Back
2024 MarsdenLR 236
COURT OF APPEAL PUTRAJAYA
TAY KEONG KOK & ORS – Appellant
Versus
EASTMONT SDN BHD & ANOTHER APPEAL – Respondent
[Civil Appeal Nos: B-02(NCC)(W)-1705-09-2021 & B-02(IM)(NCC)-666-04-2022]
The court affirmed that fraudulent trading under Section 540 of the Companies Act 2016 allows lifting the corporate veil to hold directors personally liable for debts incurred with intent to defraud creditors.
Headnote:(A) Companies Act 2016 - Section 540 - Fraudulent trading - The plaintiff claimed against the defendants for fraudulent trading and conspiracy to injure, asserting that the business of Mega Planner was carried on with intent to defraud creditors - The High Court found sufficient evidence of fraudulent trading and conspiracy, leading to a judgment in favor of the plaintiff. (Paras 4, 19, 68, 240)
(B) Appellate Intervention - The principles governing appellate intervention were reiterated, emphasizing that an appellate court will not interfere unless the trial court is plainly wrong. (Paras 14, 240)
(C) Tort of Conspiracy - The elements of conspiracy were established, showing an agreement to injure the plaintiff through unlawful means. (Paras 182, 240)
Facts of the case:
The plaintiff, Eastmont Sdn Bhd, claimed against the defendants for fraudulent trading under the Companies Act 2016 and conspiracy to injure, asserting that the defendants orchestrated the winding up of Mega Planner to avoid debt repayment. (Paras 1, 6, 12)
Findings of Court:
The court found that the defendants acted with intent to defraud and were knowingly parties to the fraudulent trading and conspiracy. The High Court's findings were affirmed. (Paras 19, 240)
Issues: The main issues included whether the defendants carried on business with intent to defraud and whether the plaintiff was a creditor at the time of the alleged fraudulent trading. (Paras 68, 177)
Ratio Decidendi: The court ruled that the intent to defraud could be inferred from the conduct of the defendants, and that the corporate veil could be lifted to hold the defendants personally liable for the debts of Mega Planner. (Paras 19, 240)
Result: Appeals dismissed; defendants ordered to pay costs to the plaintiff. (Paras 241)
Key Points: - (!) (!) (!) - (!) (!) (!) - (!) (!) (!) - (!) (!) (!) - (!) (!) (!) - (!) (!) (!) - (!) (!) (!) - (!) (!) (!) - (!) (!) (!) - (!) (!) (!) - (!) (!) (!) - (!) (!) (!) - (!) (!)
What is the scope of courts that may hear a fraudulent trading action under s540 CA 2016?
What must be proven to establish fraudulent trading under s540 CA 2016, including whether intent to defraud can be inferred and whether dishonesty is required?
What constitutes "knowingly a party to the carrying on of the business" under s540 CA 2016 and how can liability be imposed on directors or related parties?
JUDGMENT
Introduction
[1] This appeal arises from the decision of the High Court which allowed the respondent's claim of fraudulent trading under the Companies Act 2016 and of the tort of conspiracy to injure against the appellants (the defendants at the High Court ).
[2] When a company is wound up, its creditors will take steps to recover their money. However, it is usually the case that there would be insufficient remaining assets of the company to ensure full repayment. In such a situation, the creditors will try to achieve repayment by extracting funds from the directors of the company, more so when there are allegations that the business of the company was being carried on for fraudulent purposes. The fraudulent trading prohibition as presently contained in s 540 of the Companies Act 2016 has been designed to combat such corporate misconduct as it enables the entire course of the director's conduct to be examined. If proven, the corporate veil of the company may be lifted as a crucial statutory exception to the common law doctrine of separate legal entity and the limited liability principle, thus making those in default personally responsible without any limitation of liability, for all or any of the debts or other liabilities of the company, as well as potentially subjecting them to criminal prosecution.
[3] This appeal raises a number of issues which primarily revolve around the interpretation of s 540 of the Companies Act 2016 , including those described by the defendants as jurisdictional, as well as concerning the overarching position of the defendants that fraudulent trading must in all cases relate to the subject company incurring debt (despite knowing there would be no repayment).
[4] Having heard the appeal - which was conducted via Zoom video technology, examined the appeal records and considered the submissions by parties, we unanimously decided to affirm the judgment of the High Court and dismiss the appeal.
[5] These grounds of judgment contain the full reasons for our decision.
[6] The parties are referred to herein as they were at the High Court .
Key Background Facts
[7] The case of the plaintiff - Eastmont Sdn Bhd is not a complex one. Its pleaded case against the six individual defendants is two-pronged. The first is the claim grounded on s 540 of the Companies Act 2016 ("the CA 2016"). The second is an action under the tort of conspiracy to injure.
[8] By way of a letter of award dated 3 August 2012 ("the LOA"), the plaintiff company was appointed by Mega Planner Jaya Sdn Bhd ("Mega Planner") to carry out sub-structure works for a project involving among others the development of two blocks of condominium in Taman Melawati Kuala Lumpur, for the contract price of RM26 million. The plaintiff's position is that whilst it had undertaken the works as specified, the LOA was subsequently in December 2013 mutually terminated by the parties. The plaintiff asserted that Mega Planner owed the plaintiff the amount of RM12,331,667.29 for the works done by the plaintiff pursuant to the LOA.
[9] A number of years later, but just before the statute of limitation set in, the plaintiff instituted a suit vide KL High Court Suit No: WA-22C-51-06/2019 ("Suit 51") for the recovery of the said sum. Crucially however, upon service of the writ on Mega Planner, the plaintiff discovered that Mega Planner had in fact just been wound up by Shah Alam High Court on 14 May 2019, at the instance of a petition filed by Dakota Engineering Sdn Bhd ("Dakota Engineering"). This petition was preceded by a suit commenced by Dakota Engineering against Mega Planner on 3 October 2018 for which a judgment in default (JID) was entered against Mega Planner on 27 November 2018. This JID was the basis of the winding up petition filed by Dakota Engineering which led to the winding up of Mega Planner.
[10] In view of the winding up status of Mega Planner, the plaintiff had then sought and did on 30 October 2019 obtain leave o
