One of the practical barriers that deters minority shareholders from bringing a statutory derivative action under Section 216A of the Companies Act (Cap. 50) is the question of costs. Who pays for the litigation? If the complainant wins, can the company be made to fund the legal fees? What happens if the action fails? And can the court order a costs indemnity from the outset — before the action is even commenced?
These are not abstract legal questions. For a minority shareholder with a legitimate claim against errant directors or controllers of a Singapore company, the financial exposure of derivative action litigation can be substantial. Understanding the costs and indemnity framework under Section 216A is therefore critical before committing to this route.
This guide explains the costs regime for Singapore statutory derivative actions: what the statute provides, how courts exercise their discretion on costs indemnity orders, the key case law principles, and the practical implications for complainants and companies.
Brief Recap: What Is a Section 216A Derivative Action?
A statutory derivative action under Section 216A of the Companies Act allows a complainant — typically a shareholder or director — to apply to the General Division of the Singapore High Court for leave to bring an action in the name and on behalf of the company against a third party (often a director or officer) who has wronged the company.
The rationale is that where those who control a company (majority shareholders or the board) have themselves committed or allowed the wrong, they will not authorise the company to sue. The derivative action mechanism gives the court power to allow a minority complainant to pursue the company’s claim on the company’s behalf. The company is the true plaintiff — not the complainant personally. This is a fundamental point that directly affects how costs are handled.
For a full explanation of how to apply for leave to commence a derivative action, see our guide on How to Apply to Singapore Court for Leave to Commence a Derivative Action.
Section 216A(5): The Statutory Costs Provisions
Section 216A(5) of the Companies Act contains the express costs provisions for derivative actions. It is worth setting out in full:
In granting leave under this section, the Court may make such orders or interim orders as it thinks fit in the interests of justice, including (but not limited to):
(a) an order authorising the complainant or any other person to control the conduct of the action;
(b) an order giving directions for the conduct of the action;
(c) an order requiring the company to pay reasonable legal fees and disbursements incurred by the complainant in connection with the action;
(d) an order requiring the company to pay any other amount that the complainant has paid out of his own pocket in connection with the action.
Several important observations arise from reading this provision carefully.
1. The Company — Not the Defendant — Pays the Complainant’s Costs
Under Section 216A(5)(c), the costs order is an order against the company, not against the defendant director or officer. This reflects the derivative nature of the action: because the action is brought on behalf of the company, and the company is the beneficiary of any successful outcome, it is the company that should fund the litigation costs.
This is a fundamental difference from ordinary litigation where costs usually follow the event (the loser pays the winner). In the derivative action context, the complainant is not personally the plaintiff — the company is. The complainant acts as a vehicle to bring the company’s claim to court. Accordingly, the company’s funds are used to finance the action from the outset, rather than requiring the complainant to bear the personal financial risk.
2. The Order Is Discretionary, Not Automatic
The use of “may” in Section 216A(5) makes clear that a costs indemnity order is discretionary. The court will not automatically order the company to pay the complainant’s costs simply because leave has been granted. The complainant must specifically apply for such an order, and the court will consider whether it is appropriate in all the circumstances.
3. The Order Can Be Made at the Leave Stage
Critically, the court can make a costs indemnity order when granting leave under Section 216A — that is, at the threshold stage before the derivative action proper even commences. This is important: a complainant can seek financial protection before incurring the full costs of litigation, rather than having to self-fund the entire proceedings and seek recovery only at the end.
The Court’s Approach to Costs Indemnity Orders: Key Principles
Singapore courts have developed a coherent body of case law on when a costs indemnity order under Section 216A(5)(c) should be granted. The following principles emerge from the decided cases.
A. A Costs Order Is Not a Condition Precedent to Leave
The court has confirmed that while a costs indemnity order is a relevant consideration in the grant of leave, it is not a condition precedent. The absence of an express costs indemnity order at the leave stage does not mean the court has refused to protect the complainant — it may simply mean the court deferred the costs question to a later stage. Equally, the court may grant leave without a costs order where the complainant has sufficient means to fund the action without company support.
B. The Company’s Financial Position Is Relevant
Courts are reluctant to order a costs indemnity where the company is insolvent or of doubtful financial standing. If the company cannot practically fund the litigation, an indemnity order may be hollow — or, worse, may deplete the company’s assets in a way that prejudices creditors. Where the company is in good financial health and the derivative action is prima facie meritorious, the case for a costs order is stronger.
C. The Merits and Size of the Claim Matter
A costs order is more readily granted where the derivative action has clear prima facie merit and the potential recovery for the company is substantial. Courts have shown reluctance to saddle the company with litigation costs for claims that are speculative, marginal, or disproportionately expensive relative to the likely recovery. Where the defendant director’s alleged wrongdoing is serious — for example, misappropriation of company funds, secret profits, or deliberate breach of fiduciary duty — and the claim is well-evidenced, the case for a company-funded costs order is compelling.
D. The Complainant’s Conduct and Good Faith
Because good faith is a threshold requirement for leave under Section 216A (see our guide on the good faith requirement in Section 216A applications), a complainant whose good faith has been established is well-positioned to seek a costs order. Conversely, where the application has collateral motives — such as using the derivative action as a tactical weapon in a broader shareholder dispute — courts may decline to make a costs order, or may make a qualified order (e.g. capped at a certain amount).
E. Section 216A(5)(d): Reimbursement of Out-of-Pocket Expenses
Section 216A(5)(d) permits the court to order the company to reimburse the complainant for amounts already paid out of pocket in connection with the action. This provision is particularly relevant where the complainant has already incurred legal costs at the leave stage itself before an indemnity order is in place. Courts have held that such reimbursement orders are appropriate where the pre-application costs were reasonably incurred in good faith in pursuing a meritorious claim.
The Position of the Company: Who Controls the Costs Decision?
A practical difficulty arises in derivative action cases: the very persons who are defendants in the derivative action (or their allies) often control the company and therefore control the company’s response to the costs application. A board dominated by the allegedly errant directors will typically resist any order that the company fund the complainant’s litigation against them.
The court is alert to this dynamic. Where the company’s opposition to a costs order is driven by the self-interest of the controllers rather than the genuine interests of the company, courts will give that opposition diminished weight. The test is not what the current controllers of the company say — it is what is genuinely in the interests of the company and its shareholders as a whole.
In practice, the complainant should prepare for the company to file affidavit evidence opposing the costs application. The complainant’s response should demonstrate: (a) the merits of the underlying claim; (b) the good faith basis of the application; (c) the company’s financial capacity to fund the litigation; and (d) why funding the claim is in the company’s interests even if the current controllers resist it.
Costs at the End of the Derivative Action: Who Pays What?
The Section 216A(5)(c) costs indemnity order covers the complainant’s costs in conducting the derivative action. But what happens at the conclusion of the proceedings, whether by judgment, settlement, or discontinuance?
Where the Derivative Action Succeeds
If the derivative action succeeds, the company recovers damages or other relief from the defendant director. Any costs order in the company’s favour against the defendant director goes to the company — not to the complainant personally. The complainant does not receive any personal financial windfall from a successful derivative action (though their shareholding in the company increases in value as the company recovers the wrongly diverted assets). Costs awarded against the defendant will reduce the net recovery to the company but do not flow to the complainant directly.
Where the Derivative Action Fails
If the derivative action is dismissed or the company loses at trial, the standard position is that the defendant is entitled to costs against the company (since the company was the nominal plaintiff). However, the court has a discretion in derivative action cases, and may take into account that the action was brought by a minority complainant in genuine good faith against the wishes of the controllers. In appropriate cases, courts have declined to award costs against the company for an unsuccessful derivative action, or have awarded costs on a reduced basis.
The complainant personally will not ordinarily be liable for the defendant’s costs where they acted in good faith — but this is not guaranteed. Where the court finds that the derivative action was commenced without proper basis, was vexatious, or was driven by collateral motives, the court may depart from the standard position and make costs orders against the complainant personally.
Where the Action Is Settled
Derivative actions are frequently resolved by negotiated settlement. The settlement requires court approval (since the company is the nominal plaintiff and its interests must be protected). Costs in a settled derivative action are typically dealt with as part of the overall settlement terms, with the company bearing the complainant’s costs to date. The court will scrutinise settlement terms to ensure they genuinely serve the company’s interests and are not structured to benefit the complainant at the company’s expense.
Strategic Implications: Should You Apply for a Costs Indemnity Order?
For any complainant considering a Section 216A derivative action, the costs indemnity application deserves careful strategic attention. Here is how to think about it.
Always Apply If You Qualify
Where the derivative action has clear merit, the company is financially sound, and the complainant has acted in good faith, there is little downside to applying for a costs indemnity order under Section 216A(5)(c) at the leave stage. The court will not penalise a complainant merely for seeking a costs order. If the application succeeds, the financial burden of the litigation is substantially reduced. If it fails, the complainant can still proceed — they simply bear their own costs.
A Costs Order Can Strengthen the Leave Application
Paradoxically, seeking a costs order can reinforce the merits of the leave application itself. By demonstrating that the claim is sufficiently strong to justify a company-funded costs indemnity, the complainant signals to the court the genuine and meritorious nature of the underlying case. Courts have noted that the willingness of a complainant to have their claim scrutinised at the costs stage reflects a level of confidence in the underlying merits.
Cap the Indemnity If Needed
Courts have made costs indemnity orders subject to caps — for example, authorising the company to fund legal costs up to a specified amount, with a review mechanism if costs exceed the cap. Proposing a sensible cap in the leave application (rather than an open-ended indemnity) may make the order more palatable to the court and reduce opposition from the company’s controllers.
Consider the Impact on the Company’s Assets
Where the company has limited assets, a costs indemnity that depletes those assets may be counterproductive — particularly if the company’s assets are what the derivative action is trying to protect or recover. In such cases, the complainant may prefer to self-fund the leave application, seek a costs order only at the substantive hearing, or consider whether a Section 216 oppression action (which allows personal remedies) is a more appropriate route. See our guide on Section 216A vs Section 216 oppression relief in Singapore.
Practical Step-by-Step: Seeking a Costs Order in a Section 216A Application
- Issue the 14-day notice to directors: Before filing the leave application, the complainant must give 14 days’ written notice to the directors of the company stating their intention to apply for leave. This notice requirement is a condition precedent — failure to comply will result in the application being dismissed (as confirmed by the Singapore High Court in multiple decisions).
- File the Originating Application: The leave application is filed by way of an Originating Application in the General Division of the Singapore High Court, supported by an affidavit setting out the grounds for leave and the basis for the costs indemnity application.
- Include the costs application expressly: The prayers in the Originating Application should expressly seek an order under Section 216A(5)(c) (and (d) if applicable). Do not assume the court will make a costs order unprompted.
- Serve on the company and the defendant: The Originating Application must be served on the company and, where appropriate, on the defendant director whose wrongdoing is the subject of the derivative action.
- Prepare evidence on merits and costs: The supporting affidavit should address both the leave criteria (good faith, prima facie merits, company’s interests) and the costs criteria (the nature and estimated quantum of the legal costs, the company’s financial capacity to fund the indemnity, and why a costs order is appropriate). A separate supporting affidavit from a solicitor on costs estimates is helpful.
- Attend the hearing: The court will hear the leave application and the costs application together. Be prepared for the company (and possibly the defendant director) to file affidavits in opposition and to attend to oppose the application.
- Draft the order carefully: If a costs indemnity order is granted, ensure it is drafted with precision — specifying the cap (if any), the payment mechanism (advance payment, periodic payment, or reimbursement), and any reporting obligations.
Key Differences: Section 216A Costs vs Ordinary Litigation Costs
The costs regime for Section 216A derivative actions differs from ordinary civil litigation in several important respects:
| Feature | Ordinary Civil Litigation | Section 216A Derivative Action |
|---|---|---|
| Who is the plaintiff | The claimant personally | The company (represented by the complainant) |
| Who bears costs risk | Claimant personally | Company (under s216A(5)(c) order) |
| When can costs be secured | At end of proceedings | At leave stage (before action commences) |
| Costs follow the event? | Generally yes | Court has broader discretion |
| Who receives damages | Claimant personally | The company |
| Settlement needs court approval | No | Yes (to protect company interests) |
Recent Singapore Case Law on Costs in Section 216A Actions
The Singapore courts have considered the costs indemnity question in numerous Section 216A decisions. Several key themes emerge from the case law.
In derivative action cases involving allegations of misappropriation of company funds or deliberate breach of fiduciary duty by majority controllers, the High Court has shown a clear willingness to grant costs indemnity orders under Section 216A(5)(c), particularly where: (a) the evidence of wrongdoing is compelling; (b) the company would plainly benefit from a successful recovery; and (c) the company’s resistance to funding the litigation is explicable only by reference to the interests of the very directors being sued.
Conversely, where a derivative action has been brought predominantly as a tactical manoeuvre in a wider shareholder dispute — for example, to gain discovery, to put pressure on the majority to buy out the minority, or to harass the defendant — courts have either refused leave entirely or granted leave without a costs indemnity, leaving the complainant to bear their own litigation risk. This underscores the good faith requirement discussed in our earlier guide on the good faith requirement in Section 216A applications.
For a broader discussion of how derivative actions relate to other shareholder remedies, see our earlier article on Section 216A vs Common Law Derivative Action in Singapore.
Using a Derivative Action Alongside Other Shareholder Remedies
In practice, a minority shareholder with a legitimate grievance against the majority or the board rarely has just one available remedy. Section 216A derivative actions (which recover for the company) frequently run alongside Section 216 oppression actions (which provide personal remedies to the minority). The costs regimes for these two proceedings differ, and a complainant pursuing parallel proceedings should take legal advice on how to structure the claims and manage costs exposure across both actions.
The General Division of the Singapore High Court has jurisdiction over both Section 216 and Section 216A claims. Where related claims are filed together, courts will typically manage them under a single case management framework to reduce duplication of evidence and costs.
Conclusion: Costs Should Not Be an Afterthought
For any minority shareholder or director contemplating a Section 216A derivative action in Singapore, the costs and indemnity framework is not an afterthought — it is a central part of the strategic planning that should happen before the leave application is filed. The Section 216A(5)(c) provision is a genuine and important protection for complainants, but it requires proactive application and careful evidential support.
The combination of a well-evidenced leave application, an express costs indemnity prayer, and a clearly documented prima facie case gives complainants the strongest possible footing at the leave hearing — and sets the stage for a company-funded derivative action that does not require the minority to bear personal financial exposure for pursuing the company’s legitimate claim.
If you are considering a Section 216A derivative action and need legal advice on the application process, the costs regime, or how to structure the claim, specialist Singapore corporate litigation counsel can guide you through each stage of the proceedings. For the latest updates on Singapore company law developments, Singapore business and legal news is a valuable resource.
How Raffles Corporate Services Can Help
Raffles Corporate Services assists directors and shareholders of Singapore companies with corporate governance advice and company secretarial support. While derivative actions are matters for specialist litigation counsel, our team can assist with the underlying corporate documentation — including shareholders’ agreements, board minutes, statutory registers, and company records — that often form the documentary foundation of a Section 216A application. Sound corporate governance reduces the conditions that give rise to derivative action disputes in the first place. For sound financial planning and investment decisions as a business owner, good governance and clear shareholder documentation are equally important.
To speak with the team at Raffles Corporate Services, you can email [email protected] or call, SMS, or WhatsApp +65 8501 7133. We are happy to assist with any queries.
— The Editorial Team, Raffles Corporate Services
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