What is considered fraud in Malaysia? A legal overview of fraudulent trading in Malaysia

‍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 Although section 304 of the CA 1965 is no longer in force, references to the case law decided under that provision would be useful in supplementing the case law under the new provision due to the substantial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 for fraudulent trading

From case laws, it appears that the elements for invocation of section 540(1) of the CA 2016 are as follows: 

1. it must be established in the course of the winding up of a company or in any proceedings against the company that the business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose;
2. that the defendant was knowingly a party to the carrying on of the business in that manner; and 
3. that there was dishonesty. 

It was held by the court in one instance 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.  

Moreover, the Court of Appeal has clarified that a scheme to defraud the company's creditors is not necessary; a single act of conducting business to defraud a creditor is enough to initiate an action for compensation against a person engaging in 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 objective is 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]

Recently, in 2022, the Court of Appeal in Zamzam Arabic Food Holding Sdn Bhd & Anor v Johanjana Corp Sdn Bhd [2022] 5 MLJ 302 said that the underlying purpose of section 540(1) of the CA 2016 is to impose a personal responsibility and liability on the director and/or the person who controls the company and not the company itself for carrying on the business of the company with intent to defraud a creditor.

Once fraudulent trading has been established as described, any person knowingly involved in conducting the business will bear personal responsibility, without any limitation of liability, for all or any of the company’s debts or other liabilities, as directed by the court. 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]  

In addition to the civil liability under section 540(1), the fraudster also commits a criminal offence and, upon conviction, may face imprisonment for up to 10 years, a fine of up to RM1,000,000, or 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 2017[8] 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 decision[11], 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:

1. according to the ordinary standard of reasonable and honest people what was done was dishonest; and
2. that the actor himself must have realised that the act was by those standards dishonest.

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]  

Separately, 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 are virtually unlimited scenarios which can be considered as fraudulent trading. The following are some examples:

1. dissipation of assets out of the reach of the liquidators[17];
2. failure to remit contributions to the Employees Provident Fund (EPF) and Social Security Organisation (SOCSO or more commonly known as PERKESO)[18];
3. payment to other creditors except the plaintiff[19];
4. assignment of the company’s future earnings to a separate company, resulting in the former becoming a dormant company with no assets and unable to pay its debts to creditors[20];
5. use by a director of the company’s funds to speculate on the stock market and then passing on the resulting loss to the company whilst recovering his own funds used in that speculative activity, causing the company to be insolvent[21]; and
6. misleading a creditor to enter into a consent judgment despite knowing that the company was insolvent and incapable of meeting its debts.[22]

Conclusion  

It is important to remember that building a case for fraudulent trading takes time, and any fraud-related claim is always time-sensitive. Therefore, when fraudulent conduct is suspected, businesses should promptly address the issue, including seeking legal advice. Initiating the process early aids in the initial investigation, and considering injunctive reliefs can prevent the fraudster from dissipating assets, thereby avoiding future complications in recovering funds.

Further, it must be borne in mind that fraud can happen both externally and internally. Hence, it is always a good idea to have a comprehensive Anti-Fraud Policy, which is implemented properly to safeguard the business against potential financial losses and reputational damage. Such policy will provide a robust framework to detect, prevent, and respond to fraudulent activities, ensuring the integrity of the business operations. This will lead to a more secure business environment, promote ethical practices, and drive long-term success.

‍This article is written by  Raja Nadhil Aqran (Partner). It only contains general information. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such.

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[1] Auto Emasjaya Sdn Bhd & Anor v Ng Kong Ngai [2016] 5 CLJ 783, page 791.

[2] JCT Ltd v Muniandy Nadasan & Ors and another appeal [2016] 6 MLJ 635, pages 650 to 651. See also Siow Yoon Keong v H Rosen Engineering BV [2003] 4 MLJ 569.

[3] Lama Tile (Timur) Sdn Bhd v Lim Meng Kwang & Anor [2015] 4 MLJ 85, page 95.

[4] Aneka Melor Sdn Bhd v Seri Sabco (M) Sdn Bhd & Another Appeal [2016] 2 CLJ 563, page 575.

[5] Chin Chee Keong v Toling Corp (M) Sdn Bhd [2016] 3 MLJ 479, pages 487 and 488.

[6] Siow Yoon Keong v H Rosen Engineering BV [2003] 4 MLJ 569, page 581. See also supra note 1, page 96.

[7] Dato’ Prem Krishna Sahgal v Muniandy a/l Nadasan & Ors [2018] 2 MLJ 693, pages 708 and 709.

[8] Ibid, pages 714 and 715.

[9] Tetuan Sulaiman & Taye v Wong Poh Kun & Anor [2021] 8 MLJ 550, pages 560 and 561.

[10] Supra note 7, page 707.

[11] Tradewinds Properties Sdn Bhd v Zulhkiple bin A Bakar & Ors [2019] 1 MLJ 421, page 432.

[12] Supra note 9, pages 569 and 570.

[13] Huatah Sdn Bhd v Yap Chee Kian & Ors [2020] 8 MLJ 98, pages 119 and 120.

[14] China Idea Development Ltd v Ooi Kee Liang & Ors and another case [2020] 8 MLJ 527, pages 548 to 552.

[15] Zamzam Arabic Food Holding Sdn Bhd & Anor v Johanjana Corp Sdn Bhd [2022] 5 MLJ 302, pages  314 to 316.

[16] Max-Sun Trading Ltd and Another v Tang Mun Kit and Another (Tan Siew Moi, Third Party) [2016] 5 SLR 815, pages 845 and 846.

[17] Supra note 7, page 718.

[18] Supra note 7, page 718.

[19] Supra note 9, page 569.

[20] Supra note 11, page 435.

[21] Supra note 6, pages 580 and 581.

[22] Supra note 14, pages 548 to 552.

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