Note: The Federal Court case of Dato’ Seri Timor Shah Rafiq v Nautilus Tug & Towage (2024) clarifies the test for leave to commence derivative action under s 348 of the Companies Act 2016.
Introduction
On the afternoon of 19 September 2016, the harbour tug NTT Lumut rested alongside the jetty at Vale’s Teluk Rubiah Maritime Terminal in Lumut. The tide was shifting, the weather unsteady. Suddenly, the vessel’s port side caught against the fenders. Water rushed in, and the tugboat sank to the seabed. For Dato’ Seri Timor Shah Rafiq, a director of the vessel’s owner, Nautilus Tug & Towage Sdn Bhd, the sinking was not merely a maritime disaster—it was the spark that would ignite a years-long legal war over the soul of the company.
The Story Behind the Suit: A Company at War
The following section contains lightly dramatised reconstruction drawn from the reported facts. Please contact our office for any correction requests.
The joint venture was born in optimism. In 2013, Azimuth Marine Sdn Bhd (“AMSB”) and Nautical Supreme Sdn Bhd (“NSSB”) came together to form Nautilus Tug & Towage Sdn Bhd (“NTT”), a company built to build, own, and manage harbour tugboats for Vale Malaysia Minerals Sdn Bhd. AMSB held 80% of the shares; NSSB held 20%. The Board reflected this divide: nominees of AMSB held the majority, while Dato’ Seri Timor Shah Rafiq and Dato’ Wan Mohamed Yaacob represented NSSB as the minority directors. From the outset, the boardroom was a study in controlled tension—two factions watching each other across a polished table, bound by contract but divided by mistrust.
In April 2013, NTT signed a sale and purchase agreement with Shin Yang Shipyard Sdn Bhd (“SYS”) to build seven tugboats for USD68.5 million. Seventy percent was financed by Export-Import Bank of Malaysia Berhad; the remaining 30%—USD20.55 million—was to come from the shareholders as a “Shareholders’ Advance,” treated as debt bearing 7% interest per annum. For a while, the machinery of commerce ran smoothly. Tugboats were delivered. Invoices were paid. The fleet began operations.
Then, in August 2015, a letter arrived from SYS that shattered the calm. SYS claimed NTT still owed it USD21.4 million. The numbers did not add up. If Exim Bank had financed USD47.95 million, and NSSB had paid its portion, why was there a shortfall? Timor Shah Rafiq began asking questions. He wanted to see proof that AMSB had paid its share of the Balance Purchase Price. The majority directors, however, met his inquiries with silence. Board meetings grew frosty. Requests for accounting records were denied.
Timor obtained a court order for inspection. Messrs Crowe Horwath, the appointed auditors, eventually produced three reports. Their findings were stark: there was a “lack of any independent and credible evidence” to substantiate approximately USD19.9 million recorded in NTT’s books as AMSB’s Shareholders’ Advance. The entries existed only as journal postings in the general ledger. No bank slips. No transfer receipts. Just numbers on a page.
While this financial mystery simmered, the NTT Lumut sank on 19 September 2016. At a board meeting the next day, Dato’ Suresh Emmanuel Abishegam—AMSB’s nominee and the principal shareholder of Azimuth Ship Management Sdn Bhd (“ASM”), the ship manager—briefed the board. The Marine Department, insurers, and Vale had investigated, he said, and the incident was an “accident.” Timor was not satisfied. He proposed an independent inquiry. The majority directors refused. He could see the conflict plainly; ASM was managed by Dato’ Suresh’s own company. How could the same hand that managed the vessel impartially judge its loss?
Timor hired Alan Loynd, a Hong Kong marine consultant. Loynd’s preliminary report was cautious. He noted that the documents provided were “totally inadequate,” that the crew appeared incompetent, and that the managers had neglected best practice. His conclusion, however, was measured: “My feeling, based upon the evidence I have seen, is that this casualty could and should have been avoided.” It was not a finding of negligence. It was a hypothesis begging for more evidence.
The board eventually agreed to an independent investigation by M3 Marine Expertise Pte Ltd, but rejected Timor’s demand for separate experts appointed by each faction. By then, the relationship had curdled. Timor issued a statutory notice under s 348 of the Companies Act 2016. He wanted to sue ASM for negligence on behalf of NTT. The board, meanwhile, had already collected approximately USD5.2 million from hull insurers, over USD150,000 from a protection and indemnity policy, and negotiated a USD3.5 million close-out payment from Vale to cancel the NTT Lumut charter. To the majority, the file was closed. To Timor, justice remained unopened.
On the Shareholders’ Advance front, the board continued to approve millions of Ringgit as “Shareholders’ Interest” payments to both AMSB and NSSB, calculated on the very advances that Crowe Horwath could not verify. Timor and Dato’ Wan stopped approving these payments after July 2017. The minority directors had drawn a line in the sand.
By 2018, Timor was fighting on two legal fronts. He applied for leave to commence derivative actions—one against ASM for the sinking, and another against the majority directors and NTT’s financial controller to account for the unsubstantiated Shareholders’ Interest of RM14,619,166.47. The High Court refused both applications. The Court of Appeal affirmed the refusal in the sinking claim, but reversed the decision in the Shareholders’ Advance claim, granting leave. Both sides appealed to the Federal Court.
The Legal Battle: Arguments of the Parties
Appeal 31: The Sinking of the NTT Lumut
Timor Shah Rafiq’s position was that ASM had been negligent in managing the NTT Lumut. He relied on Loynd’s preliminary and supplementary reports, which suggested the crew had not been properly trained and that the sinking could have been avoided. He argued that the board was conflicted: Dato’ Suresh, the principal shareholder of ASM, could not impartially decide whether to sue his own company. Because NTT itself refused to take action, a derivative action was the only avenue. He contended that it was plainly in NTT’s best interest to pursue wrongdoers and recover losses.
NTT and the majority directors resisted fiercely. They argued that Loynd’s opinion was incomplete and inconclusive—he had not been given access to the wreckage, and his report was merely a “feeling,” not a finding of negligence. Against Loynd stood reports from Vale, Braemar Technical Services, and M3 Marine, none of which suggested fault on ASM’s part. They further submitted that NTT had already been fully indemnified by insurance and the Vale close-out agreement, meaning any lawsuit would yield little or no financial benefit. Worse, it would drag Vale—NTT’s sole customer—into the dispute and jeopardise a lucrative long-term relationship. Finally, they accused Timor of acting with an ulterior motive, using the derivative action as a weapon in a personal vendetta against the majority.
Appeal 32: The Phantom Millions
Timor Shah Rafiq argued that NTT was saddled with a wholly unverified debt exceeding RM90 million. Crowe Horwath’s reports, he said, demonstrated that there were no documents proving AMSB had actually paid its portion of the Shareholders’ Advance. Millions in interest were being paid out on a debt that might not exist. If the derivative action succeeded, NTT would be relieved of this burden and could recover the RM14.6 million in Shareholders’ Interest already paid. He maintained that his belief in the merits was honest and objectively reasonable, and that he was pursuing justice for the company, not personal revenge.
NTT and the majority directors countered that Timor had “unclean hands.” They pointed out that he had previously approved some Shareholders’ Interest payments and that NSSB had accepted dividends based on the audited accounts. They characterised the dispute as essentially a shareholder quarrel that should be resolved between AMSB and NSSB, not by dragging NTT through derivative litigation. They argued that the action would be enormously disruptive, that the accounts had been approved by three separate audit firms, and that an alternative remedy—a shareholder suit under the shareholders’ agreement—was available. They also repeated the allegation that Timor’s true purpose was to destabilise the company.
Key Authorities and Laws Considered by the Court
Statutes and Subsidiary Legislation
- Companies Act 2016, ss 345, 347(2), (3), 348(4)(b), and 350
- s 345: Defines “complainant” broadly to include members, former members, directors, and the Registrar.
- s 347(1)-(3): Creates the exclusive statutory right to commence derivative proceedings with leave of court, and expressly abrogates the common law right to bring such actions.
- s 348(4): Sets the twin requirements for leave: (a) the complainant is acting in good faith; and (b) it appears prima facie to be in the best interest of the company.
- s 350: Grants the court wide ancillary powers, including orders controlling the conduct of proceedings, directions, inspection of books, and costs.
- Courts of Judicature Act 1964, s 78
- Governs the preparation and delivery of judgments where a judge has retired.
- Rules of Court 2012, O 53
- The procedure for judicial review. The Court clarified that the threshold for derivative action leave under s 348 is not the low threshold applicable to judicial review applications.
Case Authorities
- Foss v Harbottle [1843] 67 ER 189
- The foundational case establishing the proper plaintiff rule and the principle of majority rule in company law. Cited as the origin of the common law principles now displaced by statute.
- Abdul Rahim Aki v Krubong Industrial Park (Melaka) Sdn Bhd & Ors [1995] 2 MLRA 63
- Set out the procedural elements of common law derivative actions in Malaysia.
- Celcom (M) Bhd v Mohd Shuaib Ishak [2010] 2 MLRA 202
- Followed the Australian position in Swansson on the two-fold test for good faith: honest belief in a good cause of action, and absence of collateral purpose. Applied to the repealed CA 1965 provisions but held relevant to the CA 2016 regime.
- Swansson v RA Pratt Properties Pty Ltd & Anor [2002] NSWSC 583; [2002] 42 ACSR 313
- The leading Australian authority establishing that good faith requires (1) an honest belief that a good cause of action exists with reasonable prospects of success, and (2) that the application is not brought for a collateral purpose amounting to an abuse of process.
- Ang Thiam Swee v Low Hien Char [2013] 2 SLR 340
- Singapore Court of Appeal decision holding that good faith depends less on the applicant’s motives and more on whether the purpose of the action has a clear nexus with the company’s benefits. A collateral purpose may still be permissible if it is consistent with doing justice to the company.
- Pang Yong Hock & Another v PKS Contracts Services Pte Ltd [2004] 3 SLR(R) 1
- Emphasised that even after establishing good faith and a genuine claim, the court must weigh commercial considerations (cost, distraction, damage to relationships) when assessing the company’s best interest.
- Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859
- Reinforced that the applicant’s honest belief must be assessed objectively: the court may disbelieve the applicant if no reasonable person in the circumstances could hold that belief.
- Lesini v Westrip Holdings Ltd [2010] BCC 420
- Established that a private interest does not necessarily negate good faith if it coincides with the company’s interest.
- Ong Keng Huat v Fortune Frontier (M) Sdn Bhd & Anor [2015] MLRHU 592
- Malaysian High Court decision considering comparative formulations of the “best interest” test across jurisdictions.
- Nurcombe v Nurcombe And Another [1985] 1 All ER 65
- English Court of Appeal decision on the “proper person” and “clean hands” doctrine under common law derivative actions.
- Towers v African Tug Company [1904] 1 Ch 558
- Held that a shareholder who has pocketed proceeds of an ultra vires act cannot bring a derivative action in respect of that act.
- Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732
- Noted that notions of equity may be imported into the good faith requirement, for instance where an applicant seeks a benefit that, in good conscience, he should not receive.
- Nautilus Tug & Towage Sdn Bhd v Nautical Supreme Sdn Bhd & Ors [2022] 4 MLRH 106
- Related litigation between the same parties, cited to show the existing level of attrition and suspicion.
- Fothergill v Monarch Airlines Ltd [1981] AC 251 (HL)
- Authority for the proposition that official reports preceding legislation may be examined to identify the “mischief” the statute intended to remedy.
- Independent Oil Tools Ltd v Dato’ Ramli bin Md Nor & Ors [2018] MLRHU 103
- Traced the legislative history of derivative actions in Malaysia from the common law to the statutory regimes under the CA 1965 and CA 2016.
Other Materials
- Corporate Law Reform Committee (CLRC), Review of the Companies Act 1965—Final Report
- Recommended abolishing the common law derivative action to “provide certainty and clarity to the law,” which the Court used to confirm the legislative intent behind s 347(3) of the CA 2016.
- Loh Siew Cheang, Corporate Powers Accountability, 3rd Edn
- Cited for the proposition that commercial considerations and the board’s bona fide commercial decisions are relevant to the “best interest of the company” assessment.
- Gower’s, Principles of Modern Company Law, 4th Edn (1979)
- Cited in Nurcombe and relied on by the parties regarding the “proper person” requirement at common law.
The Court’s Decision: Plain English Explanation
The Federal Court dismissed both appeals. In doing so, it delivered a comprehensive roadmap for how Malaysian courts must assess applications for leave to commence derivative actions under ss 347 and 348 of the Companies Act 2016.
The Statutory Regime Has Killed the Common Law Derivative Action
The Court left no room for doubt: s 347(3) of the CA 2016 has completely abolished the common law derivative action. The old exceptions to the rule in Foss v Harbottle no longer provide an independent basis to sue on behalf of a company. A complainant must now come exclusively through the statutory gate. However, the Court noted that common law principles remain useful as interpretive tools when applying the statutory concepts of “good faith” and “best interest of the company.”
Leave Is Not a Mere Formality
The Court stressed that the threshold for leave under s 348 is not low. It is not analogous to the threshold for judicial review under Order 53 of the Rules of Court 2012. Once leave is granted, the complainant wields extraordinary power to litigate in the company’s name. The court’s role at the leave stage is therefore a critical filtering process.
Two Separate, Independent Hurdles
Section 348(4) sets out two distinct prerequisites that must each be independently satisfied:
- Good faith; and
- Prima facie best interest of the company.
An applicant cannot compensate for weakness in one by strength in the other.
What “Good Faith” Really Means
Drawing on Celcom and Swansson, the Court endorsed a two-fold test:
- Honest belief: The applicant must honestly believe that a good cause of action exists and has a reasonable prospect of success. This has both a subjective component (does the applicant actually hold this belief?) and an objective component (is the belief so perverse that no reasonable person could share it?).
- No collateral purpose: The application must not be an abuse of process brought for an ulterior purpose unrelated to the subject matter. However, the Court followed Ang Thiam Swee in noting that the focus is on the purpose of the proposed action, not merely the applicant’s motives. Even if the applicant has a personal interest or collateral purpose, good faith is not defeated if that purpose is sufficiently consistent with doing justice to the company. Pure hostility or shareholder vendetta, without more, is not enough to establish bad faith.
What “Best Interest of the Company” Really Means
The Court confirmed that this is not a mini-trial. The judge does not resolve the merits. Instead, the court asks whether the proposed action is legitimate and arguable, with some reasonable chance of success such that the company would stand to gain substantially. Frivolous or vexatious claims are rejected outright.
Beyond the merits, the court must weigh commercial considerations: the likely costs, the potential recovery, the consequences if the action fails, and the impact on business relationships. The Court agreed with Pang Yong Hock and Loh Siew Cheang that if the board has made a bona fide commercial decision not to sue, the court should be slow to interfere—unless the board itself is the alleged wrongdoer, in which case its views carry far less weight.
Application to the Facts
Appeal 31 (The Sinking): The Federal Court agreed that Timor Shah Rafiq failed the good faith test. Loynd’s report was explicitly preliminary. Loynd himself stated he did not have sufficient evidence to fully explain the loss, and his conclusion was couched as a “feeling.” Against this stood multiple reports finding no negligence. The Court held that no reasonable person could have an honest belief in a viable cause of action based on such incomplete material. As for best interest, the Court found that NTT had genuine commercial reasons not to sue: Vale was its sole customer and wished to remain impartial; NTT had already been fully compensated by insurance and the close-out agreement; and any victory would likely be Pyrrhic. Leave was rightly refused.
Appeal 32 (The Shareholders’ Advance): The Federal Court upheld the grant of leave. Here, the evidence showed a startling absence of documentation for a RM90 million debt. Crowe Horwath had raised “grave concern” over the lack of supporting records. The Court found that Timor’s honest belief—both subjectively and objectively—was well-founded. There was no collateral purpose; his actions were “reasoned and reasonable,” not vengeful. As for best interest, NTT stood to gain massively by being relieved of an unsubstantiated debt and recovering over RM14.6 million in interest already paid out. The Court also rejected the argument that “clean hands” or the availability of an alternative remedy automatically bars a statutory derivative action.
Significance and Practical Takeaways
This decision is now the lodestar for derivative action litigation in Malaysia. Here is what it means in practice:
For Minority Shareholders and Directors
Do not treat an application for leave under s 348 as a mere procedural stepping-stone. Evidence matters profoundly at the leave stage. An expert report that is preliminary, conditional, or based on incomplete material will likely doom your application. You must be able to point to concrete facts supporting an arguable cause of action with a reasonable prospect of success. Personal hostility toward the majority is not fatal, but if your judgment appears clouded by vendetta rather than company benefit, the court will find a lack of good faith.
For Boards and Majority Shareholders
The decision confirms that a bona fide commercial decision not to litigate can protect the company from a derivative suit—provided the board is not itself accused of misconduct. If the company has already been made whole through insurance or compensation, and suing would alienate a critical customer, the court is likely to respect that calculus. However, if the board stonewalls legitimate inquiries into unverified debts or suspicious transactions, its views will carry little weight.
For the Wider Commercial Community
The Federal Court has drawn a bright line: the common law derivative action is dead. Any attempt to bypass s 348 by invoking the old Foss v Harbottle exceptions will fail. At the same time, the Court has clarified that notions of “clean hands” or “proper person” from the common law era do not operate as automatic statutory disqualifications. What matters now is the statutory language: good faith and best interest, interpreted with commercial realism.
For Practitioners
Prepare your leave applications with the rigour of a substantive motion, not an interlocutory skirmish. Address both s 348(4) prerequisites distinctly. Anticipate the commercial-objection defence by weighing the likely costs and benefits of the proposed action before filing. If the board is conflicted, say so and explain why its opposition should be discounted. If alternative remedies exist, argue why they are inadequate or why the derivative route is still preferable.
Closing
The saga of Nautilus Tug & Towage is a cautionary tale about what happens when trust evaporates in a boardroom. The Federal Court’s judgment does more than resolve two bitter appeals; it provides a clear framework for balancing the rights of minority complainants against the need to protect companies from weaponised litigation. Derivative actions remain a vital safeguard against corporate wrongdoing, but they are not a blank cheque for factional warfare. If you find yourself caught between a silent board and a suspected wrong, the law offers a path—but only for those who come with clean evidence, a genuine belief in the merits, and the company’s true interest at heart.
If you are navigating a shareholder dispute or considering a derivative action, seek professional legal advice tailored to your circumstances. The leave threshold is high, and the evidence you assemble at the outset will often determine the outcome.