A Double-Barrelled Approach?

In the recent decision of Mak Siew Wei v Yeoh Eng Kong & Other Appeals [2019] 7 CLJ 470 ("Mak Siew Wei"), the Malaysian Court of Appeal had the opportunity to consider whether it is appropriate for a shareholder to sue in his personal capacity for losses he had suffered personally, and also on behalf of the company for losses suffered by the company by way of a derivative action, both in the same suit. In other words, can both a shareholder's personal action and a derivative action be brought under the same suit? The question posed to the Court of Appeal in Mak Siew Wei is closely linked to the principle of reflective loss. Reflective loss is one suffered by a shareholder which is merely reflective of the company's loss, such as where the shareholder's loss is a diminution in the value of his shares as a result of a wrong committed against the company.

THE RULE AGAINST REFLECTIVE LOSS

It is a long-standing rule that the proper plaintiff in an action in respect of a wrong allegedly committed against a company is, prima facie, the company. This is the common law rule laid down in Foss v Harbottle (1843) 67 ER 189 ("Foss v Harbottle"). However, the rule in Foss v Harbottle is subject to exceptions and allows a shareholder to initiate a common law action on behalf of the company provided two requirements are met. First, the wrong is one that cannot be validly ratified by the majority due to a fraud on the minority; and second, the perpetrators of the fraud are in control of the company. This is the common law derivative action. It is based on a cause of action belonging to the company, not the shareholder. At the heart of the common law rule in Foss v Harbottle is the principle that a company is a separate legal entity and therefore, any loss suffered by a company is separate and distinct from that suffered by its shareholder. In a shareholder's personal action, the allegation is that the wrongdoing in question is an invasion of rights that belong to the said shareholder individually and in his personal capacity as a member. This is to be contrasted with a situation where the wrong is committed against the company. While the shareholder may suffer a loss as a consequence of the wrong committed against the company, for example, in the form of diminution of the value of his shares, such loss is merely reflective of the loss suffered by the company by reason of a wrongdoing committed against the company. A shareholder cannot commence a personal action for such loss. The proper party to commence legal action to make good such loss would be the company. This is the principle against...