What is Proper Plaintiff Rule in Malaysia – The rule in Foss v Harbottle

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What is the “proper plaintiff rule”?

The proper plaintiff rule was discussed and explained (by relying on the rules in Foss v Harbottle) in Edwards and Another v Halliwell and Others1 which states that:

“The rule in Foss v Harbottle, as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio. No wrong had been done to the company or association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue.”

To cut the long story short, the proper plaintiff rule dictates that:

  1. Only the company (via the appropriate individual) can initiate, intervenes or defend a proceeding on behalf of the company; and
  2. If a majority shareholder of the company is in favour or willingly accepts the consequences of action i.e. wrongdoing for or against the company, no individual member can revisit the matter again (or in Latin, cadit quaestio).

Why is that the case?

The reason behind the above statement is this: courts usually have a non-interference policy in corporate affairs. The traditional view is that the majority of shareholders in a general meeting has the power to bind the whole body by the terms of incorporation, and every individual shareholder is taken to have entered the corporation upon those terms. The general meeting of the company is capable of ratifying or approving the acts complained of, and deciding whether or not to institute proceedings in respect of those acts2.

A keen eye will tell you by now that this rule is not immune from abuse. There will be instances where members of the company blatantly use the rule to commit fraud or improper conduct/ advance the company in a way that is not in the best interest of the company. As the court puts it3:

“The rule is easy enough to apply when the company is defrauded by outsiders. The company itself is the only person who can sue. Likewise, when it is defrauded by insiders of a minor kind, once again the company is the only person who can sue. But suppose it is defrauded by insiders who control its affairs — by directors who hold a majority of the shares — who then can sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise the proceedings to be taken by the company against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue them themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another, some means must be found for the company to sue. Otherwise, the law would fail in its purpose. Injustice would be done without redress.”

The exception

Thus, an exception was born- where the wrongdoers are in control of the company such that the company is incapacitated from bringing an action, the court would allow an action to be brought by individual shareholders on behalf of the company to obtain redress. The exception was a ‘mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress4’ (Burland v Earle [1902] AC 83 (PC) at p 93). This exception was given the name ‘derivative action5’.

A derivative action is whereby an individual shareholder of a company (with leave from court) initiates, intervenes or defend a proceeding on behalf of the company if the company itself chooses not to do so6. This rule was created to circumvent the general rule that was laid down in Foss v Harbottle7.

Things to consider in relation to a derivative action

  1. A derivative action can only be instituted if there is no alternative recourse i.e. winding up on just and equitable ground8 that is available to a faction of the company shareholders.
  2. Any shareholders can institute a derivative action, even the majority shareholder of a company9.
  3. A derivative action can be initiated against a third party if the below conditions are fulfilled10:
    1. Where the wrong-doer (one part of the shareholders/ directors of the company) prevents the others (majority or minority) from bringing an action against the wrong-doer; and
    2. If the decision to prevent the pursuance of litigation was influenced by a third party.

And there you have it, a small snippet of this topic.

Need legal advice regarding Proper Plaintiff Rule or Company Law?

1. [1950] 2 ALL ER 1064.

2. Perak Integrated Networks Services Sdn Bhd v Urban Domain Sdn Bhd (On Behalf Of Themselves And Pins Osc & Maintenance Services Sdn Bhd Through Derivative Action) & Anor[ 2018] 4 MLJ 1.

3. Moir v wallersteiner and Others (No 2) [1975] QB 373.

4. Burland v Earle [1902] AC 83 (PC)

5. Section 347, Companies Act 2016.

6. Section 347 (1), Ibid.

7. (1843) 67 ER 189.

8. Section 465 (h), Companies Act 2016.

9. Ong Keng Huat v Fortune Frontier (M) Sdn Bhd & Anor [2015] 11 MLJ 604.

10.  Ibid.