Derivative Actions in Singapore: Section 216A of the Companies Act Explained

A derivative action is a court proceeding brought by a shareholder on behalf of a company — rather than for the shareholder’s own benefit — to remedy a wrong done to the company itself. In Singapore, derivative actions are governed by Section 216A of the Companies Act, which provides a statutory framework that is stricter and more structured than the common law approach it largely replaced. Understanding when and how to use this remedy is essential for minority shareholders, directors who have been excluded from management, and any party investigating potential wrongdoing at the board level.

This guide explains the law on derivative actions in Singapore, the procedural requirements under Section 216A, how courts have applied the key tests, and the practical considerations for any shareholder considering this route.

What Is a Derivative Action?

When a wrong is done to a company — for example, a director breaches their fiduciary duties, misappropriates company assets, or causes the company to enter a transaction at an undervalue for personal benefit — the right to bring legal proceedings to remedy that wrong belongs to the company, not to individual shareholders. The company is the aggrieved party.

This principle, known as the rule in Foss v Harbottle [1843] 2 Hare 461, means that a majority of shareholders can effectively prevent legal action being taken against wrongdoers who control the company. Where the wrongdoers are the majority, or are controlled by the majority, the company will typically decline to sue itself.

A derivative action breaks through this impasse by allowing a shareholder — typically a minority shareholder — to bring proceedings in the name of and on behalf of the company, for the benefit of the company, not themselves personally. Any damages recovered go to the company, not the plaintiff shareholder.

Section 216A of the Companies Act: The Statutory Framework

Section 216A was introduced to provide a clear procedural route for derivative actions, replacing the uncertain and burdensome common law position. The section applies to:

• Any member (shareholder) of a company;
• The Minister (in specific public interest circumstances); and
• Any other person whom the court considers to have a legitimate interest.

A former shareholder who ceased to hold shares before the wrong occurred generally cannot bring a derivative action, as they are no longer a “member.” Courts have also required that the applicant hold shares at the time of the application, not just at the time of the alleged wrongdoing.

The Three Requirements Under Section 216A(3)

To obtain leave to bring a derivative action, the applicant must satisfy the court on three grounds under Section 216A(3) of the Companies Act:

(a) Notice to Directors

The applicant must have given 14 days’ notice to the directors of the company of their intention to apply to court, unless the court considers it appropriate to dispense with notice. The notice allows the directors a final opportunity to consider taking action themselves on behalf of the company before court proceedings are commenced.

In Petroships Investment Pte Ltd v Wealthplus Pte Ltd [2016] SGCA 17, the Court of Appeal confirmed that the notice requirement is procedural and is not a condition precedent that defeats jurisdiction if not perfectly complied with — courts have discretion to waive or modify the requirement in appropriate cases.

(b) The Applicant Is Acting in Good Faith

The court must be satisfied that the application is made in good faith. An application will not be in good faith if the applicant’s real purpose is not to benefit the company, but rather to harass management, gain a collateral advantage in separate proceedings, or satisfy a personal grudge.

In Ang Thiam Swee v Low Hian Chor [2013] SGCA 11, the Court of Appeal held that the good faith inquiry is two-limbed: the court asks both (i) whether the applicant honestly believes there is a good cause of action, and (ii) whether the applicant is bringing the action for a proper purpose. A lack of good faith can be inferred from the conduct of the applicant and the surrounding circumstances of the case.

Crucially, a shareholder does not lose their good faith standing merely because they stand to benefit indirectly from the action. As minority shareholders, their shareholding value increases if the company recovers damages — this is an inevitable feature of derivative actions and does not constitute an improper purpose.

(c) It Appears Prima Facie in the Interests of the Company

The court must be satisfied, on a prima facie basis, that it is in the interests of the company to bring the proposed action. This is the most important and most litigated of the three requirements.

“Prima facie” is a lower standard than balance of probabilities — the applicant does not need to prove that the action will succeed, only that there is a legitimate foundation for it. In Agus Irawan v Toh Teck Chye [2002] 2 SLR(R) 198, the High Court confirmed that the applicant must show that the action is legitimate and arguable, not a mere façade or abuse of process.

The court will consider:

• Whether the cause of action is legally tenable on its face;
• Whether there is a reasonable basis for expecting that the company would obtain some benefit from the proceedings;
• The likely costs and risks of the action relative to the expected recovery; and
• Whether the company has taken reasonable steps to investigate and prosecute the matter without the need for a derivative action.

The Application Process

Step 1: Send the 14-Day Notice

Before filing any court papers, send written notice to each member of the board of directors stating your intention to apply to the High Court for leave to bring a derivative action. The notice should describe the proposed action, the relief sought, and the legal basis of the claim in sufficient detail for the directors to consider the matter meaningfully.

Step 2: File an Originating Application

After the 14-day period has expired (or immediately, if seeking to dispense with notice), file an Originating Application in the General Division of the Singapore High Court under Order 15, Rule 5 of the Rules of Court 2021. The application must be supported by an affidavit setting out:

• The applicant’s standing as a shareholder;
• The details of the notice given to directors;
• The facts constituting the alleged wrong done to the company;
• The proposed cause of action and relief to be sought on behalf of the company; and
• Evidence establishing good faith and the prima facie case.

Step 3: The Leave Hearing

The court will hear the application for leave. The company and its directors will typically be served and may appear at the hearing to oppose the application. The leave hearing is not a full trial — the court is assessing whether there is a sufficient basis to allow the action to proceed, not deciding the merits of the underlying claim.

If leave is granted, the applicant is authorised to bring and conduct proceedings on behalf of the company. The court will also typically make directions regarding who will fund the litigation and whether the company is required to indemnify the applicant for costs.

Step 4: Conduct of the Derivative Proceedings

Once leave is granted, the applicant conducts the proceedings in the name of the company. The company is formally the plaintiff, and the applicant manages and funds the litigation on the company’s behalf (unless the court has directed otherwise). Any settlement reached in derivative proceedings requires court approval under Section 216A(6) — the parties cannot settle without leave of court.

Derivative Actions vs Oppression Claims Under Section 216

A derivative action under Section 216A must be distinguished from a personal oppression claim under Section 216 of the Companies Act. The differences are significant:

In practice, minority shareholders facing management misconduct often plead both Section 216A and Section 216 claims in the same proceedings, because the same facts can give rise to both a corporate wrong (addressed by the derivative action) and personal harm to the minority shareholder (addressed by the oppression claim). For more on oppression remedies, see our earlier articles on exclusion from management as oppression and dividend withholding as oppression.

Cost Implications and Indemnification

One of the most practically significant aspects of derivative actions is the cost position. The applicant shareholder brings proceedings on behalf of the company but must initially fund those proceedings. If the action is successful, the company (now in receipt of the damages) should reimburse the applicant’s costs. If the action fails, the applicant may be personally liable for the defendant’s costs.

Courts have discretion under Section 216A(5) to order the company to indemnify the applicant for reasonable legal costs incurred in connection with the action. This power is important because it removes one of the main practical barriers to bringing derivative actions — the risk of personal cost exposure where the company (which may be controlled by the wrongdoer) refuses to cooperate.

The interaction between costs, indemnification, and the shareholder’s personal financial risk should be carefully assessed before commencing any derivative action. If you are considering this remedy, obtaining legal advice at the outset is strongly recommended. For legal advice on derivative actions and shareholder rights, we can point you in the right direction.

Key Case Law Developments

Singapore courts have developed a sophisticated body of case law on Section 216A applications:

• Ang Thiam Swee v Low Hian Chor [2013] SGCA 11 — Court of Appeal authoritatively set out the good faith test and confirmed the distinction between personal benefit and improper purpose.
• Petroships Investment Pte Ltd v Wealthplus Pte Ltd [2016] SGCA 17 — Confirmed that the notice requirement is procedural and subject to court discretion to waive.
• Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1 — High Court considered the “interests of the company” limb and confirmed that a minority shareholder’s indirect benefit does not automatically negate good faith.
• Fong Wai Lyn Carolyn v Kao Chai-Chau Linda [2023] SGHC 44 — Recent High Court decision applying the Section 216A framework to a family company dispute, with useful guidance on the relationship between derivative and oppression claims.

Practical Considerations Before Bringing a Derivative Action

• Exhaust internal remedies first: Courts look more favourably on derivative action applications where the applicant has genuinely tried to get the company to act on the wrong before resorting to litigation.
• Preserve evidence: Before commencing, ensure all relevant documents — emails, financial records, board minutes, contracts — are preserved. Directors who are aware of impending litigation may attempt to destroy or conceal records.
• Consider alternative dispute resolution: Mediation or arbitration may be more cost-effective routes for resolving shareholder disputes without the complexity and cost of court proceedings.
• Assess the financial capacity of the defendant: If the wrongdoer has already dissipated the company’s assets, the cost of litigation may exceed any likely recovery.
• Check any arbitration clauses: If the underlying wrong arose from a contract with an arbitration clause, part of the claim may need to be brought in arbitration rather than court.

Conclusion

Derivative actions under Section 216A of the Companies Act are a powerful but procedurally demanding remedy for minority shareholders facing corporate misconduct. The three-stage test — notice, good faith, and the interests of the company — sets a meaningful bar that distinguishes genuine corporate grievances from abusive shareholder conduct. Where the bar is cleared, the Singapore courts have shown willingness to grant leave and ensure that wrongdoers within company management are held accountable.

Understanding the interaction between derivative actions, oppression claims under Section 216, and the broader remedies available in Singapore company law is essential for any shareholder or director navigating a corporate dispute. For more on the court’s approach to company disputes, see our articles on court-appointed receivers and the members’ voluntary liquidation process.

For official procedural rules on commencing High Court proceedings, refer to the Singapore Courts website and the Rules of Court 2021.

If you need legal advice on derivative actions, shareholder disputes, or company law proceedings, we can point you in the right direction. These matters require specialist legal representation from the outset.

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