsequently, the third defendant (“Jen”), Chew's wife, incorporated the fourth defendant, IDV Asia Pte Ltd (“IDV Asia”). Upon discovering this, Teo alleged that Chew and Jen had breached various duties owed to IDV as a director and manager respectively, and that IDV Asia had engaged in wrongful

conduct contrary to the interests of IDV. Teo subsequently gave notice to the directors of IDV (“Notice”) pursuant to s 216A(3)(a) of the CA and applied to the court for leave to commence a derivative action under s 216A. The defendants argued that Teo should not be granted leave because, inter alia, the Notice was ineffective as it had omitted several heads of claim: (a) the fourth defendant using IDV's office premises and equipment without approval; and (b) the fourth defendant accessing IDV's confidential information without approval or authorisation. The relevant portions of s 216A of the CA states:

216A(2) Subject to subsection (3), a complainant may apply to the Court for leave to bring an action in the name and on behalf of the company or intervene in an action to which the company is a party for the purpose of prosecuting, defending or discontinuing the action on behalf of the company.

(3) No action may be brought and no intervention in an action may be made under subsection (2) unless the Court is satisfied that —

(a) the complainant has given 14 days' notice to the directors of the company of his intention to apply to the Court under subsection (2) if the directors of the company do not bring, diligently prosecute or defend or discontinue the action;

(b) the complainant is acting in good faith; and

(c) it appears to be prima facie in the interests of the company that the action be brought, prosecuted, defended or discontinued.

(4) Where a complainant on an application can establish to the satisfaction of the Court that it is not expedient to give notice as required in subsection (3)(a), the Court may make such interim order as it thinks fit pending the complainant giving notice as required.

4 In IDV Concepts, Belinda Ang J rejected the defendants' arguments and granted leave to Teo to bring an action on behalf of IDV. With regard to the defendants' arguments on the Notice, Belinda Ang J held that there is “nothing in s 216A(3)(a) that requires the statutory notice to list down each and every allegation” and that all that was required was that “notice be given of the complainant's intention to apply for leave to bring an action in the name and on behalf of the company”.8 She relied on the British Columbia Court of Appeal decision in Re Bellman et al and Western Approaches Ltd9 (“Re Bellman”) for the proposition stated by Nemetz CJ that a “failure to specify each and every cause of action, claim or head of relief in a notice does not … invalidate the notice as a whole” and that it was sufficient “so long as the notice allows a company's directors to be reasonably notified of the intention to

apply for leave to commence a derivative action”. Further, Belinda Ang J commented that Chew did not contend that he would have acted (or even considered the matter) differently had the Notice contained the omitted allegations.10 Accordingly, Belinda Ang J held that the Notice was not invalid,11ie, it was sufficient to fulfil the notice requirement in s 216A(3)(a) of the CA.

5 In another Singapore High Court decision, Agus Irawan v Toh Teck Chye,12 the complainant, a director of the company, sought leave to commence a derivative action on behalf of the company against the respondents, who were two other directors of the company, for breach of fiduciary duties. The complainant brought an action for breach of fiduciary duties as the respondents had allegedly siphoned some rebates which the company was entitled to. The respondents argued that the notice requirement in s 216A(3)(a) of the CA had not been met as the complainant had applied to amend his application to include a claim for “price rebates” when the original application, and for which notice was given, was initiated only on the basis of a claim for “volume rebates”. Choo Han Teck J rejected this argument on the basis that:13

… the amendment was in respect of the particulars; the action for which leave was sought concerned a breach of fiduciary duties and … the defendants were in no way prejudiced by the inclusion of the additional item especially since the basic position of the defendants is the same in respect of both rebates.

In other words, the notice requirement was met because only some particulars, and not the cause of action, were omitted.

6 In another recent case before the Singapore High Court, Lee SengEder v Wee Kim Chwee14 (“Lee Seng Eder”), the complainant alleged that the directors of the company had allowed other parties to appropriate the company's assets and goodwill. However, the complainant did not provide the 14 days' notice to the directors of the company in accordance with s 216A(3)(a) of the CA. The complainant argued, relying on s 216A(4), that it was not expedient to do so because he had reasonable concerns that the directors would destroy or tamper with the evidence of their alleged conspiracy to deplete the assets and goodwill of the company.15 In this respect, the complainant relied on an earlier Singapore High Court decision in Fong Wai Lyn Carolyn v Airtrust (Singapore) Pte Ltd16 (“Fong Wai Lyn”) where the plaintiff provided 7 days of notice

instead of the requisite 14 days under s 216A(3)(a) before commencing an action for leave to commence a derivative action. Judith Prakash J held that s 216A(4) applied as it was impracticable in the circumstances to adhere to the notice requirement and that there was a strong inference on the facts that even if the notice requirement had been complied with, the defendant directors would not have acted differently and thus suffered no prejudice.

7 On the facts in Lee Seng Eder, Andrew Ang J held that the complainant failed to establish why it was not expedient to provide notice. Andrew Ang J found that the risk that the directors might destroy or tamper...