Fraudulent trading: Personal liability

intent to defraud the creditors of the company or for any fraudulent purpose, the court may declare that any person who was knowingly a party to the carrying on of the business in that manner, be personally responsible for all or any of the debts or other liabilities of the company.

The section is a re-enaction of Section 304(1) of the (old) Companies Act 1965.

The liquidator or any creditor or contributory of the company, can invoke this statutory provision either in the course of the winding up of the company or in any proceedings against the company. In this regard, “creditor” includes contingent or prospective creditor, as held by the Federal Court in a 2017 case.

To succeed, two elements must be proven on the balance of probabilities: Firstly, that the business of the company had been carried on with intent to defraud creditors or with a fraudulent purpose and secondly, that the accused was knowingly a party to the carrying on of the business in that manner.

What constitutes fraudulent trading? Essentially, what amounts to fraudulent trading would depend on the facts of each case. Thus, it may be helpful to look at decided cases.

In a Court of Appeal case decided in 2015, a company known as LMK, purchased goods from a supplier but did not make payment for the goods. Therefore, the supplier issued a letter of demand to LMK. To avoid paying the debt, LMK transferred its business to another company known as SLMK thereby rendering LMK a dormant company. The supplier sued and obtained judgment against LMK. But, LMK failed to settle the judgment debt, as LMK was already a dormant company. Thereafter, the supplier sued the common directors and shareholders of LMK and SLMK for fraudulent trading. The High Court dismissed the supplier’s claim. However, on appeal, the Court of Appeal allowed the supplier’s claim.

In another Court of Appeal case decided in 2016, the directors of a company, having no reasonable prospect of paying its debts, placed unusually large purchase orders with a supplier. The Court of Appeal affirmed the High Court’s decision holding the directors to be personally liable for debts due from the company to the supplier.

In a recent 2017 Federal Court case, the company did not pay contributions to the Employees Provident Fund and Social Security Organisation, despite having made statutory deductions from the employees’ salaries. It was held that the employees became the creditors of the company when the company failed to remit the employees’ statutory contribution. It was further held that this amounted to an intent to defraud the employees as the creditors of the company. The executive managing director was held personally responsible for the arrears of salary and worker’s compensation claimed by the employees.

Conclusion This statutory provision “is aimed principally at curbing the possibility on the part of the officers of a company to act opportunistically and take advantage of the principle of the separate legal personality of a company and the principle of limited liability”, as observed by the Court of Appeal in a 2015 decided case.

Contributed by Diana Chang Kuok Eng of Christopher & Lee Ong (www.christopherleeong.com).