This alert discusses the recent Court of Appeal ruling in Tay Keong Kok & Ors. v Eastmont Sdn. Bhd., Civil Appeal No.: B-02(NCC)(W)-1705-09/2021, regarding a claim under Section 540 of the Companies Act 2016 (CA) against a number of individuals for the debts incurred by a company in respect of the fraudulent trading undertaken using the company’s name.
Tay Keong Kok also decided on a claim for tort of conspiracy to injure but this point is not discussed in this alert.
Background
By way of a letter of award dated 3.8.2012, Eastmont Sdn Bhd (Eastmont) was appointed by Mega Planner Jaya Sdn Bhd (Mega Planner) to undertake substructure works in a condominium project in Taman Melawati, Kuala Lumpur (Project). The value of the Project was RM 26 million. Despite completing the works, Mega Planner owed a sum of RM 12,331,667.29 to Eastmont (Mega Planner’s Debt). The construction contract between Mega Planner and Eastmont was mutually terminated in December 2013.
In 2019, Eastmont filed a suit against Mega Planner to recover Mega Planner’s Debt (Eastmont’s Suit). After the filing of Eastmont’s Suit, Eastmont discovered that Mega Planner was wound up in May 2019 by a petition by Dakota Engineering Sdn Bhd (Dakota Engineering).
Dakota Engineering’s petition against Mega Planner was based on a default judgment for a sum of RM 5,890,724.10 obtained by Dakota Engineering against Mega Planner in November 2018 (Dakota Engineering’s Default Judgment).
As Mega Planner had been wound up, Eastmont obtained leave from the winding up court to continue the Eastmont’s Suit and thereafter, Eastmont obtained a default judgment for a sum of RM10,050,819.57 against Mega Planner.
Eastmont subsequently discovered that Mega Planner and Dakota Engineering were related companies by having common “ultimate controllers”, directors and shareholders. Hence, Eastmont filed a suit against six individual defendants (6 Defendants) based on the following two causes of action:
(a) the 6 Defendants should be personally liable for Mega Planner’s Debt under Section 540 of the CA.
(b) the 6 Defendants had committed a tort of conspiracy to injure Eastmont (Eastmont’s Suit (6 Individuals)).
Issues Regarding Section 540 Of The CA
There are 3 questions with regard to Section 540 of the CA:
(a) Whether a fraudulent trading claim under Section 540 must be filed in the winding up court or in Eastmont’s Suit . If the answer to this question is “yes”, Eastmont’s Suit (6 Individuals) had been wrongly filed.
(b) Whether the fraudulent trading of the 6 Defendants must be discovered by Eastmont in Mega Planner’s winding up proceedings or in Eastmont’s Suit. If this question answered in the affirmative, Eastmont’s Suit (6 Individuals) would fail because Eastmont did not discover the fraudulent trading in Mega Planner’s winding up proceedings and nor did Eastmont discover the fraudulent trading in Eastmont’s Suit (Mega Planner).
(c) Whether the 6 Defendants were personally liable to Eastmont for Mega Planner’s Debt.
Question (a)
Despite the wordings of Section 540(1) of the CA, the Court of Appeal held that Eastmont can file a fresh suit, such as Eastmont’s Suit against the 6 Defendants. The Court of Appeal followed the earlier ruling of the same court in Chin Chee Keong v Toling Corporation (M) Sdn Bhd [2016] 4 MLRA 180, where it was held that a fresh suit based on fraudulent trading under the previous Section 304 of the Companies Act 1965 (the predecessor to Section 540) can be filed.
Question (b)
Section 540(1) of the CA has two limbs, namely:
(a) there is evidence of fraudulent trading “in the course of the winding up” of a company (1st Limb); and
(b) there is evidence of fraudulent trading “in any proceedings against a company” (2nd Limb).
The Court of Appeal held that fraudulent trading is not required to be discovered in Mega Planner’s winding up proceedings or in Eastmont’s Suit. Once again, the Court of Appeal relied on Chin Chee. The words “in the course of the winding up” of Mega Planner in the 1st Limb, according to the Court of Appeal, should be construed widely and were not confined to proceedings in the winding up court which lead to a winding up order. Accordingly, Eastmont’s discovery of fraudulent trading of Mega Planner arose “in the course of the winding up” of Mega Planner within the meaning of the 1st Limb. There was no requirement for the fraudulent trading of the 6 Defendants to be discovered by Eastmont in Mega Planner’s winding up proceedings or in Eastmont’s Suit.
The Court of Appeal further held that the 2nd Limb also applied in this case as Eastmont’s Suit (6 Individuals) had already been filed.
Question (c)
The Court of Appeal affirmed the High Court’s decision that the 6 Defendants were personally liable to Eastmont under Section 540 for Mega Planner’s Debt. The court applied the test laid down by the Federal Court in Lai Fee & Anor v Wong Yu Vee & Ors [2023] 3 MLRA 495. According to the Court of Appeal, the 6 Defendants are liable to Eastmont under Section 540 for Mega Planner’s Debt due to the following reasons:
(a) The business of Mega Planner had been carried on with the intent to defraud its creditors including Eastmont. This was because the 6 Defendants who controlled both Mega Planner and Dakota Engineering had orchestrated the following:
(i) the filing of a suit by Dakota Engineering against Mega Planner.
(ii) Mega Planner allowed Dakota Engineering’s Default Judgment (Mega Planner) to be entered.
(iii) Dakota Engineering subsequently filed winding-up proceedings against Mega Planner.
(iv) Mega Planner did not oppose the winding up petition filed by Dakota Engineering and consequently, Mega Planner was wound up.
(b) As a result of which, Eastmont was denied payment of Mega Planner’s Debt. In this regard, the Court of Appeal gave a wide interpretation of the word “business” in Section 540(1). According to the court, the term “business” in Section 540(1) was not confined to the business “actually undertaken by the company in the ordinary course of its commercial existence or in the usual nature of its business operations”. The word “business” in Section 540(1) extends to the “collection of assets acquired in the course of business and distribution of the proceeds in reduction of business liabilities”. Consequently, the term “business” in Section 540(1) included the orchestrated activities by Mega Planner.
(c) The 6 Defendants had participated in the orchestrated activities to defraud Mega Planner’s creditors including Eastmont.
(d) The 6 Defendants had actual knowledge that the orchestrated activities were carried out with intent to defraud Mega Planner’s creditors.
Conclusion
The purpose of Section 540 is to allow the corporate veil concept to be pierced and impose personal liability on individuals behind a company’s fraudulent trading. In attaining this purpose, the Court of Appeal’s ruling in Tay Keong Kok is welcomed because it gives a practical and commercially sensible interpretation of Section 540 in safeguarding the creditors of a company.
29 July 2024