ISSUE 12/2023 - MALAYSIAN FEDERAL COURT ENFORCES DIRECTOR'S LIABILITIES PER FRAUDULENT TRADING RULES

Federal Court case of Lai Fee & Anor v. Wong Yu Vee & Ors relates to a suit filed in the High Court against three individuals for fraudulent trading pursuant to s 540 of the Companies Act 2016.

The plaintiffs were granted leave to appeal on three questions of law:

(1) where a vendor agreed to the immediate transfer of an asset to a company relying on the representation of the company that the balance purchase price would be paid in the future, and the company subsequently failed to pay the balance purchase price when it fell due, were the directors of the company, ipso facto, liable to the vendor under s 540?

(2) where a company had 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 was subsequently sued under s 540 arising from the said debt: - (i) was such a director barred by the issue of estoppel and/or res judicata from asserting defences which the company had unsuccessfully raised in the previous suit?; (ii) might 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? and

(3) was the position by Lord Kerr in the English Supreme Court case of Takhar v Gracefield Developments Ltd and Others, 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?

The Federal Court, in allowing the plaintiffs' appeal, answered as follows: Question 1: affirmative; Question 2(i): affirmative; 2(ii): negative; and Question 3: affirmative.