1. The Federal Court had the opportunity to consider novel questions of law concerning fraudulent trading under S 540, Companies Act 2016 ("CA 2016") in Lai Fee & Anor v Wong Yu Vee & Ors [2023] 4 CLJ¹.
The Federal Court was invited to consider 3 questions –
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?
Facts
2. The appellants (plaintiffs) were partners of a partnership business, Fave Enterprise ("Fave") that owned timber logging rights. The respondents (defendants) negotiated with the appellants to acquire the timber logging rights from Fave. It was agreed the appellants would enter a sale and purchase agreement ("SPA") with Centennial Asia Sdn Bhd ("Centennial"). The respondents are directors of Centennial². The appellants agreed to transfer their interest in Fave to Centennial for the purchase price of RM7 million ("Purchase Price"), which would be paid in 3 tranches.
facts were not in dispute (Grounds, para [30]) -
8.1 The respondents incorporated Centennial for the sole purpose of acquiring Fave for its timber logging rights.
8.2 The respondents became directors of Centennial not long after they became aware that Fave had been awarded the timber logging rights and the negotiations regarding the sale of Fave began.
3. Upon execution of the SPA, the appellants relinquished and transferred their interest in Fave. Although Centennial was the named buyer under the SPA, the respondents caused Fave to be registered under their personal names. The respondents caused another company, Westhill Equity Sdn Bhd ("Westhill") to pay the initial 2 tranches of the Purchase Price to the appellants. Centennial defaulted in paying the final balance Purchase Price of RM2.5 million ("Balance Purchase Price").
4. Centennial's default resulted in the appellants commencing an action against Centennial in the High Court for specific performance of the SPA and for an order that Centennial pay the Balance Purchase Price ("Centennial Suit"). Centennial raised a defence and counterclaimed for misrepresentation. The High Court allowed the appellants' claim and dismissed Centennial's counterclaim. Centennial, an impecunious company, failed to settle the judgment.
5. The appellants brought a separate action in the High Court against the respondents, being directors of Centennial, for fraudulent trading and sought to declare them personally liable for the Balance Purchase Price ("Fraudulent Trading Action"). The respondents denied liability. The respondents in their defence claimed misrepresentation by the appellants.
6. The High Court after full trial dismissed the Fraudulent Trading Action³. The Court of Appeal affirmed the decision on appeal⁴.
7. The Federal Court granted leave to appeal on Questions 1, 2, and 3.
Question 1: Fraudulent trading
8. The Federal Court found the following facts were not in dispute (Grounds, para [30]) -
8.1 The respondents incorporated Centennial for the sole purpose of acquiring Fave for its timber logging rights.
8.2 The respondents became directors of Centennial not long after they became aware that Fave had been awarded the timber logging rights and the negotiations regarding the sale of Fave began.
8.3 The respondents had full control, power, and were actively involved in the management of Centennial.
8.4 Centennial was a dormant company. It did not have –
(i) any business dealings or history of business prior to the SPA;
(ii) any funds, assets of value and/or any bank accounts as at the date of the SPA;
(iii) a business address; and,
(iv) auditors;
8.5 Centennial shares the same registered address and company secretary with Westhill;
8.6 Westhill is the majority shareholder of Centennial;
8.7 The respondents are directors and majority shareholders of Westhill;
8.8 Westhill does not have a business address; and
8.9 Neither Centennial nor Westhill filed their audited financial statements.
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