Kumpulan Perubatan (Johor) Sdn Bhd v. Dr Mohd Adnan Sulaiman & Anor [2015] 1 CLJ 471, Court of Appeal

Folin & Brothers Sdn Bhd (in liquidation) & Ors v Folin Food Processing Sdn Bhd & Ors [2011] 6 MLJ 585.
March 20, 2017
Projeck Lebuhraya Usahasama Bhd v. Majlis Perbandaran Subang Jaya [2016] 9 CLJ 238.
May 20, 2017

The Facts

The first and second respondents entered into a ‘Joint Venture Agreement Incorporating Shareholders Agreement’ (‘JVSA’) with the appellant, Kumpulan Perubatan Johor Sdn Bhd (‘KPJ’), a company involved in the running of private hospitals. The JVSA was entered into as to incorporate a limited liability company (‘Hospital Penawar Sdn Bhd’) to run a private hospital, Hospital Penawar (‘HP’).

The respondents later discovered that the appellant was in the process of setting up a new hospital which was located less than a kilometre away from HP. The respondents objected to this since the new hospital would be offering the same services within the same area and would be unfairly competing with HP. The respondents then sued the appellant for breach of the express and implied terms of the JVSA; breach of fiduciary duties; and for loss of future profits.

The High Court

In agreement with the respondents, the High Court allowed the claims and made the orders  that the appellant was in breach of the JVSA and that the appellant was in breach of its fiduciary duties. A sum of RM70,486,000 was ordered to be paid as damages by the appellant to the respondents with costs in the sum of RM150,000.

Court of Appeal

The appellant appealed and submitted that (i) only Hospital Penawar Sdn Bhd, as the affected company, could be the proper plaintiff to sue for projected loss of profits, not the respondents who were mere shareholders; (ii) no fiduciary relationship existed between the shareholders and the JVSA did not contain any competition clause; (iii) the damages for the loss of profits could not be said to be a claim for special damages; and (iv) the calculations of the award of RM70,486,000 were based on estimates and projections.

The Court of Appeal allowed the appeal after coming to a unanimous finding that there were serious misdirections in law and had set aside the order of the High Court. The appellant’s submission was pitched on the fundamental point in company law that only the affected company could be the proper plaintiff to sue for projected loss of profits caused to it by the setting up of the new hospital by the defendant, not the respondents who were mere shareholders entitled merely to dividends out of the profits.

The Court of Appeal held that this was an argument reverting to basic principles of company law as laid down in Foss v Harbottle [1843] 2 Hare 461 in that a shareholder cannot sue to enforce a company’s rights, unless his personal rights are infringed. Counsel referred to the case of Perman Sdn Bhd & Ors v European Commodities Sdn Bhd & Anor [2005] 4 CLJ 750 which was approved by Macaura v Northern Assurance Co Ltd & Others, supra, that a principle which lies at the heart of company law is that a company is a separate legal person from its shareholders, and that the shareholders “have no interest, legal or beneficial over the property of the former”.

The Court of Appeal further held that in determining that a fiduciary relation must be a sine qua non of a joint venture agreement, the High Court failed to sufficiently appreciate that on the facts of this case, the joint venture agreement was in the nature of a commercial joint venture. In which case, it was incumbent on the High Court to have determined the exact contractual terms binding the parties. Secondly, the High Court had failed to sufficiently consider the fundamental principle of company law that shareholders are only entitled to dividends declared out of profits within the terms of the governing articles of association, even in the context of joint venture.

Lastly, the report adduced by the respondents was based on assumptions, estimates and projections that had not been independently verified. Being based on estimated losses and projections, the sums claimed as loss of profits could not be classified as ‘special damages’ for the short reason that they had not been actually incurred, nor capable of exact calculation. The respondent’s claim in this regard was fundamentally flawed.

The Appeal was allowed with costs of RM200,000 to be paid to the Appellant and the order of the High Court was set aside.

Alex De Silva (S. Shamalah with him) (Bodipalar Ponnudurai De Silva) acted for the Appellant, KPJ. For further information, please contact alex@bpdlex.com