[CORPORATE & COMMERCIAL DISPUTES] Removal Of Directors & Non-Payment Of Dividends ' Oppression Under Section 346 Companies Act 2016?

• Published date: 15 June 2023
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Shareholders
• Law Firm: Lee Hishammuddin Allen & Gledhill
• Author: Chan Mun Yew

Companies operate under the principle of 'majority rule', where decisions made by the majority shareholders prevail to reflect corporate democracy.¹ However, section 346 of the Companies Act 2016 (CA 2016) introduces an exception to this principle. It enables courts to grant a wide range of reliefs to aggrieved shareholders in cases involving oppression, unfair discrimination, prejudice, or disregard of shareholders' rights and interests.

The liability for oppression under section 346 depends on the specific circumstances of each case. This alert explores the applicability of section 346 in relation to two scenarios:-

(a) the removal of directors; and

(b) the non-distribution of dividends to shareholders.

Removal of Directors

When it comes to the removal of directors, shareholders often assert their right or legitimate expectation to either remain as directors or have their nominees appointed. Removal of directors in violation of such rights can lead to claims of oppression under s. 346.

The general principle is that companies are governed strictly by their constitution,² which typically allows for the removal of a director in a private company through an ordinary resolution by shareholders.³ Courts have in several cases held that where a director is removed in accordance with the company's constitution, there is no oppression within the meaning of s. 346.⁴

However, exceptions arise in the case of a 'quasi-partnership',⁵ where courts look beyond the constitution to determine if the removal of a director breaches any fundamental understanding or agreement between shareholders upon which their association is based. If breach is established, the removal of directors can be considered oppressive under s. 346.⁶

Quasi-partnerships usually involve companies which satisfy one or more of the following conditions:-

(a) it is formed on personal relationships of mutual trust and confidence;

(b) there is an agreement or understanding that some or all of its shareholders will participate in the business's conduct; and

(c) there are restrictions on share transfers.⁷

Family-based companies and those formed from pre-existing partnerships are typical examples of quasi-partnerships. Nonetheless, each case should be decided based on its specific facts. For instance, express provisions in shareholders' agreements may negate the classification as a quasi-partnership. Also, the fact that the company is a joint venture does not necessarily mean that it is a...