Court makes adverse presumption against parties who destroyed evidence in fraudulent trading case
13 September 2019
In Huatah Sdn Bhd v Yap Chee Kian and Ors (KLHC OS No. WA-24-NCC-453-10/2017), the High Court allowed the plaintiff’s claim for fraudulent trading under section 540(1) of the Companies Act 2016 (‘CA 2016’) against four individuals (‘defendants’) who were the directors of a company.
Section 540(1) of CA 2016 provides that -
“If in the course of the winding up of a company or in any proceedings against a company it appears that any business of the company has been carried on with intent to defraud the creditors of the company or creditors of any other person or for any fraudulent purpose, the Court on the application of the liquidator or any creditor or contributory of the company, may, if the Court thinks proper so to do, declare that any person who was knowingly a party to the carrying on of the business in that manner shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court directs.”
Arising from proceedings initiated by the plaintiff in 2014 and subsequent related proceedings, a company was ordered to pay the plaintiff a sum of approximately RM423,000 (‘Outstanding Amounts’). One of these proceedings had resulted in a winding up order being issued against the company.
As a result of the discrepancies between the company’s audited accounts and the statement of affairs submitted by the defendants to the liquidator, the plaintiff cross-examined the fourth defendant pursuant to an application made under section 249 of the Companies Act 1965 (then in force). Based on the evidence elicited during the cross examination, the plaintiff commenced proceedings against the defendants for fraudulent trading under section 540(1) of CA 2016, seeking, inter alia, a declaration that the defendants be jointly and severally liable to the plaintiff for the Outstanding Amounts.
Among others, the plaintiff alleged that the defendants had -
- caused the company to suffer significant losses by disposing of a substantial portion of the company’s assets at “fire sale” prices;
- caused the company to dispose of all of its assets by 31 March 2015, making the company a “dead company” for all intents and purposes;
- utilised the proceeds of sale of the company’s assets to pay the other creditors of the company, but not the plaintiff;
- caused the company to incur unsubstantiated high expenses; and
- provided inaccurate information in the statement of affairs to the company’s liquidator.
During the cross examination, it was revealed that the defendants had destroyed all the books and records of the company in breach of the latter’s statutory duty under section 245(3) of CA 2016 to retain the same for seven years after the relevant transaction date.
The plaintiff, relying on the English Court of Appeal case of Malhotra v Dhawan  EWCA Civ 1096, contended that an adverse inference should be drawn or presumed from the destruction of the books and records of the company. In essence, Malhotra enunciated that an adverse presumption may be drawn if a party is responsible for the unavailability of documents because of its actions when litigation is contemplated, or even before litigation is contemplated if that presumption is consistent with other available evidence and there was a possibility of a claim at the time.
The defendants argued that there was no fraudulent trading as the transactions were necessary and reasonable in the ordinary course of business, especially in light of the dire financial state of the company at the material time.
The defendants also said that the company’s books and records were destroyed due to the relocation of the company’s premises and to avoid incurring storage costs. The defendants averred that the books and accounts were only destroyed after the company’s liquidator had informed them that everything was in order. However, no evidence was tendered by the defendants to support this averment.
The Court’s Decision
According to the High Court, the principles established in Malhotra are as follows–
- If it is found that the destruction of the evidence was carried out deliberately so as to hinder the proof of a plaintiff’s claim, then such finding will reflect on the credibility of the party that destroyed the evidence; in such circumstances, the court may disregard the evidence of the destroyer upon the application of the presumption;
- If the Court has difficulty in deciding which party’s evidence to accept, then it would be legitimate to resolve the doubt by the application of the presumption; and
- If the judge forms a clear view, having borne in mind all the difficulties which may arise from the unavailability of material documents, as to which side is telling the truth, then the presumption has no application and the judge cannot be required to accept the evidence he does not believe or to reject evidence he finds truthful.
The learned judge, Nantha Balan J, found it “very bizarre” for the defendants to destroy all documents and records of the company. The judge added that “[t]his raises a “red flag” of deep suspicion, particularly so in this case, where no paper trail can be done since there are no documents available.” The Court added that the documents may very well have exonerated the defendants, but the defendants themselves have made that impossible since no documents are available now.
The Court also found it “very odd (to say the least) that the documents and records were destroyed”. In His Lordship’s view, “the “smoking gun” lies in the documents.”
Nantha Balan J added that there was no evidence to substantiate the defendant’s averment that the company’s documents and accounts had been destroyed due to the relocation of the company’s office or to show that the documents and accounts could not have been kept on the premises or offices of the defendants.
Consequently, the Court held that as a result of the conduct of the defendants, there is no collaborative evidence of the defendants’ stand or justification on the necessity or reasonableness of the expenses incurred by the company, the payment to all of the company’s creditors (except the plaintiff), the “fire sale” of the company’s assets and the writing off of the debts.
In the learned judge’s opinion, based on the destruction of the company’s books and records (in violation of section 245(3) of CA 2016), it is only proper in the circumstances that an adverse presumption should be inferred against the defendants, namely that the exorbitant expenses incurred by the company, the alleged payment made to all creditors (except the plaintiff), and the writing off of the debts owed to the company, are manifestation of fraudulent trading by the defendants.
The judge added that taking all of the circumstances into account, the inference to be drawn here is that the books and records of the company were deliberately destroyed by the defendants to hinder or prevent the liquidator from ascertaining the truth as regards the financial affairs of the company and to verify the balance sheet and the reasonableness of the expenses that were incurred.
In the circumstances, the Court granted the declaration sought by the plaintiff and held the defendants jointly and severally liable for the Outstanding Amounts. It also ordered that such amounts be paid by the defendants within one month from the date of service of the court order on them.
There are very few reported cases in Malaysia where the “adverse presumption” principle in Malhotra has been applied. This decision is noteworthy as it appears to be the first decision by a Malaysian court where a fraudulent trading claim has been established as a result of an adverse presumption being made against parties who had destroyed documents that were relevant to the claim.
The defendants have appealed to the Court of Appeal against the High Court’s decision.
The plaintiff in this case was represented by our Nimalan Devaraja (Senior Associate) and Joyce Lim Hwee Yin (Associate).