“Rather fail with honour than succeed by fraud” – Sophocles
 
 
Introduction
 
Fraud and its impact on businesses are an increasing concern. The costs of addressing the consequences of fraudulent conduct are growing exponentially and fraudulent schemes are becoming more prevalent, sophisticated and even international.
 
Fraudulent trading in Malaysia is now governed by section 540 of the Companies Act 2016 (“CA 2016”), which covers both civil and criminal liabilities as discussed below.  Prior to the coming into force of the CA 2016, fraudulent trading was governed by section 304 of the Companies Act 1965 (“CA 1965”). Although section 304 is no longer in force, references to the case law decided under that provision would be useful in supplementing the case law under the new provision due to the substantial similarity of the two provisions.
 
The elements to be fulfilled
 
From case laws, it appears that the elements for invocation of section 540(1) of the CA 2016 are as follows: 

1. with intent to defraud creditors of the company or creditors of any other person; or 


2. for any fraudulent purpose;

It is interesting to note that the fact that the fraud did not benefit the fraudster was irrelevant in the operation of section 304(1) of the CA 1965.¹ In other words, it may not be necessary to prove that the fraudster has benefitted from the fraudulent scheme.
 
The Court of Appeal has clarified that it is not a requirement for there to be a scheme to defraud the company’s creditors; a single act of doing business to defraud a creditor would be sufficient to trigger an action for compensation against an errant person for fraudulent trading.²
 
The overriding objective of the provision
 
In 2014, the Court of Appeal said that section 304 of the CA 1965 was a “specific statutory provision which allows the corporate veil to be lifted in the limited situations specified”.³ This is aimed principally to curb 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.⁴
 
Once fraudulent trading has been established as aforesaid, there would then be personal responsibility on the part of any person who was knowingly a party to the carrying on of the business, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court directs. As was stated by the Court of Appeal in 2016, the primary object was to “statutorily provide for the lifting of the veil of incorporation in the specific circumstances of fraudulent trading with a view to ultimately pinning personal accountability and liability on the directing minds behind such trading of the company”.⁵
 
Apart from the civil liability under section 540(1), the fraudster also commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding 10 years or to a fine not exceeding RM1,000,000 or to both.
 
Other considerations
 
Standard of proof
 
The phrase “if it appears” in the provision indicates a lower standard of proof, i.e. on the balance of probabilities.⁶ In 2017, the Federal Court confirmed this standard of proof.⁷
 
Definition of a creditor?
 
By virtue of section 217 of the CA 1965 (in pari materia with section 464 of the CA 2016), the term “creditor” in the provision has been interpreted to include “contingent or prospective creditor”. This was affirmed by the Federal Court in 2017⁸ and most recently applied by the High Court in the context of section 304 of the CA 1965. ⁹
 
How to establish “Intent to defraud”?
 
In order to establish an “intent to defraud” creditors, it has been held by the Federal Court that the element of dishonesty is an essential ingredient and this is a question of fact which has to be ascertained from a consideration of the entirety of the relevant circumstances.¹⁰
 
In a subsequent decision¹¹, the Court of Appeal shed light in establishing dishonesty, i.e. in order to establish dishonesty under section 304(1) of the CA 1965, the court must find that: 

In a recent High Court decision, it was held that to be a knowing party to the fraud, the person does not have to know every detail of the fraud or how it is to be perpetrated. It is sufficient if he has a “blind-eye” or “Nelsonian” knowledge, namely, deliberately shutting his eyes to the obvious that fraud was involved.¹²
 
The deliberate destruction of a company’s books and records without valid cause may give rise to an adverse presumption that the books and records were destroyed to hinder or prevent the liquidator from investigating into questionable expenses that are manifestations of fraudulent trading.¹³
 
Who can be liable for fraudulent trading?
 
A shadow director and beneficial owner of shares in the defrauding company may be held liable for fraudulent trading if it can be shown that the said person had control over the defrauding company.¹⁴
 
On the other hand, it was held in a recent Court of Appeal decision that a company cannot be liable for fraudulent trading committed through another company because a company does not have a mind to cheat and is not a “person” within the meaning of section 540(1) of the CA 2016.¹⁵ The Court of Appeal held that only a real person could have an intention to defraud a creditor and such an intention does not exist in a company.
 
However, that does not mean that the company ought not to be made a party to the proceedings. The jurisdiction under the provision is statutory, not common law or equity. That being the case, it can only be exercised in a matter that comes within its purview. Inter alia, it can only be exercised “in any proceedings against a company”. Thus, it is incumbent upon the claimant to include both the corporate and the individual defendants in the same proceedings. This is supported by the Singaporean High Court’s decision which held that the plaintiffs could not rely on section 340(1) of the Singaporean Companies Act (Cap 50, 2006 Rev Ed) (in pari materia with section 304(1) of the CA 1965) as the action was commenced only against the individual defendants and did not include the relevant Singaporean company.¹⁶
 
What can be considered fraudulent trading?
 
As long as the aforesaid elements of the statutory provision are fulfilled, there is virtually unlimited scenarios which can be considered as fraudulent trading. The following are some examples: 

Conclusion
 
It must always be borne in mind that it takes time to build a case for fraudulent trading. At the same time, any claim involving fraud is always time sensitive. Hence, where there is suspicion of fraudulent conduct, it is important for businesses to take immediate steps in addressing the issue, including seeking legal advice. Starting the process early can help with the initial investigative process and injunctive reliefs should be considered to prevent dissipation of assets by the fraudster to avoid future complications in recovering monies.
 
Article by Raja Nadhil Aqran bin Raja Ahmad Aminollah (Senior Associate) and Tommy Lim Ka Hui (Associate) of the Dispute Resolution Division of Skrine.
 

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