Corporate Insolvency Legal Update: Derivative action by minority shareholders not available where company is in liquidation

The Singapore Court of Appeal in the recent case of Petroships Investment Pte Ltd v Wealth Plus Pte Ltd and others and another matter [2016] SGCA 17 considered for the first time as to whether a statutory derivative action by minority shareholders under s216A of the Companies Act (Cap. 50,2006,Rev Ed) (“the Act”) is available to a company in liquidation. Minority shareholders had sought to commence action in Wealth Plus Pte Ltd’s name against its directors. Prior to the application being heard, Wealth Plus went into voluntary liquidation.

The Court of Appeal held that statutory derivative actions, whether under common law or s216A of the Act, are not applicable to a company in liquidation. Noting that there were no Singapore decision relevant on this issue, the Court of Appeal examined the statutory text of section 216A, legislative history and case law in other jurisdictions. The Court of Appeal formed the view that s216A envisages a situation where the directors are in active movement of the company. It noted that s216A(3)(a) sets a prerequisite for an statutory derivative actions i.e. a notice must be served on the directors of the company. The Court of Appeal also noted that since directors of a company are functus officio from the commencement of winding up, they would not be able to react to any notice served pursuant to s216(3)(a), to  defend or commence proceedings on behalf of the company. In considering the legislative history, the Court of Appeal found that there was no indication that s216A was intended to be available to as a shareholder’s remedy where the company in question had been placed in liquidation. The Court of Appeal also found support in Canadian legal authorities.

The Court of Appeal, in arriving at its decision, commented that minority shareholders are not without remedy as an action may be against the liquidator of the company.  This decision is instructive in clarifying the law relating to the right to commence derivative actions by minority shareholders.

Any queries with regard to the law relating to derivative actions by minority shareholders or corporate disputes may be directed to N. Sreenivasan S.C at sreeni@straitslaw.com.sg or Valerie Ang at valerieang@straitslaw.com.sg or to the director who normally handles your matters.