Shareholders’ injury and distress – an encroachment on the doctrine of separate legal entity


The concept of separate legal entity is central to the corpus of company law. It remains a fundamental doctrine that a company once incorporated has a separate and distinct legal entity from its shareholders or directors. This is further statutorily codified in s 20 of the Companies Act 2016 (CA 2016). In short, a company is, in law, a person.

However, shareholders or directors have, on many occasions, been obliged to make a personal commitment with regard to the company’s debts, including the provision of personal guarantees for the repayment of such debts in the event the company default on its repayment. Such undertakings provide an avenue for creditors to pursue, at their own discretion, legal actions directly against shareholders or directors instead of the company for the speedy recovery of debts.


Such an approach by creditors against shareholders or directors seriously encroached into the doctrine which holds a company as a separate legal entity from its shareholders or directors. The legality of such an action against shareholders or directors was recently deliberated and hotly debated in the Court of Appeal’s case of Foo Toon Yeong & 3 Ors v Jonah Wong Ching Hang [2019] 6 AMR 613.

The legislation

Section 20 of CA 2016 provides:

“A company incorporated under this Act is a body corporate and shall—
(a) have legal personality separate from that of its members; and
(b) continue in existence until it is removed from the register.”


The clear wording of s 20(a) on its own footing affirms that shareholders or directors would not be liable for the company’s debts. It is the company that is responsible and liable for any of its debts borrowed. The company is the entity that should be sued for the recovery of debts owed by it. Likewise, it can sue for
the recovery of debts owed to it.


It is a fundamental doctrine that a company is a legal person, endowed with its own corporate identity, which are separate and distinct from its directors or shareholders. A company owns property and rights and interests to which it alone is entitled. If it
is defrauded by a wrongdoer, the company itself is the only party having the right to sue for damages.

Practical illustration

In Foo Toon Yeong & 3 Ors v Jonah Wong Ching Hang [2019] 6 AMR 613, the four plaintiffs, being the entire shareholders and directors of Facade Treatment Engineering Sdn Bhd (FTE), sue the minority shareholder (Jonah Wong, holding 15% shares) of Greatlight Builder Sdn Bhd (GBSB) for a sum of RM2,456,691.05, which represents part of an amount of RM16 million owed by GBSB to FTE. The four plaintiffs also hold 85% shares in GBSB.


The shareholders of GBSB have signed an agreement with FTE, agreeing to to be held personally accountable in accordance with their shareholding ratio for any outstanding loans which GBSB received from FTE. According to the plaintiffs, as at 30.11.2016, GBSB has received loans amounting to RM16,337,940.30 from FTE, which it has failed to repay. The plaintiffs claimed that the defendant, as a shareholder and director of GBSB, is now liable to pay RM2,456,691.05, based on his 15% shares in GBSB. Consequently, the plaintiffs brought legal action against the defendant to seek recovery of the said sum of RM2,456,691.05. The High Court held that since GBSB and FTE are private companies and separate legal entities, FTE should have taken up legal suit against GBSB for the recovery of the alleged loan of RM16,337,940.30. The shareholders of FTE have no legal right to step in and assume the identity of FTE to demand payment of the loan from GBSB or initiate legal action against the shareholders of GBSB for recovery of the same. As the loan is solely a matter between the two companies, the legal suit should therefore be initiated by FTE against GBSB.


The true and proper application of the principle of separate legal entity requires that the company be regarded as a legal person with the capacity to sue for the recovery of debts owed to it. This is in accordance with the fundamental doctrine that where injuries are inflicted on the company, it is the injured party, i.e., the company, which has the right to sue. It is never for the shareholders to step in, in their personal capacity, and assume the role of the company in taking up legal proceedings for the recovery of debts owed to the company.


The High Court held on p 618:

“Therefore if a wrong has been done to a company, then it is either FTE or GBSB, depending on the position of which is the injured party, to recover such debt. The only conclusion one can derive based on the above situation is that the plaintiffs cannot put forth a claim in their personal capacity as shareholders and directors for a damage allegedly suffered by FTE. If FTE has indeed been the injured party that had suffered damage, then it is for FTE in its own capacity as a separate legal entity to commence action for the recovery of the debt against GBSB and not the plaintiffs.”

The High Court took cognizance of the obligation and commitment
made by the individual shareholder (i.e., the defendant) with regard to the debts owed by GBSB to FTE.


However, the proper sequence of procedure, which should be observed before legal action can be instituted against the defendant, is as follows:

(a) FTE, being the injured party, must initiate a legal claim for recovery of the loan;

(b) GBSB must fail to pay the debts owing to FTE;

(c) In the event GBSB failed to pay, recourse then can be taken by the plaintiffs on the shareholder (defendant), pursuant to the commitment as stated in the agreement.

The judge held that there was a total absence of evidence to show that GBSB has failed to pay its debts to FTE as claimed by the plaintiffs. There was also no evidence to show that FTE has initiated any legal action against GBSB to recover the debts. Therefore, unless and until GBSB is found to be liable to pay the debts to FTE, the defendant’s commitment under clause 7 of the agreement to pay his share of 15% of the total company’s debts to FTE, has yet to crystalise.


Being aggrieved, the plaintiffs, being the shareholders of FTE, appealed to the Court of Appeal.


The plaintiffs alleged that FTE has given business loans to GBSB and that the shareholders of GBSE have entered into an agreement on 4.2.2016 that they would repay any outstanding loans owed by GBSB to FTE, the amount to be calculated based on their respective shareholding in GBSB.


As at 30.11.2016, GBSB has failed to repay loans totalling RM16.3 million which it has taken from FTE. The plaintiffs claimed they have a right to enforce on the GBSB shareholders their contractual agreement to repay the loans. Accordingly, they have initiated a claim of RM2.5 million from the defendant, based on the 15% shares which he owned in GBSB.


The crux of the plaintiffs’ litigation falls on the contractual obligation laid down in the shareholders’ agreement whereby each party shall contribute to the repayment of the GBSB’s debts in accordance with their respective shareholding.


Clause 7 of the shareholders’ agreement has stipulated that:

“… any outstanding loans received from FTE as stipulated in Clause 6 hereof, shall be repayable by the parties hereto in accordance to their respective shareholding at GBSB.”

The Court of Appeal unanimously upheld the High Court’s decision, holding that the doctrine of separate legal entity remains fundamental. If a wrong has been done to a company, then it is the company which is the proper party to initiate legal action to redress the injury. Shareholders of the company have no locus standi or legal capacity to bring an action to remedy a wrong done to the company. The Court then ruled that FTE is the proper party to institute legal proceedings against GBSB for the recovery of the loans, failing which the plaintiffs, being the shareholders of FTE, have no cause of action against the defendant.


It is a serious misconception on the part of the plaintiffs to assume that since they collectively own FTE, they have a cause of action against the defendant. If FTE wants to recover the monies owed to it by GBSB, it should file a suit to claim it. It is important to note that the signed agreement by the shareholders of GBSB simply spells out the obligations of the five shareholders and their expected contribution when the time came for GBSB to pay its dues to FTE.


It is a settled trite law that in order to redress a wrong done to the company or to recover monies owed it, the legal action should be brought by the company itself. The cardinal principles laid down are that the company itself is the rightful party to initiate a suit. It is the proper claimant in any action to redress any loss it has suffered.


The Court of Appeal concluded that notwithstanding the existence of the shareholders’ agreement, the company (FTE) remains the injured party which has the locus standi to initiate a suit to seek redress. If the Court were to allow the shareholders’ claim, it would amount to allowing them to exercise FTE’s right to sue. A shareholder cannot leapfrog over FTE to commence legal action even if he himself has a cause of action, pursuant to the shareholders’ agreement.

Hanipah Farikullah JCA delivered the leading judgement sharply pointed out on p 622:

“As a general rule, the company is the proper claimant in an action to recover the loss that itself has suffered. A shareholder cannot in substance avoid that rule by bringing a personal claim to recover damages for loss in the value of his shares merely because the company in which he is interested has suffered damage, even if the conduct of which he complains gave him personally, and not the company alone, a cause of action.”

The Court of Appeal took great pains to explain the rationale of confining the company (FTE) itself to institute the legal suit instead of the shareholders. Allowing a claim by the shareholders may eventually result in an injustice being perpetrated against GBSB and its creditors as the money recovered is diverted to the shareholders or, at worst, a double recovery at the expense of the defendant may come about.

Hanipah Farikullah JCA explained on p 623:

“The policy is to ensure that loss to the company is recovered only by the company and that the proceeds of recovery are not diverted to the shareholders to the potential prejudice of creditors. It similarly ensures that the process of recovery is conducted only by the company and that the company’s right to recover is not adversely affected by the outside compromises with the shareholders to the potential prejudice of creditors. It applies to loss of benefits as a director as well as to the loss of dividends. There is no exception to it by which a shareholder can recover in respect of reflective loss that the company itself has for any reason failed to recover.”

In essence, if the shareholder is allowed to recover the loss suffered by the company, then either there will be double recovery at the expense of the wrongdoer or the shareholder will recover at the expense of the company and its creditors and other shareholders. None of these are desired or just to any party. Justice to the wrongdoer requires only one claim. Protection of the interest of the company’s creditors or other shareholders requires that it is the company that is the party allowed to institute legal suit for the recovery of damages.

Shareholders’ distress and injuries

The Court of Appeal’s decision comes as a relief. The doctrine of separate legal entity remains intact and inviolable in the company law regime. It is a settled principle that the company that is injured is the proper party to institute legal proceedings to seek redress. Though shareholders may suffer loss in dividends or diminution in their shares’ value, they have no legal right to initiate the suit and this remains so, even if the company had failed to bring action to recover damages.


The Court generally refrains from interfering with the company’s management and operation, which is in line with the principle of a company having autonomy over its own affairs.The Court has to ensure that the interest of the company’s creditors and shareholders is not prejudiced by the unilateral action of any particular shareholder. It also cannot allow the occurrence of double recovery whereby both the shareholders and company concurrently seek to hold the same party for liability.


The holding of shares by a shareholder only denotes that he has an investment in a company. The doctrine of separate legal entity prohibits the shareholder from initiating any legal action to recover losses suffered by the company. Any loss suffered by the company is legally speaking the company’s loss and not the shareholders’. The shareholder’s ‘loss’ is actually a reflection of the diminution in the net assets value of the company. It is ultimately a reflection of the loss suffered by the company and nothing more.


The trite legal principle set out by the Court of Appeal are summarised as follows:


The shareholders of a company have no legal right of action based on the alleged diminution in the value of their shares caused by damage the company. The subscription of shares connotes the right of participation in a company and nothing more.


Even if there is a contractual obligation by the shareholders to contribute towards the repayment of loans taken by the company, it only crystalises if the company that is injured failed to seek redress for the recovery of the loans.

*Dr. Choong Kwai Fatt is a practicing advocate & solicitor of the High Court of Malaya.
Note: The deliberation on “Shareholders’ injury and distress – an encroachment on the doctrine of separate legal entity” is the writer’s own opinion and conclusion.


  1. Dr Choong on Companies Act 2016, Peng You Solutions Plt, 2020, 3rd ed.
  2. Dr Choong on Interpretation of Companies Act 2016 (2020, 1st ed.), Peng You Solutions Plt, 2020, 1st ed.
  3. Hallmark Legal Principles on Companies Act 2016, Choong Consultants Plt, 2019, 1st ed.
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