Directors breaching fiduciary duties by unlawfully transferring company funds establish a constructive trust over property acquired with those funds, allowing tracing of assets to ensure recovery.

JUDGMENT

(Conspiracy To Injure; Tracing)

Kenneth St James J:

Prelusion

[1] Persons A and B own and control Companies X, Y and Z. A and B transferred money from Company X to Company Y and Company Z. Company Y and Company Z used the money for their benefit. Company Y used the money to purchase Company Z. Company Z used the money to purchase a piece of land.

[2] Company X sues A, B, Company Y and Company Z. Company X sues A and B for conspiracy to injure by unlawful means, for fraud and for breach of fiduciary duty. Company X also seeks the relief of a Declaration that a constructive trust is created over the money transferred and the land that was purchased. Company X asks for the process of tracing to be applied over the money transferred, to trace the money to the value of the land purchased.

[3] Should Company X's claim be allowed?

Preliminaries

[4] This case took seven days of trial, and several oral submission sessions (concurrent with the filing of written submissions, submissions in reply and further speaking notes). The several oral submission sessions were held at the request of the parties' counsel.

[5] I will refer to the Plaintiff as "P"; the 1st Defendant as "Encony"; the 2nd Defendant as "Eramas"; the 3rd Defendant as "D3/Khor"; and the 4th Defendant as "D4/Chin".

[6] As the same firm of solicitors represents them, I will refer to Encony (1st Defendant), D3/Khor and D4/Chin together as "EnconyD3D4". Another firm of solicitors represents Eramas (2nd Defendant).

[7] P called one witness: PW1 — Dato' Sri K. Navaneethakrishner (DSK). EnconyD3D4 called one witness: DW1 — D4/Chin. Eramas called two witnesses: DW2 — Valerie Yeo (a solicitor) and DW3 — Ching Seak Hooi (a director of Eramas, and the brother of D4/Chin).

P's Pleaded Case Against The Defendants

[8] I summarise D3/Khor's, D4/Chin's and Encony's shareholdings in P, in Encony and in Eramas with the following Table:

[9] As the Table shows, at the material time (which is the two years between February 2014 and January 2016):

(1) In P — D3/Khor was a shareholder, and D4/Chin was a shareholder and director.

(2) In Encony — D3/Khor was a shareholder and director, and D4/Chin was a director.

(3) In Eramas — D3/Khor and D4/Chin were directors. Encony was the sole shareholder of Eramas ie sole owner of Eramas. D3/Khor was a beneficial owner of Eramas, as he was a shareholder of Encony, which wholly owns Eramas.

[10] P's cause of action against D3/Khor and D4/Chin is for conspiracy to injure P by unlawful means. The unlawful means was transferring money out of P to Encony and Eramas. P asserts that D3/Khor and D4/Chin — fraudulently and in breach of their fiduciary duties to P, in the material period of two years: between February 2014 and January 2016, while D3/Khor was P's shareholder, and D4/Chin was P's director — caused RM9,397,057.40 (the RM9.397 million or the money) to be transferred from P to Encony and Eramas, for Encony's and Eramas' benefit.

[11] The RM9.397 million was P's money, obtained by financing from banks, for which P had to repay, with interest. The money was for P's business operations. The transfer of the RM9.397 million was without any consideration to P, and provided no benefit to P.

[12] D4/Chin, as P's director, was a trustee of P's assets. D4/Chin owed a fiduciary duty to P. D4/Chin breached his obligations as a trustee; breached his fiduciary duty to P; acted against P's interest; and acted in bad faith to procure a profit for himself.

[13] D3/Khor and D4/Chin were signatories of P's cheques. They conspired to transfer the RM9.397 million to Encony and Eramas, to defraud P, causing loss and damage to P.

[14] D3/Khor and D4/Chin were constructive trustees of P's money. Encony and Eramas — the recipients of the money — are liable to account to P for the money. P seeks to trace the money and the asset (the subject property) bought with the money.

[15] The subject property is a piece of land in the Mukim of Ulu Kinta known as Lot 516685 (Property).

[16] The reliefs and