Bay Investments Ltd v Mohinani Harry Hassomal_ [2023 SCJ 516] : 

In Bay Capital Investments Ltd v Mohinani Harry Hassomal [2023 SCJ 516], the Court reiterated the prerequisites for a successful derivative action and briefly examined the potential remedies and cost considerations associated with such actions.

Background Facts

The Appellant Company, Bay Capital Investments Ltd (BCI Ltd), appealed against the Supreme Court’s decision to grant leave to the Respondent, Mr. Mohinani, to bring a derivative action against the directors of BCI Ltd.

The Board of Directors of BCI Ltd proposed a restructuring plan to its investors regarding funding for a specific project through Park Chinois Mauritius (PCM), a GBL II company incorporated in Mauritius. This investment comprised of a debt of GBP 21.7 million to PCM and equity in PCM, represented by 1620 ordinary shares accounting for 74% of PCM’s total shareholding.

Mr. Mohinani, an investor who purchased shares totalling GBP 1.5 million in BCI Ltd, applied to the Commercial Division of the Supreme Court for leave to pursue a derivative action under Section 170(1)(a) of the Companies Act [the Act], on behalf of BCI Ltd. He alleged that the investment restructuring was tainted with fraud and illegality, orchestrated to defraud BCI and its investors. According to Mr. Mohinani, the restructuring primarily benefited Bay Capital Partners Ltd (Investment Manager) and its Founding and Managing Partner, Mr. Mehta, rather than BCI Ltd. He claimed that the devised scheme was facilitated by the complicity of BCI Ltd’s board of directors, who, in his view, condoned the actions of the Investment Manager and Mr. Mehta in breach of their fiduciary duties and through fraudulent means.

Key Issues

Can leave be granted under section 170(2) of the Act as the facts of the case are that there appears to have been a breach of section 143 of the Companies Act regarding a failure on the part of the directors of (BCI) to act in good faith and in [its] best interests?

What is the process for a derivative action?

Section 170(1) of the Act specifies who is eligible to initiate a derivative action.

Upon the request of a shareholder or director of a company, the Court has the authority to grant permission to that shareholder or director to:

– Initiate legal proceedings in the name and on behalf of the company or its subsidiary.

– Intervene in proceedings in which the company or any related company is involved, for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or its subsidiary, as applicable.

Consequently, such action can only be commenced by a « shareholder or director » of the company, acting in the name and on behalf of the company or its subsidiary.

The shareholder or director must seek the Court’s permission (leave) to initiate derivative proceedings. This procedure serves as a gatekeeping mechanism to prevent frivolous claims from proceeding further. Before granting permission (leave) to pursue legal action, the Court meticulously evaluates the evidence to determine whether the claim demonstrates a reasonable basis for success (prima facie case).

Upon establishing a prima facie case and obtaining permission (leave) from the Court, the derivative action proceeds akin to a regular court action initiated by the company itself.

Application for Leave

Section 170(2) of the Act outlines the factors to be considered when deciding on an application for leave for a derivative action. These factors include:

– The likelihood of the proceedings’ success.

– The costs of the proceedings relative to the relief expected.

– Any previous actions taken by the company or its subsidiary to seek relief.

– The interests of the company or its subsidiary in initiating, continuing, defending, or discontinuing the proceedings.

Circumstances under which Leave is granted

Section 170(3) of the Act provides that:

1. When the company or a related entity does not intend to initiate, diligently continue, defend, or discontinue the proceedings.

2. When it’s in the interests of the company or its subsidiary that the conduct of the proceedings should not be solely left to the directors or the determination of the shareholders as a whole.

Applicable Test

The Court of Civil Appeal (CCA) clarified that the trial court’s role is to determine whether there is a genuine issue to be tried, meaning that the applicant must identify the legal and equitable rights to be adjudicated at trial for which final relief is sought. This principle was established in the case of *Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd* ([2001] HCA 63) and reiterated in *Ragless v IPA Holdings Pty Ltd* ([2008] SASC 90), and was applied in *Alpine Asset Appreciation Fund Limited v JM Financial – Old Lane India Corporate Opportunities Fund I Limited* [202 SCJ 134].

Considering the above, the court assesses the situation through the lens of a knowledgeable and prudent businessperson who understands both their rights and the actions of other parties involved. This approach, established in Mattison and Anor v Gough & Ors ([2000] 8 NZCLC 262, 399), considers the potential financial gains and losses associated with pursuing litigation.

The CCA emphasized that the paramount consideration in such applications is the interests of the company. The applicant must demonstrate to the court that it is the company itself that is harmed by the alleged wrongdoing, and this harm occurs when all shareholders are equally affected, without any experiencing special harm.

Legal reasoning

The Court of Appeal (CCA) upheld the trial court’s decision, affirming that the application presented a plausible case for a derivative action, meeting the necessary conditions and serving the interests of BCI Ltd. While the Supreme Court has previously outlined the conditions for such actions, the CCA, in this instance, aimed to provide further clarity on the prerequisites to be met on a prima facie basis when initiating such actions. These include:

1. Allegations of wrongdoing against the company.

2. Demonstrating that the company itself has suffered harm under Section 170 of the Act due to the alleged wrongdoing.

3. Establishing that the company would ultimately benefit from any judgment in the proposed proceedings.

Remedies

The Act provides at section 172(d) the following remedy:

The Court may “make an order directing that any amount ordered to be paid by a defendant in the proceedings shall be paid, in whole or part, to former and present shareholders of the company or its subsidiary instead of to the company or the related company.”

Costs of the Application

On the application of the Shareholder or director to whom leave was granted under s 170 of the Act, the Court shall order that the whole or part of the reasonable cost of bringing or intervening in the proceedings, including any cost relating to any settlements, compromise, or discontinuance approved under s 170 shall be met by the company unless the Court considers that it would be unjust or inequitable for the company to bear those cost as per s 171 of the Act.

Conclusion

Derivative actions allows shareholders or directors to enforce a company’s rights when management are in breach of their duties and refuse to act and initiate proceedings on the company’s behalf, provided any relief granted by the court will benefit the company.