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2021 MarsdenLR 58
HIGH COURT MALAYA KUALA LUMPUR
YSA MARKETING SDN BHD – Appellant
Versus
NG SHIAN TECK & ORS – Respondent
[Suit No: WA-22NCC-192-04-2019]
The mere inability of a company to pay its debts does not establish intent to defraud creditors under the Companies Act without evidence of dishonesty by directors.
Headnote:(A) Companies Act 2016 – Section 540 – Claim for fraudulent trading against directors – Plaintiff entered into sub-contracts with Hin Interior for projects but claimed the business was conducted to defraud creditors – Court assessed evidence regarding intent to defraud and standards of proof applicable to civil fraud – Allegations lacked sufficient evidence as plaintiff’s witnesses could not support claims – Burden of proof not met – Claim dismissed with costs. (Paras 2, 10, 11, 12, 14, 36, 40)
Facts of the case: Plaintiff engaged in sub-contracts with Hin Interior between 2015 and 2018 for mirror installation, leading to unpaid debts exceeding RM 269,000 by late 2017; Plaintiff alleged fraudulent trading by directors due to default in payments.
Findings of Court: Evidence insufficient to establish directors acted dishonestly or fraudulently; payments were made until mid-2017; mere financial loss does not equate to intention to defraud.
Issues: Whether the business was carried out with intent to defraud creditors and the burden of proof on the plaintiff.
Ratio Decidendi: The court found that intent to defraud must be established with evidence of dishonesty; the mere inability to pay debts does not imply fraudulent conduct.
Result: Claim dismissed with costs.
JUDGMENT
Introduction
[1] This judgment is delivered after full trial.
[2] The Plaintiff's action is based on s 540 of the Companies Act 2016 (' CA 2016') (previously s 304 of the Companies Act 1965 (' 1965')) which provides:
'(1) If in the course of the winding up of a company or in any proceedings against a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court on the application of the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do declare that any person who was knowingly a party to the carrying on of the business in that manner shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court directs'.
Background Facts
[3] Sometime in 2015, the Plaintiff entered into 2 sub-contracts with one Hin Interior Trade & Furnishing Sdn Bhd ('Hin Interior') for the supply and installation of glass mirrors in respect of 2 projects undertaken by Hin Interior, namely, the 'Potpourri' at Ara Damansara and the 'Wangsa 9' at Ulu Klang (collectively referred as 'the Projects').
[4] It is not in dispute that the Plaintiff was duly paid progressively for the goods supplied and work done under the 2 sub-contracts for the period from 2015 until sometime in mid-2017.
[5] Notwithstanding the default in payments by Hin Interior, the Plaintiff had continued to supply and install the glass mirrors for the Projects until sometime end 2017 or early 2018 by which time the amount outstanding from Hin Interior to the Plaintiff had grown to RM 269,166.14.
[6] When Hin Interior failed to make the payment despite demands, the Plaintiff commenced an action in Suit No BA-A52NCvC-434-08/2018 against Hin Interior in the Session Court, Shah Alam and obtained judgment in default against Hin Interior on 4 September 2018 for the sum of RM 269,166.14 with interest and costs.
[7] On 28 November 2018, the Plaintiff obtained an order to wind up Hin Interior vide Winding Up Petition No 28NCC-1102-11/2018.
[8] Subsequent to the winding up, the Plaintiff came to know of Hin Interior's financial affairs for the period 2015 to 2018, in particular, the fact that whilst Hin Interior had profits for its financial year 2015 and 2016 amounting to RM 34,520.00 and RM 163,712.00 respectively, the company had incurred a loss of RM 689,389.00 for its financial year 2017.
[9] Based on further information obtained from Hin Interior's financial records, the Plaintiff claimed that the business of the company had been carried out by the Defendants as directors of the company with the intent to defraud the Plaintiff. In particular, the Plaintiff pleaded in its Statement of Claim that:
(a) The Defendants had allowed Hin Interior to carried on its business with the Plaintiff and to increase its indebtedness to the Plaintiff and other sub-contractors even when the company was no longer able to pay its debts to them at the material times;
(b) When the Plaintiff was engaged to act as sub-contractor for the Projects, Hin Interior had insufficient funds to pay the Plaintiff for the work to be performed by the Plaintiff owing to the losses sustained by Hin Interior in 2017. Notwithstanding the aforesaid, the Plaintiff was instructed to continue with its works under the sub-contracts;
(c) The Defendants as directors of Hin Interior had permitted the company to be wound up with the mala fide intent to avoid its payment obligations to its sub-contractors including the Plaintiff;
(d) The Defendants had deployed Hin Interior's employees, its equipment and materials to carry out works of one ER Reno Sdn Bhd ('ER Reno') and to permit ER Reno to collect the payments therefrom without any accounts to Hin Interior, in particular, for the works rendered to one Simplex Design Sdn Bhd ('Simplex Design') in respect of the 'Proposed Interior Desi
