Fraudulent trading under Section 304 of the Companies Act allows creditors to hold directors personally liable if business is conducted with intent to defraud, requiring a lower standard of proof.

[1] In this appeal, the appellant was the plaintiff in the High Court. The appellant filed a writ action against the respondents, as defendants, seeking remedies under s 304(1) of the Companies Act 1965 ("the Act"). The High Court dismissed the claim.

[2] The respondents were common Directors and shareholders of two companies, namely, LMK Edaran Sdn Bhd and SLMK Edaran Sdn Bhd (hereafter, "LMK Edaran" and "SLMK Edaran"). In essence, the claim was grounded on fraudulent trading by LMK Edaran and its Directors/shareholders (the respondents), by which the plaintiff, as the creditor of LMK Edaran, was defrauded in the sense that, after judgment had been obtained against LMK Edaran, the business of LMK Edaran was transferred to SMLK Edaran, leaving SMK Edaran dormant so as to defeat the rights of the appellant as the judgment creditor. The respondents are spouses, and, at all material times, were the only Directors and shareholders of both companies.

[3] The appeal was allowed with costs since it was clear that there was sufficient material evidence on the record to prove fraudulent trading within the meaning of s 304 of the Act. The judgment of the High Court in dismissing the claim was set aside, and it was ordered that judgment be entered as prayed in para 22(c) of the Statement of Claim. We were of the opinion that the High Court had misdirected itself on the pleaded case of the appellant as plaintiff, and further, had misdirected itself under the applicable law, as well as failed to properly evaluate and appreciate the evidence before the Court, which showed a patently clear case of an intention to defraud the plaintiff as the creditor of LMK Edaran.

[4] The underlying facts are straightforward and can be stated very briefly. LMK Edaran was a purchaser of building materials from the appellant. Upon LMK Edaran's request, the appellant delivered a quantity of tiles and marble between the months of October 2004 and April 2005, which were acknowledged as having been delivered and received by LMK Edaran in good condition. As pleaded in para [8] of the Statement of Claim, the total cost of these materials supplied over that period was RM309,481.20. None of the delivered items was paid for by LMK Edaran, with the result that as of 30 April 2005, the accumulated interest came to RM6,576.22, giving a total indebtedness of RM316,057.42.

[5] The appellant demanded payment, without success, leading it to file an action in the High Court, Kota Bharu to recover the sum owing. Judgment was entered against LMK Edaran for this sum in that writ action (Writ Saman 22-91-2005). That suit commenced on 12 October 2005. The judgment against LMK Edaran was allowed by the High Court on 23 December 2010.

[6] It was common ground that the sealed Judgment was not served on LMK Edaran. Despite securing the judgment, LMK Edaran failed to settle the indebtedness.

[7] The facts also disclosed that, shortly after the letter of demand was sent before filing the writ action, LMK Edaran had changed its company signboard from LMK Edaran to SLMK Edaran. This was done around November 2005, the information being supplied by LMK Edaran's customers itself to the appellant. The change was done by adding the alphabet 'S' to the signboard in the Romanised script, but the Chinese characters were left unaltered, and similarly, the facsimile number, telephone number, and logo.

[8] It was not in dispute that SLMK Edaran was formerly known as Southern Taipan Sdn Bhd and incorporated on 13 May 1996. The name change to SLMK Edaran was done only on 5 September 2005, that is, about more than 2 months after the appe