Directors can incur personal liability for a company's debts under section 540 of the Companies Act 2016 if fraudulent intent is established.

Introduction

[1] This appeal relates to a suit filed in the High Court ('s 540 Suit') against three individuals for fraudulent trading pursuant to s 540 of the Companies Act 2016 ( CA 2016). The three individuals (defendants) were shareholders cum directors of a company. The company had entered into an agreement with the plaintiffs to purchase all of the plaintiffs' shares in a partnership firm, and having taken over the partnership firm, failed to pay the balance purchase price. The plaintiffs sued and obtained judgment against the company for the balance purchase price. However, the company did not satisfy the judgment debt.

[2] The plaintiffs wanted to make the defendants personally responsible for the unpaid balance purchase price on the ground that the business of the company has been carried on with intent to defraud the plaintiffs. In 2018, the plaintiffs brought the s 540 Suit against the defendants for fraudulent trading to declare the defendants personally liable for the RM2.5 million debt due and owing by the company to the plaintiffs. The Shah Alam High Court dismissed the plaintiffs' claim after a full trial. The plaintiffs' appeal to the Court of Appeal failed. In this judgment, the parties shall be referred to as they were in the High Court.

Leave To Appeal To The Federal Court

[3] On 11 April 2022, this Court granted leave to the plaintiffs to appeal to the Federal Court on three questions of law.

Question 1

Where a vendor agrees to the immediate transfer of an asset to a company relying on the representation of the company that the balance purchase price will be paid in the future and the company subsequently fails to pay the balance purchase price when it falls due, are the directors of the company, ipso facto liable to the vendor under s 540 of the CA 2016?

Question 2

Where a company has been adjudged in a previous suit to be liable for failure to pay the balance purchase price under a sale and purchase and a director of the company is subsequently sued under s 540 of the CA 2016 arising from the said debt:

(i) is such a director barred by issue of estoppel and/or res judicata from asserting defences which had been unsuccessfully raised by the company in the previous suit?

(ii) may such a director raise as a defence that the company had a legitimate commercial reason not to pay the balance purchase price notwithstanding the judgment in the previous suit?

Question 3

Is the position by Lord Kerr in paragraph of the grounds in the English Supreme Court case Takhar v. Gracefield Developments Ltd and Others [2019] UKSC 13 , namely, "... that the law does not expect people to arrange their affairs on the basis that other people may commit fraud" representative of the position of Malaysian law?

Salient Facts

[4] The 1st and 2nd plaintiffs were partners of a partnership business with timber logging rights known as Fave Enterprise ('Fave'). The defendants were involved in negotiations with the plaintiffs to acquire the timber logging rights from Fave.

[5] Pursuant to the negotiations, the plaintiffs entered into a sale and purchase agreement dated 11 January 2013 ('the SPA') with Centennial Asia Sdn Bhd ('Centennial') whereby the plaintiffs agreed to transfer their interest in Fave to Centennial for the purchase price of RM7 million ('the Purchase Price').

[6] Upon execution of the SPA, the plaintiffs relinquished and transferred their interests in Fave. Although Centennial was the designated buyer under the SPA, the defendants procured the registration of themselves individually as the new partners of Fave. Immedi