THE STATUTORY DERIVATIVE ACTION

Citation(2014) 26 SAcLJ 766
Published date01 December 2014
Date01 December 2014

Case Note

What of the Notice Requirement?

Teo Seng Ho v IDV Concepts Pte Ltd [2013] SGHC 269 and Lee Seng Eder v Wee Kim Chwee[2014] 2 SLR 56

This case note considers the requirement that a complainant seeking leave under statute to commence a derivative action on behalf of the company give 14 days' prior notice to the directors of the company. The governing statutory provisions do not spell out what is required in such a notice. What, therefore, is required to be included in such a notice? This is to be answered by considering the rationale behind such notice. Two recent High Court decisions touching upon the requirement will be examined to consider the present state of the law and where we stand today in relation to the notice requirement in Singapore.

I. Introduction

1 Two recent High Court decisions have added to the Singaporean jurisprudence on the notice requirement under s 216A(3)(a) of the Companies Act1 (“CA”). Section 216A of the CA, which provides for what is known as the statutory derivative action, was enacted in Singapore in November 1993, and allows, inter alia, a member of a company to bring an action in the name and on behalf of a company, or intervene in an action to which the company is party,2 provided certain

statutorily provided requirements are met. The provision, which has stood unamended since its enactment some 20 years ago, reads as follows:

Derivative or representative actions

216A.—(1) In this section and section 216B —

‘company’ means a company other than a company that is listed on the securities exchange in Singapore;

‘complainant’ means —

(a) any member of a company;

(b) the Minister, in the case of a declared company under Part IX; or

(c) any other person who, in the discretion of the Court, is a proper person to make an application under this section.

(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.

2 In Teo Seng Ho v IDV Concepts Pte Ltd3 (“IDV Concepts”) and Lee Seng Eder v Wee Kim Chwee4 (“Lee Seng Eder”), the High Court in two separate occasions explored some of the procedural issues involved

in the making of an application to commence derivative action under s 216A, namely, in respect of the notice requirement as found in s 216A(3)(a). The two decisions also considered the other substantive requirements set out under the statutory provision, ie, the requirements under s 216A(3)(b) that the applicant is acting in good faith and s 216A(3)(c) that the action appears to be prima facie in the interests of the company. This note is concerned mainly with the former procedural requirement.
II. The decision in IDV Concepts

A. The factual background

3 The company which formed the subject matter in IDV Concepts, IDV Concepts Pte Ltd (“IDV Concepts”), was a company in the business of providing interior design and renovation services, and was run by two main personalities, Teo, the applicant in the leave proceedings, and Chew, the second defendant. After almost a decade and a half in business, the relationship between Teo and Chew deteriorated and became strained. There were talks between Teo and Chew relating to suggestions to liquidate the company. Sometime after this, Chew, together with Jen, his wife, who was the third defendant in the proceeding, set up IDV Concepts Asia Pte Ltd (“IDV Asia”), the fourth defendant. Jen explained that IDV Asia was incorporated in view of an agreement to liquidate IDV Concepts, and that IDV Asia commenced business only after Teo had signed a purported directors' resolution to put the company into members' voluntary winding up. Chew subsequently sent an e-mail to potential clients explaining that IDV Asia would be in charge of all new projects while IDV Concepts would remain to complete all ongoing jobs. Teo took exception to all of these, and in a letter from his solicitors on 15 April 2013, demanded that the defendants cease and desist in their wrongful acts. The letter complained that Chew, as director, and Jen, as manager, had breached their duties to IDV Concepts. Several allegations were made in this letter, including the allegations that the use of the name IDV Asia which was similar to IDV Concepts was intentional, that they had instructed the staff in IDV Concepts' office to change the signature block of their e-mails to that of IDV Asia, that business opportunities were passed to IDV Asia, that they had copied IDV Concepts' website in its entirety, and that this constituted a passing off, that they had taken over IDV Concepts' office premises for the use of IDV Asia's business, as well as its computers, servers, and confidential information, and finally, that they had solicited the staff of IDV Concepts to transfer their employment to IDV Asia. In this vein, four heads of allegations were made, namely, (a) the passing off of the name and goodwill of IDV Concepts; (b) the infringement of copyright and passing off in relation to IDV Concepts' slogans and goodwill; (c) the use of IDV Concepts' office premises and equipment without approval or authorisation; and (d) the accessing of IDV Concepts' confidential information without approval or authorisation.

4 When the matter could not be settled amicably, Teo sent IDV Concepts and Chew a notice as required under s 216A(3)(a) of the CA on 10 May 2013. However, in this notice, whereas mention was made of allegations (a) and (b), mention of allegations (c) and (d) was missing. On this footing, it was argued for the defendants that the notice was ineffective.

B. The court's decision

5 Belinda Ang J noted that there was no express requirement under s 216A(3)(a) that the notice list down each and every allegation sought to be made.5 Her Honour referred6 to the British Columbia Court of Appeal decision in Re Bellman et al and Western Approaches Ltd7 (“Re Bellman”), in which Nemetz CJ stated:8

A perusal of the [Notice Letter], when read together with the response …, leads me to conclude that the directors were reasonably notified of the Bellman group's intention to apply to commence a derivative action. Failure to specify each and every cause of action in a notice does not, in my opinion, invalidate the notice as a whole. [emphasis added by the High Court in IDV Concepts]

In this regard, her Honour held that the notice in question was not ineffective: it, despite the omitted allegations, was sufficient to notify Chew and IDV Asia that Teo would be applying to commence an action under s 216A of the CA.9 Her Honour also emphasised that Chew did not contend that he would have acted differently had the notice contained the omitted allegations.10

C. Commentary

6 The decision in IDV Concepts, in following the decision in Re Bellman, takes a narrow view of the notice requirement. Section 216A of the CA finds its origins in an equivalent Canadian legislation, namely, the Canada Business Corporations Act11 (“Canadian Federal Legislation”), and the requirement of giving notice to the directors under s 216A(3)(a)

of the CA was modelled after s 239(2)(a) of the Canadian Federal Legislation.

7 But even in Canada, the issue of the sufficiency of such notice is somewhat unsettled. On the one hand, Re Bellman, which discussed the predecessor provision to s 239(2)(a) of the Canadian Federal Legislation, and which was relied upon by the court in IDV Concepts, lays down a relatively low threshold. It appears from Nemetz CJ's dictum that all that is required is that there is notice of an impending application under the statutory provision. Whether this is a correct reading of Re Bellman will be revisited later, but it suffices to note for now that this is the plain implication from the holding of the court. Next, in the British Columbia Supreme Court decision in Re Northwest Forest Products Ltd12 (“Re Northwest Forest”), it was held that s 222(3)(a) of the British Columbia Companies Act,13 which requires that the applicant has made “reasonable efforts to cause the directors of the company to commence or diligently prosecute or defend the act”, was fulfilled by the service of a letter to the company directors containing “no more than would be … sufficient to found an endorsement on a generally endorsed writ of summons”.14 This threshold requirement laid down in Re Northwest Forest was then echoed in the subsequent British Columbia Supreme Court decision in Re Daon Development Corp15 (“Re Daon Development”). There, the minimum requirement was described by Wallace J as being “the details of the nature of the claim [the complainant] wishes the directors to prosecute”.16 In these two latter cases, the legislation considered was the British Columbia Companies Act, which, as already apparent above, differed from the Canadian Federal Legislation in that what was required was not the service of a “notice” on the company directors, but the exertion of “reasonable efforts” to cause the directors to take up the action...

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