Kicking out the Big Boss: Can the Removal of Directors Constitute Oppression under S346 of the Companies Act 2016?

I. INTRODUCTION

Directors are often aptly described as the directing minds of a company.[1]  If we are to imagine the company as a ship, the director(s) would be the captain(s) steering it.

However, what happens if the said captain(s) simply could not steer the ship due to drunkenness, incompetence or sheer stupidity? Or what if the crew decide to throw the captain(s) overboard and feed them to the sharks?

II. SEMANTICS

1. Directors

S2 of the Companies Act 2016 defines a director as “any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the majority of directors of a corporation are accustomed to act and an alternate or substitute director”.

2. Oppression

The circumstances and remedies in connection to the oppression of shareholders are encapsulated in S346 of the Companies Act 2016, wherein:

          “(1) Any member or debenture holder of a company may apply to the Court for an order under this section on the ground-

(a) that the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or debenture holders including himself or in disregard of his or their interests as members, shareholders or debenture holders of the company; or

(b) that some act of the company has been done or is threatened or that some resolution of the members, debenture holders or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or debenture holders, including himself.

(2) If on such application the Court is of the opinion that either of those grounds is established, the Court may make such order as the Court thinks fit with the view to bringing to an end or remedying the matters complained of, and without prejudice to the generality of subsection (1), the order may-

(a) direct or prohibit any act or cancel or vary any transaction or resolution;

(b) regulate the conduct of the affairs of the company in the future;

(c) provide for the purchase of the shares or debentures of the company by other members or debenture holders of the company or by the company itself;

(d) in the case of a purchase of shares by the company, provide for a reduction accordingly of capital of the company; or

(e) provide that the company be wound up.

(3) If an order that the company be wound up is made under paragraph (2)(e), the provisions of this Act relating to winding up of a company shall apply as if the order had been made upon a petition duly presented to the Court by the company, with such adaptations as are necessary.

(4) If an order under this section makes any alteration in or addition to any constitution, then, notwithstanding anything in any other provision of this Act, but subject to the order, the company concerned shall not have power without the leave of the Court to make any further alteration in or addition to the constitution inconsistent with the order, but subject to the foregoing provisions of this subsection, the alterations or additions made by the order shall be of the same effect as if duly made by resolution of the company.

(5) An office copy of any order made under this section shall be lodged by the applicant with the Registrar within fourteen days from the making of the order.

(6) The applicant who contravenes subsection (5) commits an offence and shall, on conviction, be liable to a fine not exceeding ten thousand ringgit and, in the case of a continuing offence, to a further fine of five hundred ringgit for each day during which the offence continues after conviction.”

The Privy Council case of Re Kong Thai Sawmill (Miri) Sdn Bhd v Ling Beng Sung [1978] 2 MLJ 227 is instructive in holding that there must be a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect before a case of oppression can be made.

III. HOW THE REMOVAL OF DIRECTORS ARE NORMALLY DONE

Directors in private companies, a.k.a ‘Sdn Bhd’ companies can be removed via an ordinary resolution of a company, subject to the company’s constitution. On the other hand, directors in public companies can be removed via S206 of the Companies Act:

“(1) A director may be removed before the expiration of the director's period of office as follows:

(a) subject to the constitution, in the case of a private company, by ordinary resolution; or

(b) in the case of a public company, in accordance with this section.

(2) Notwithstanding anything in the constitution or any agreement between a public company and a director, the company may by ordinary resolution at a meeting remove the director before the expiration of the director's tenure of office.

(3) Special notice is required of a resolution to remove a director under this section or to appoint another person instead of the director at the same meeting.

(4) Notwithstanding paragraph (1)(b), if a director of a public company was appointed to represent the interests of any particular class of shareholders or debenture holders, the resolution to remove the director shall not take effect until the director's successor has been appointed.

(5) A person appointed as a director in place of a person removed under this section shall be treated, for the purpose of determining the time at which he or any other director is to retire, as if he had become a director on the day on which the person in whose place he is appointed was last appointed a director.”

IV. IS THE REMOVAL OF DIRECTORS OPPRESSIVE?

It depends on the circumstances of each company.

1. Circumstances where the Removal of Directors are not Oppressive

Oon Hoon Wah v Noble Global Sdn Bhd & Ors [2014] 9 MLJ 114 alluded that oppression does not arise when a director is validly removed via an Extraordinary General Meeting for the greater good of the company:

“[12] … In this case, the removal of the son was pursuant to a properly constituted extraordinary general meeting and the majority in the two companies have spoken against him. I see no reason why the views of the majority should be silenced or should not be respected.

[13] In fact given the escalating tension between the father and son, the latter's removal as directors were for the greater good of the two companies. His removal as directors, in other words, have not 'passes over' as oppression as he alleged.”

Hiew Tze Min v Teo Hua Chong & Ors [2012] MLJU 976 explained that a director may be removed per the memorandum and articles of association (akin to the constitution of a company) of the company and or pursuant to S128(2) Companies Act 1965 (now S206 of the Companies Act 2016).  Hence, such removal does not constitute an act of oppression:

“[43] A director of a company may be removed in accordance to the memorandum and articles of association (M & A) of the company and or pursuant to s 128(2) CA. In this case the Petitioner was removed as a director at the EGM pursuant to the notice of EGM dated 21.1.2011 that he be removed as a director of the company. There was no complaint by the Petitioner that the notice of EGM was bad or not valid or that it was not served on him. There was no complaint by the Petitioner that his removal as director was not in accordance with the M & A of the company.

[44] The minutes of the EGM showed that he attended and was present at the EGM. PW1 also attended the EGM as the company secretary. The minutes showed that the Petitioner asked for the reasons for his removal as director which were explained to him by Bah sitting as the chairman of the EGM. The minutes also showed that the Petitioner did not agree with the reasons given and he gave his side of the reasons. In other words, he was given the chance to be heard before his removal. The EGM then passed a resolution (exhibit P22) for his removal. The resolution did not remove the Petitioner as a cheque signatory. Teo and Bah subsequently as the two directors of First Line changed the signatories for all cheques issued by First Line.

[45] Looking at all the above complaints together, and not in isolation, the Petitioner has failed to prove oppression and or unfairness on the part of the Respondents within the meaning of s 181(1) CA.”

In short, directors can be removed from companies without giving rise to oppression if such removal is:

1. for the greater good of the company; and
2. in accordance with the company’s constitution and S206 of the Companies Act.

          B. Circumstances where the Removal of Directors are Oppressive

In Tan Kian Hua v Colour Image Scan Sdn Bhd & Others [2004] 6 CLJ 174, the petitioner-director was removed with the aim of discriminating him excluding him from the management of the company.  There is oppression. The Court took cognisance of the following in deciding so:

“I have perused the relevant affidavits with utmost care and with that measure of circumspection. I too have considered all the submissions of the parties and I have concluded, based on the available evidence, that:

(1)        the petitioner did not have access to the accounts of the Company;

(2)        the petitioner was removed as a director without any basis whatsoever;

(3)        there was only one petition to wind up the Company and not two as alleged by the respondents -- which allegation was also unsubstantiated;

(4)        the petitioner's offer to the second respondent to buy his shares was only made after his expulsion as a director of the Company and by then all mutual confidence and relationship between the petitioner and the second respondent, being the founder members of the Company, had broken down; it was only natural that the petitioner being the minority shareholder made a proposal to the second respondent who was the controlling shareholder to buy him out;

(5)        the respondents' complaint of this purported collateral purpose of the petitioner in filing this petition was not supported by the respondents' affidavits;

(6)        there were definitely financial improprieties in the running of the Company since the respondents had caused the Company to make illegal payments to the third and the fourth respondents and when confronted by the petitioner, the second respondent caused the Company to renege on the repayment of the interest on the overdraft; and

(7)        having agreed that the petitioner would have active participation in the management of the Company, the removal of all the benefits granted to the petitioner constituted discrimination per se.

Despite the fact that the petitioner no longer took an active part in the management of the Company, the petitioner:

(i)         remained the guarantor to the hire purchase of the said car with the finance company;

            (ii)        continued to be the borrower in the said Facility with the Bank; and

(iii)       had charged the property belonging both to himself and his wife to the Bank as security for the said           Facility.”

In Wong Shee Cheong [2011] 1 LNS 666, the Court alluded there is oppression in the following circumstances:

1. Removing a longstanding director despite the minority shareholder’s legitimate expectation to be in the management; and
2. The replacement director’s competency is dubious.

The relevant passage is seen herein:

“First, the removal of a director representing the interest of minority shareholders in circumstances where the competency of the replacement director is dubious has been held to amount to oppression (see Re Gee Hoe Chan Trading Co Pte Ltd [1991] 3 MLJ 137). Secondly, where a minority shareholder alleges entitlement to participate in the management of accompany based on a legitimate expectation following many years of appointment, the Courts are inclined to uphold the entitlement. In such circumstances, the sudden removal of a longstanding director may amount to oppression.”

In the upshot, removing directors can be oppressive when there is a departure from the standards of fair dealing and a violation of the conditions of fair play. Such departure arises in the following circumstances:

1. The said removed director is discriminated;
2. The removal is done to exclude the director from the management of the company;
3. The removal is in breach of the minority shareholders’ legitimate expectation to be in the management of the company; and
4. The replacement director is incompetent.

V. IS THE REMOVAL OF DIRECTORS OPPRESSIVE?

The removal of directors in the absence of the departure from the standards of fair dealing and fair play is not oppressive.  Such departure can only be ascertained by gleaning through the factual contours of the company in an oppression action.

Like the winds at the sea, directors come and go.  Before feeding the director-captain(s) to the sharks, the crew must think about what will happen to the company-ship.