When a director misappropriates company funds, diverts business opportunities to themselves, or transfers company assets at an undervalue for personal gain, the company is the party that has suffered loss — not the individual shareholders. In theory, the company itself should bring a lawsuit to recover what was taken. In practice, however, the very directors who caused the loss are often still in control of the company and will not authorise litigation against themselves. Section 216A of the Companies Act 1967 solves this problem by allowing a shareholder (or other qualifying complainant) to obtain leave from the Singapore High Court to bring a derivative action in the company’s name against the wrongdoing directors.

This guide explains how derivative actions work in Singapore for the specific purpose of recovering misappropriated company assets, the test the court applies in deciding whether to grant leave, the practical steps involved, and the challenges that applicants typically face in this type of litigation.

The Problem: Directors Who Control the Company’s Litigation Decision

Under normal corporate governance principles, the decision to commence litigation on behalf of a company is a matter for the board of directors, acting collectively. A single director cannot sue on the company’s behalf without board authorisation; similarly, a shareholder cannot simply instruct the company to sue — the right to manage the company’s affairs, including the pursuit of legal claims, belongs to the board.

This creates a fundamental problem when the wrongdoer is a director (or a majority shareholder who controls the board). If the board will not authorise a claim against one of its own members — whether out of misplaced loyalty, self-interest, fear, or deliberate obstruction — the victims of the wrongdoing have no remedy through the ordinary channels. The company suffers the loss, and the wrongdoer goes unpunished.

Section 216A of the Companies Act provides the statutory mechanism to break this deadlock. It allows a “complainant” — as defined in the Act — to apply to the Singapore High Court for leave to bring a civil action in the company’s name against the director responsible for the misappropriation.

Who Can Apply: The “Complainant” Definition

Section 216A(1) defines “complainant” as a member of the company, a former member, or any other person who, in the discretion of the Court, is a proper person to make the application. In practice, the most common applicants are minority shareholders who have become aware of misconduct and cannot persuade the board to act.

A creditor may also be a complainant in appropriate circumstances, particularly where the company is insolvent or near-insolvent and the misappropriation has directly harmed the creditor’s position. In the Singapore decision of Pang Yong Hock v PKS Contracts Services Pte Ltd [2004] 3 SLR(R) 1, the Court of Appeal clarified that the “proper person” limb of the complainant definition requires the court to assess the relationship between the applicant and the company and the reason for the application.

A person who has ceased to be a member (former shareholder) may still apply if they were a member at the time of the alleged misconduct — the Act does not strip locus standi from shareholders who sell their shares after the breach occurs, provided they were members when the cause of action arose.

The Three-Part Test for Leave Under Section 216A(3)

Section 216A(3) sets out three conditions that the applicant must satisfy before the court will grant leave to bring a derivative action. All three conditions must be met. The court will not grant leave if any one of the conditions is not established.

Condition 1: Notice to the Directors

The complainant must have given 14 days’ notice to the directors of the company of the intention to apply for leave, and must have requested that the directors bring the action themselves, or cause the company to bring the action. The purpose of this notice requirement is to give the board a final opportunity to act — if the board takes appropriate steps to pursue the wrongdoer independently, the need for a derivative action is removed.

In practice, this means sending a formal written demand to all directors of the company, clearly specifying the nature of the alleged misconduct, the relief sought, and the intention to commence a Section 216A application if the company does not take action within 14 days. The notice is both a statutory requirement and an important strategic step — the board’s failure to respond, or its dismissive response, will be evidence before the court that the company cannot be expected to sue on its own behalf.

Condition 2: Acting in Good Faith

The court must be satisfied that the complainant is acting in good faith. Good faith requires that the applicant genuinely believes the action is in the best interests of the company — not that it is being brought primarily to settle personal scores, to destabilise the company for competitive advantage, or for some other collateral purpose.

The Singapore Court of Appeal has held that good faith does not require the applicant to be free of personal interest or even personal grievance against the defendant director. The key question is whether the application is brought with an honest belief that the action would benefit the company: Ang Thiam Swee v Low Hian Chor [2013] 2 SLR 340. A shareholder who is also a commercial rival of the company may still act in good faith if their dominant purpose is genuinely to benefit the company.

Where the court finds that the application is primarily motivated by personal animus rather than by a genuine desire to benefit the company, it will decline leave. Applicants should therefore ensure that the application is grounded in a clear articulation of why the litigation is in the company’s best interests — particularly in terms of the value to be recovered relative to the costs and risks of litigation.

Condition 3: Apparently in the Interests of the Company

The proposed action must be prima facie in the interests of the company. This is a lower threshold than the standard required to win the underlying action — the court at the leave stage is not conducting a full merits hearing. The applicant must show that there is a reasonable basis for the claim (sometimes described as a “legitimate or arguable case”) and that pursuing the claim is in the company’s overall interests.

In asset misappropriation cases, this typically means demonstrating: that there is credible evidence of misappropriation (for example, unauthorised transfers of company funds, suspicious transactions with related parties, or transfers at undervalue); that the quantum of the loss is material and worth pursuing; that there is a reasonable prospect of recovering the misappropriated assets or obtaining a monetary judgment that can be enforced; and that the company would not be pursuing the action itself (usually because the defendant director controls the board).

The court will weigh the potential benefit of the action against its costs and the disruption to the company’s business. An action that, even if successful, would recover a trivial sum relative to the cost of litigation may not be found to be in the company’s interests.

Types of Misappropriation That Ground a Derivative Action

Section 216A derivative actions for asset recovery are most commonly brought in the following fact patterns.

Unauthorised withdrawals and transfers: A director with control over the company’s bank accounts transfers company funds to their own accounts, to a related company, or to a third party at their direction without board approval. This is the most straightforward form of misappropriation and is often evidenced by bank statements and accounting records.

Diversion of business opportunities: A director diverts contracts, clients, or business opportunities that belong to the company to a competing business they own or have an interest in. The company loses the revenue; the director gains it personally. This is a breach of both the duty not to profit from the director’s position (Section 156 Companies Act) and the duty to avoid conflicts of interest.

Asset transfers at undervalue: A director causes the company to sell assets — property, equipment, intellectual property, or business units — to themselves or to connected parties at a price below market value, effectively transferring value out of the company at the shareholders’ expense.

Excessive or fictitious remuneration: A director-shareholder pays themselves inflated salaries, bonuses, or “consultancy fees” that are not commercially justifiable and that effectively strip cash from the company to the detriment of other shareholders. This overlaps with the Section 216 oppression remedy, which our article on minority shareholder oppression covers in detail.

Misuse of company credit facilities: A director borrows on the company’s credit facilities for personal purposes, leaving the company liable for the debt. This may also give rise to claims under Section 163 (prohibition on loans to directors) and Section 162 (prohibition on companies giving financial assistance for purchase of own shares).

Procedural Steps: How to Apply for Section 216A Leave

A Section 216A leave application is commenced by way of Originating Application in the Singapore High Court (General Division). The applicant files an Originating Application supported by an Affidavit setting out the background facts, the alleged misconduct, the evidence available, and the reasons why the applicant believes the proposed action is in the company’s interests.

The company and the director(s) against whom the proposed action will be brought are served with the Originating Application and Affidavit. They are entitled to file Affidavits in reply, and the leave application is then heard by a judge. In straightforward cases, leave may be granted on the papers without a contested hearing. Where the facts are disputed or the respondents raise strong objections, a substantive oral hearing will be required.

The costs of the leave application — and potentially of the underlying action — may be ordered to be paid by the company if leave is granted and the action succeeds. This is one of the most significant features of the derivative action: the complainant need not fund the litigation entirely from their own resources, as the court may direct the company to bear or contribute to the costs of proceedings brought for the company’s benefit.

Costs, Indemnity, and Security

Under Section 216A(5), the court may order the company to pay the complainant’s reasonable legal costs incurred in bringing the application and the action, and may also order that the company provide security for those costs. This is a powerful feature of the derivative action — it means that a minority shareholder with limited financial resources can potentially pursue a well-funded director without bearing the full costs themselves, provided the court is satisfied that the action is meritorious and in the company’s interests.

However, the court also has the power to require the complainant to provide security for the costs of the respondents, particularly where the respondent director can demonstrate a real risk that the complainant will not be able to pay costs if the application fails. Applicants should factor this risk into their planning.

Provisional Injunctions and Asset Preservation

In cases where there is a real and immediate risk that misappropriated assets will be dissipated, transferred overseas, or placed beyond reach before the action is determined, the complainant should consider applying for a Mareva injunction (freezing order) against the defendant director simultaneously with or immediately after commencing the derivative action. A Mareva injunction requires the applicant to demonstrate: a good arguable case on the merits; a real risk of dissipation of assets; and that the balance of convenience favours the grant of the injunction.

The urgency with which asset preservation steps need to be taken in misappropriation cases means that early and decisive legal advice is critical. If you are a shareholder who has discovered evidence of director misconduct and believes company assets may be at risk, you should seek urgent legal advice on your options before approaching the board or taking any other preliminary steps that could alert the wrongdoer.

Alternative and Complementary Remedies

The Section 216A derivative action is not the only remedy available in director misconduct cases, and is often pursued alongside or in parallel with other claims.

A Section 216 oppression application may be brought concurrently if the misappropriation is part of a broader pattern of conduct that is unfairly prejudicial to minority shareholders. The court’s powers under Section 216 include ordering a buy-out of the minority’s shares at a price that takes into account the damage caused by the misconduct — this may be a more commercially efficient outcome than pursuing a stand-alone recovery action.

Criminal complaints may be made to the police or the Commercial Affairs Department (CAD) where the misappropriation amounts to criminal breach of trust or cheating under the Penal Code 1871. Criminal proceedings run independently of civil litigation and may result in the recovery of assets through the proceeds of crime regime even where civil enforcement is difficult.

ACRA may also be notified of director misconduct under the Companies Act. Where a director has been convicted of an offence involving fraud or dishonesty in connection with the company, ACRA has the power to disqualify the director from acting as a director of any Singapore company.

Our guide on statutory derivative actions under Section 216A provides an overview of the broader derivative action framework, and our article on applying to the Singapore court for leave to commence a derivative action covers the procedural steps in detail.

For the authoritative statutory framework, the Companies Act 1967 is available on Singapore Statutes Online. The Singapore High Court’s Originating Application procedure is governed by the Rules of Court 2021, available on the Singapore Judiciary website.

If you need legal advice on a derivative action, director misconduct, or asset recovery in Singapore, we can point you in the right direction.

To speak with the team at Raffles Corporate Services about corporate secretarial matters, director governance, or to discuss a referral for legal assistance, 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