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Recent Singapore Ruling on Derivative Actions

May 17, 2016

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Recent Singapore Court of Appeal Ruling: Derivative Actions by Shareholders not Available for Companies in Liquidation

In a recent case, the Singapore Court of Appeal issued an important ruling regarding derivative actions brought by shareholders. In the case Petroships Investment Pte Ltd v Wealthplus Pte Ltd and others [2016] SGCA 17, Singapore’s Court of Appeals held that derivative actions brought by minority shareholders are not available if the company in question is in liquidation.

Shareholder derivative actions occur when a shareholder brings a lawsuit on behalf of a company, usually against an insider, such as a director or officer. These lawsuits are important because they can help “balance the scales” when fiduciaries abuse their power. Rules and procedures regarding derivative suits are complex, so additional guidance in this area helps to provide clarity and direction. The Singapore ruling is especially important for shareholders seeking alternative legal remedies when a derivative suit is not available.

The Court’s Rationale

The Court of Appeal based its decision largely on interpretation of the language used in section 216A of the Companies Act. The court agreed that derivative actions are an important mechanism designed to protect minority shareholders and provide a remedy when the company directors refuse to provide enforcement. However, the Court also reasoned that when a company enters into liquidation status, the power to run the company is transferred to the liquidator, and the board’s authority expires. In this type of situation, shareholders may not seek leave to initiate derivative actions once liquidation begins.

The Court reached its conclusion based on the legislative history of section 216A, as well as analogous authorities from other courts such as Australia, New Zealand, and the UK, which also deny derivative actions for shareholders in a company that is in liquidation.

Alternative Remedies for Minority Shareholders

On the other hand, minority shareholders do have alternative remedies available  in instances where the company is in liquidation. These include:

  • Applying with the court to replace the liquidator
  • Seek direction for liquidators to commence an action
  • Bring an action against liquidator for breach of duty

Thus, once liquidation begins, attention shifts to the liquidator’s duties, and they are subject to court oversight. This is similar to Australia’s treatment of statutory derivative actions in cases where the company is in liquidation. Australian courts have similarly disallowed derivative actions for liquidating companies; however, they have ruled that their courts have the power to authorize a creditor to sue in the name of the company.

Singapore’s Unique Role in the Global Economy

Singapore has often been described as a “diplomatically neutral” and “economically opportunistic” country with regards to its positioning in the Asian financial market. It acts somewhat as a buffer or filter for global investment into Asia, as well as a facilitator for Asian capital seeking to expand into international partnership. Thus, decisions such as the recent one regarding derivative actions in Singapore may be important signals for the entire Asian region.

One of Singapore’s greatest strengths is the ability to channel policy into concrete responses through “real-time governance”. In this manner it is similar to Taiwan in its openness to adapt and implement governance policies rapidly. Thus we are seeing that swift adaptation and responses are the key for countries to thrive in ever-changing and shifting markets. For instance, Saudi Arabia is currently having to react quickly to continual changes with regards to oil prices and reserves. It will be important to keep an eye on Singapore as a key player in the global securities litigation scene.

Global investors need to understand the laws of various nations and jurisdictions and must be aware of when they can and cannot file a claim. If you have any legal claims or concerns that need to be addressed, contact us today at Kessler Topaz. Our team of attorneys works closely and creatively with clients to help obtain not only financial recompense, but also corporate reform to prevent future misconduct and create more responsive and transparent boards.