Tan Guan Eng v Ng Kweng Hee & Ors [1992] 1 MLJ 487
Facts
The first plaintiff is a shareholder and director of the ninth defendant, Dragon
Enterprises Sdn Bhd ('Dragon'). Dragon is the holding company and controlling shareholder of
Thean Seng Co Sdn Bhd ('TSS'), the eighth defendant. Dragon is in turn a subsidiary of an
incorporated investment company called BH Low Holdings Sdn Bhd ('BHL'). The first plaintiff
is also a majority shareholder and director of BHL. The first and second defendants were the
directors of both Dragon and TSS.
Notice of TSS's extraordinary general meeting ('EGM') was given to pass a resolution
to increase the issued and paid-up capital of TSS by way of a rights issue. The plaintiffs
obtained an ex parte interlocutory injunction to restrain the holding of the EGM, alleging that
the calling of the EGM by the first to seventh defendants was not a proper or bona fide exercise
of their powers as directors of TSS because the calling of the EGM was to effect a change in
the control of TSS in interest or favour of the first to seventh defendants.
The defendants applied to discharge the interlocutory injunction. The defendants
claimed that the purpose of increasing TSS's capital was to finance the cost of developing TSS's
property and to reduce TSS's bank borrowings. The defendants argued that the first plaintiff
had no locus standi to sue against TSS because the first plaintiff was not its shareholder.
The plaintiffs urged the court to lift the corporate veil of TSS and Dragon because the
first and second defendants were in de jure control of Dragon and were in de facto control of
TSS and that they had placed themselves in a position of conflict of interest when they
promoted their own personal interest. The second plaintiff argued that he had locus standi
because since the injury alleged was personal to him as a member of TSS, the rule in Foss v
Harbottle did not apply.
Issue
1. Whether calling of TSS's EGM by the first to seventh defendants was a proper or bona fide
exercise of their powers as TSS's directors
2. Whether plaintiff has locus standi to sue subsidiary company
3. Whether issue of locus standi should be decided as a preliminary point or at conclusion of
trial
Held:
The court by dismissing the application to discharge injunction held that,
(1)
The issue whether calling of TSS's EGM by the first to seventh defendants was a
proper or bona fide exercise of their powers as TSS's directors, was neither just
nor convenient to be decided without the process of a full trial.
(2)
The term 'locus standi' means entitlement to judicial relief apart from the questions
of the substantive merits and the legal capacity of a plaintiff.
(3)
In deciding the question of locus standi, the court will proceed on the basis that
allegations in the statement of claim and in the documents relied upon by the
plaintiffs are true. The jurisdiction to uphold a plea of no locus standi should only
be exercised very carefully in circumstances where there is no possibility of doubt.
(4)
The traditional view of 'control' of a company is one of ownership but the new
view considers who has de facto control of a company. In this case, His Lordship
pointed out that shareholding may be one index to determine the question of
control. It was held that, “The obvious and no doubt the easiest way of determining
whether the wrongdoer has control of a company is to have regard to their
shareholdings. If the majority of the shares is held by them, then it goes without
saying that they are in control of the company; but if that is not the case, it does
not necessarily follow that they are not in control, for the court may go behind the
apparent ownership of the shares, in order to determine whether the wrongdoers
do in fact control of the company”. “Apparent ownership” could be or perhaps,
even an outsider, through the use of nominee directors, interlocking shareholding,
and agreement of the shareholders or the use of proxies.
(5)
Although each company within a group of companies is a distinct entity, in certain
circumstances courts have treated a group of companies as a single corporate
entity. In the circumstances of this case a prima facie case for piercing the
corporate veil had been established.
(6)
Both of the plaintiffs had established a prima facie case of locus standi to maintain
this suit; there are also serious questions of law and fact to be tried.