City Properties Sdn Bhd v Jalex Sdn Bhd (W-02(NCC)(W)-1226-07/2022)

YAP WEE CHUN

ASHAK BIN HASSAN (NO. K/P: 471007-01-5979) …PERAYU-PERAYU DAN JALEX SDN BHD (NO. SYARIKAT: 176538-U) …RESPONDEN [Dalam Mahkamah Tinggi Malaya di Kuala Lumpur Di Wilayah Persekutuan Malaysia Guaman No.: WA-22NCC-247-06/2017 Antara Jalex Sdn Bhd (No. Syarikat: 176538-U) …Plaintif

City Properties Sdn Bhd (No. Syarikat: 16234-T)

Yap Wee Chun (No. K/P: 701014-07-5655)

Ashak bin Hassan (No. K/P: 471007-01-5979) …Defendan-Defendan] (DIDENGAR BERSAMA) DALAM MAHKAMAH RAYUAN MALAYSIA (BIDANG KUASA RAYUAN) RAYUAN SIVIL NO.: W-02(NCC)(W)-1226-07/2022 ANTARA CITY PROPERTIES SDN BHD (COMPANY NO: 16234-T) …PERAYU DAN JALEX SDN BHD (COMPANY NO: 176538-U) …RESPONDEN [Dalam Mahkamah Tinggi Malaya di Kuala Lumpur Dalam Wilayah Persekutuan, Malaysia Guaman No.: WA-22NCC-247-06/2017 Antara Jalex Sdn Bhd (Company No: 176538-U) …Plaintif

City Properties Sdn Bhd (Company No: 16234-T)

Yap Wee Chun (NRIC No: 701014-07-5655)

Ashak bin Hassan (NRIC No: 471007-01-5979) …Defendan-Defendan] CORAM: WONG KIAN KHEONG, JCA. ALWI BIN HJ. ABDUL WAHAB, JCA. ONG CHEE KWAN, JCA.

This judgment revisits the scope and application of section 540(1) of the Companies Act 2016 (“CA 2016”), which empowers the Court to impose personal liability for fraudulent trading. Three interrelated issues arise. First, whether the term “person” in section 540(1) extends beyond natural persons to include a body corporate, notwithstanding the statutory placement of civil and criminal consequences within the same provision. Secondly, whether dishonest intent may properly be inferred where a company continues to carry on business and incur liabilities in the face of persistent cost overruns and the exhaustion of its available term loan facilities with no alternative source of funds. Thirdly, where the “knowing party” is itself a corporate entity, how should the rules of attribution to be applied to determine whether the requisite knowledge and dishonesty can be imputed to that entity for the purposes of section 540(1).

The learned High Court Judge below, after a full trial, found City Properties Sdn Bhd (“CPSB”), the 1st Defendant below, and the Appellant in Appeal 1226, and Yap Wee Chun (“Yap”) and Ashak bin Hassan (“Ashak”), the 2nd Defendant and 3rd Defendant respectively below, and the Appellants in Appeal 1223 to be persons who were knowingly parties to the carrying on of the business of KL Landmark Development Sdn Bhd (“KLL”) with the intent to defraud the creditors of KLL.

Both the Appeal 1226 and Appeal 1223 (collectively “the Appeals”) are dealt with in this judgment. In our analysis of the contentions raised by the parties, we are unanimous in our findings that there are no appealable errors by the learned High Court Judge (“the Learned HCJ”) and accordingly, both the Appeals are dismissed with costs.

The Respondent, who was the Plaintiff below, is one Jalex Sdn Bhd (“Jalex”). Jalex is a construction and interior renovation contractor. Jalex was appointed as the contractor for works at the Avenue K retail complex under two separate construction contracts with KLL.

KLL was the employer under both contracts. KLL was, at all material times, a wholly-owned subsidiary of CPSB, which owned and operated the Avenue K development and retail complex (“the Avenue K”).

Yap and Ashak were at all material times directors of KLL. Yap was also a director of CPSB, whilst Ashak was CPSB’s nominated representative director to KLL’s board of directors.

On 23.2.2012, Jalex entered into a Letter of Award with KLL for architectural and interior works relating to the refurbishment of Avenue K (“1st Contract”). The original contract sum was RM19,608,243.50, subject to variation orders, prime cost adjustments, and provisional sums during the course of the works.

Jalex achieved Practical Completion for the 1st Contract on 7.10.2013. A Final Account prepared as at 8.1.2015 reflected a revised final value of RM40,043,571.22, comprising substantial additions from variations, provisional sum adjustments, and prime cost items.

On 18.11.2013, KLL awarded a separate Letter of Award to Jalex for renovation works at Level 4, Avenue K (“2nd Contract”). The contract sum was RM2,886,931.30. Practical Completion for the 2nd Contract was achieved on 27.5.2014.

Under both the 1st Contract and the 2nd Contract (collectively “the Contracts”), Jalex submitted progress claims, which were certified by the consultants. KLL made substantial payments totalling more than RM17 million during the project period.

However, certain amounts remained outstanding at later stages. The Respondent’s pleaded outstanding sums were: a) RM6,648,217.27 under the 1st Contract; b) RM1,356,792.99 under the 2nd Contract.

On 29.3.2016, Jalex obtained two adjudication decisions in its favour against KLL for the total sum of RM9,252,342.52.

KLL did not commence proceedings to set aside or stay the adjudication decisions.

On 29.9.2016, the High Court granted a winding-up order against KLL upon Jalex’s petition under section 218(1)(e) Companies Act 1965 (“CA 1965”). In fact, KLL did not resist the winding-up petition.

According to the Official Receiver, the amount available in KLL’s estate at liquidation was RM3,000.00, representing the deposit paid by Jalex for the adjudication proceedings.

On 21.2.2020, the High Court allowed Jalex’s application for the discovery of documents against the Appellants, which, inter alia, compels the Appellant to produce to the Court the Architect’s Confirmation that there was no cost overrun over and above the Contracts costs (“the Discovery Order”). This part of the Discovery Order remained notwithstanding a successful appeal by the Appellants to set aside other parts of the Discovery Order.

The Appellants claimed that vide 2 letters dated 27.9.2012 and 15.3.2013 issued by the Architect to UOB, there was confirmation that there was no cost overrun.

Jalex brought this action under s. 540(1) of the CA, 2016 against: a) CPSB, which ultimately carried on the business of KLL; b) Yap, in his capacity as a director of both CPSB and KLL; and c) Ashak, in his capacity as a director of KLL, with the intent to defraud the creditors of KLL, being the target company in which the fraud took place, and of which CPSB, Yap, and Ashak are knowing parties.

It is not in dispute that it was CPSB who had obtained the financing for the Avenue K project.

United Overseas Bank Bhd (“UOB”) had granted facilities Term Loan 1(“TL 1”) and Term Loan 2 (“TL 2”) to CPSB. The purpose of TL 1 was to discharge the obligation of Pengurusan Danaharta Nasional Bhd (“Danaharta”) under a payment guarantee of RM125 million issued by Danaharta and Public Bank Bhd. As observed by the Learned HCJ upon the evidence led at trial, Yap admitted that this was essentially a “rescue package provided by Danaharta to allow CPSB to build the whole complex, including Avenue K”.

More significantly, for the Appeals, a Supplemental Agreement II (“SA II”) was entered into between CPSB and UOB on 16.1.2013. The SA II was an extension of the facilities granted by UOB under the original facilities agreement. Term Loan 3 (“TL 3”) and Term Loan 4 (“TL 4”) were issued 6 months after the 1st Contract was entered into. It was already in contemplation by Jalex and CPSB before entering into the 1st Contract that CPSB would obtain financing for the retrofit and upgrade of the podium in Avenue K. It was established in evidence that both Yap and Alex Chan, the principal of Jalex (PW1), stated that CPSB would finance the project.

However, Jalex had no knowledge of and was never informed of the detailed terms of the financing or that CPSB would be working within a limited budget to finance the work. This is a significant fact.

TL 3 was a facility of RM35 million given by UOB to be strictly used to fund 100% of the Retrofit and Upgrade costs of the Podium. There were strict conditions precedent to be met for drawdowns under TL 3. Out of the RM35 million, RM2 million was to be used to service interest on both TL 3 and TL 4. Therefore, the budget available under TL 3 to finance the Retrofit and Upgrade works under the Contracts was RM33 million. This is because TL 4, which was a facility for RM12 million, was to be utilised strictly to fund 100% of the fit-out costs of individual tenant units in Avenue K. The fit-out of individual tenant units was not part of Jalex’s scope of work under the Contracts.

24.

As security for the facilities, KLL was to assign to UOB all of its rights, benefits, entitlements, and interests under the 1st and 2nd Contracts. In this regard, KLL had lodged a Form 34 with the registry of companies on the creation of a charge in the form of an assignment on 16.1.2013 (“the Retrofit Assignment”). These included the rights over the Bank Guarantees.

KLL did not give any written notice of the Retrofit Assignment to Jalex. However, there is no dispute that the Bank Guarantees were never called upon by KLL or UOB.

This limit to the TL 3 is relevant in the context of the escalating costs of the Retrofit and Upgrade works and the strict monetary budget within which CPSB and KLL were acting under. In other words, CPSB’s budget for the Retrofit and Upgrade works under the Contracts entered into with Jalex was capped at RM 33 million. This included the costs of all nominated sub-contractors, whom Jalex was responsible for, and the consultants.

There was an elaborate process from UOB to facilitate payments to the contractors. In particular, CPSB had to ensure that various conditions precedent were met before any disbursement under TL 3 could be made. The process involved, amongst others: a) obtaining written confirmation from the architect that the total costs and professional fees for the Retrofit and Upgrade Works did not exceed RM33 million (“Architect’s Confirmation”); b) written confirmation from the relevant contractors that CPSB had duly settled the difference between the Retrofit and Fit-Out works under TL 3 (“Contractor’s Confirmation”); c) written confirmation that there are no cost overruns above the total Retrofit and Upgrade Costs of RM 33 million (“Owner’s Confirmation”).

It is this RM33 million budget cap and the instruction of Additional Works and the issuing of Variation Orders notwithstanding the exhaustion of the budget that forms the focus of the Appellants’ complicity in incurring debts for KLL with no prospect of paying its debts to the creditors, more specifically Jalex.

It is Jalex’s contention that the budget of RM33 million had already been exceeded when these Additional Works and Variation Orders were instructed and issued. The contract sum under the 1st Contract had doubled from the original RM19,608,243.50 to RM40,043,571.22, taking into account some 158 variations to the works.

The Learned HCJ had observed from the evidence that as at 24.8.2014, when Interim Certificate No. 16 (“IC No. 16”) was issued, the total costs of the contractors and consultants had increased to RM34,108,243.50. At the time when CPSB made the 14th and final drawdown request under TL 3, the budget had been exceeded by more than RM3 million.

Significantly, Jalex did not know the limited budget or the exceeding of this budget.

The Learned High Court Judge also took into consideration the admission by DW1, who gave evidence for CPSB as the project manager, that the sum under the 1st Contract had indeed been exceeded. “GP : Yes. As far as what I just showed you on Interim Cert No. 14, if you add that figure with the consultants' fees, 31 million add with 1.8 million for consultants' fees, you are hitting RM33.5 million already, isn't it for the retrofit and upgrade works under the first contract, agree? SEAH: Yes, addition, the mathematics seems correct.”

Crucially, the Learned HCJ found that the business of KLL was, in effect, being carried out by CPSB. More specifically, the Learned HCJ found that: a) the tender for the retrofit contracts was initially taken out by CPSB and all negotiations for the tender took place with CPSB; b) that CPSB actively took part in all decisions and interfaced with the consultants and nominated subcontractors pertaining to the Retrofit and Upgrade works of Avenue K; c) CPSB obtained the financing of the projects through term loans from UOB as part of discharging the obligations of Pengurusan Danaharta Nasional Bhd;

CPSB controlled the drawdown process as part of its obligations to ensure compliance with the conditions precedent for disbursement under TL 3; and

by reason of the above, CPSB was at all times conscious and aware of the financial position of KLL and carrying out the business of KLL, whilst KLL was in contract with Jalex as the retrofit contractors for Avenue K.

Thus, whilst on paper, KLL was the employer, in reality, it was a vehicle used by CPSB as its holding company to contract with Jalex on the Retrofit and Upgrade works for Avenue K. In fact, the Bank Guarantees that Jalex had submitted with the tender was in favour of CPSB.

It was also established at trial that the consultants appointed for the project were employed by CPSB and reported to CPSB, not KLL. In short, it was CPSB, through Yap as its directing mind and will, that dealt with Jalex on the works under the Contracts.

The Learned HCJ found that Yap and Ashak were the directing minds and will of KLL and not merely servants and agents. The Learned HCJ held: “[58] In determining the role played by Yap and Ashak, it is not disputed that they were the directing minds of KLL. They were not just mere servants and agents of KLL. As the directing minds of the company, they control the company. The state of mind of the company is their state of mind.”

As directors of the target company, namely KLL, Yap and Ashak were primarily responsible for the conduct of the business of KLL. Yap and Ashak had management control on KLL and that being directors of KLL, the Learned HCJ held that they must have been presumed to know the entire affairs of the company which they were directors of.

The Learned HCJ found that the intention to defraud could be inferred on the part of Yap, as the director of both KLL and CPSB, when Yap, on behalf of CPSB and KLL, continued to carry on the business of KLL with no reasonable prospect of the creditors receiving payments of the debts incurred by KLL. They were complicit as the Learned High Court Judge observed that despite “their express knowledge of KLL status and contracting capacity, they allowed KLL to continue incurred the said debt”.

On the issue of dishonest intent, the Learned HCJ was rightly guided by the objective and subjective tests promulgated by the Court of Appeal in Tradewinds Properties Sdn Bhd v. Zulhkiple Bakar [2019] 2 CLJ 261 when discussing s. 304(1) of Companies Act 1965 (the predecessor to section 540(1) of CA 2016): [75] On the issue of dishonesty, the Court of Appeal in Tradewinds (supra) in discussing s. 304 (1) of the CA 1965 held: - "...Thus, in order to establish dishonesty under sub s. 304(1) of CA 1965, the court must find that:

According to the ordinary standard of reasonable and honest people what was done was dishonest; and

(ii) That the actor himself must have realised that the act was by those standards dishonest."

The Learned HCJ came to his conclusion that dishonest intent was established when considering the following undisputed facts and evidence: a) the non-disclosure of the Retrofit Assignment, being the creation of a charge for the facilities under TL 3 and TL 4 in favour of CPSB; b) the misrepresentation of the actual status of KLL to the world at large in the Financial Statements that KLL was a dormant company; c) the timing of resignations of Yap and Ashak as directors of KLL; d) the conduct of CPSB, Yap and Ashak allowing KLL to be wound up; and e) the failure to comply with the Discovery Order requiring disclosure of the utilisation of the RM 47 million under TL 3 and TL 4. (the “Five Dishonesty Inferring Events”)

The Learned HCJ found that Yap and Ashak, being the directing mind and will of KLL, were clearly persons who were knowingly parties to the fraudulent trading carried out by KLL. As regards CPSB, the Learned HCJ attributed Yap’s knowledge to the company. In the premises, the Learned HCJ found that all the necessary ingredients under section 540(1) CA 2016 had been established on the balance of probabilities against CPSB, Yap and Ashak. Contentions on Appeals

Before this Court, learned counsel for CPSB canvassed the following points to demonstrate that the Learned HCJ had erred in his conclusions: In relation to the Retrofit Assignment: a) KLL was entitled to assign its rights and benefits under the Contracts to UOB vide the Retrofit Assignment and did not require Jalex’s consent for the same; b) There was no concealment of the Retrofit Assignment at all. On the contrary, Jalex had actual notice of the same, including the subsequent release of the assignment; c) Jalex was never prejudiced by the Retrofit Assignment as the same was irrelevant to the issue as to whether CPSB or KLL could pay Jalex or otherwise; d) The failure to give notice of the Retrofit Assignment only means that UOB did not acquire full legal rights to sue in its own name; e) There is no inference of dishonest intent to defraud Jalex by reason of the failure to give notice; In relation to TL 3, which was exceeded in August 2013 a) In fact, in August 2013, TL 3 retained a surplus of funds of RM2.6 million and did not burst by RM3 million as found by the Learned HCJ. More specifically, IC No. 16 had included the total sum of RM5,841,830.48 incurred for “Fit-Out” works. These “Fit-Out” works were paid out of TL 4 and not TL 3. This amount, if properly excluded, would mean that TL 3 still had a surplus of RM2.6 million at the time of the IC No. 16; b) The fact that Jalex had continued to receive payments during the period from September 2013 to May 2014 further suggests that TL 3 had not been exceeded; c) In any case, the outstanding Interim Certificates under the 1st Contract, namely IC Nos. 17 to 20, and the 2nd Contract, namely IC Nos. 6 to 9 were not even due for payments in August 2013. Accordingly, there could be no fraudulent trading in August 2013. In relation to Additional Works and Variation Works a) The finding by the Learned HCJ that all Additional Works and Variation Orders were instructed by CPSB, Yap or Ashak is without evidential foundation; b) The contractual framework expressly delineated the authority of the Architect in issuing instructions and variations; c) All execution, monitoring and supervision of the construction works were by 4 independent consultants; d) No evidence was tendered to show that at the time the Variation Orders were issued, KLL was unable to pay for the works or that the works were ordered in circumstances amounting to fraudulent trading. In relation to the Five Dishonesty Inferring Events a) The Five Dishonest Inferring Events do not disclose a course of conduct amounting to an intent to defraud; b) There was no duty to disclose the Retrofit Assignment, and in any case, actual notice was given; c) The resignations as directors by Yap and Ashak were on 25.8.2015, and KLL was wound up on 29.9.2016. Both these events occurred much later than August 2013 when the fraudulent trading had purportedly taken place; d) Similarly, the Discovery Order was only made on 21.5.2020; e) Further, any breach of the Discovery Order, even if true, relates to conduct in litigation and is not a substitute for proof of fraudulent purpose under section 540(1) of CA

2016.

It is also contended that CPSB, as a corporate entity, cannot be held liable under section 540(1) of CA 2016. This was held by this Court in Zamzam Arabic Food Holding Sdn Bhd v. Johanjana Corporation Sdn Bhd [2022] 6 CLJ 692.

In any case, there is no evidential or legal basis to impute to CPSB the fraudulent intent or actual knowledge to make CPSB liable. The Learned HCJ had disregarded the rules of attribution as expounded in Meridien Global Funds Management Asia Ltd v. Securities Commission [1995] 2 BCLC 112, in holding CPSB personally liable for Yap’s and Ashak’s fraudulent intent.

Further, Jalex’s pleadings are devoid of any material facts and particulars to engage the rules of attribution. The Learned HCJ was wrong in treating CPSB as the alter ego of KLL. There was no express finding as to how and when the alleged conduct and knowledge of Yap and Ashak concerning fraudulent trading were attributed to CPSB.

The learned HCJ had placed undue weight on the credibility of the witnesses, as the core issues revolved around the interpretation of documents rather than the credibility of witnesses.

Finally, Jalex ought to have joined KLL as a party to the proceedings.

The thrust of learned counsel for Yap and Ashak’s Appeal is that the Learned HCJ had wrongly treated normal commercial problems, such as limited capital, payment delays, and the use of a special purpose vehicle (“SPV”) as signs of fraud. These factors do not, in law, amount to fraudulent intent. In fact, there is no evidence to support the existence of dishonesty at all.

More specifically, the contentions of learned counsel for Yap and Ashak can be summarised as follows: a) Although in KLL’s Financial Statements, it was described as a dormant company and “had no business”, this was consistent with its SPV status. In truth, KLL did carry on business and was never a façade for a fraudulent purpose. The Learned HCJ erred in drawing a negative inference from the Financial Statements; b) Commercial risk is not evidence of fraud which requires proof of dishonesty. In particular, the Learned HCJ erred in treating financial difficulty, delayed payments or the use of an SPV as evidence of dishonest intent. There was no evidence to support an intention by KLL to deceive Jalex. Payments were tied to drawdowns and works certified by consultants, not the directors; c) The Court of Appeal in Tradewinds Properties Sdn Bhd v Zulhkiple bin A Bakar & Ors [2019] 1 MLJ 421 (“Tradewinds Properties”), held that two elements must be shown: (i) actual fraudulent intent in the carrying on of the business, and (ii) that the defendant was knowingly a party to that conduct. Jalex had not identified any act by Yap and Ashak demonstrating actual knowledge of, or participation in, a fraudulent scheme. On the contrary, Yap and Ashak had relied on consultants, made substantial payments to Jalex, openly communicated about the drawdowns from UOB and works continued to be certified. There was no diversion of funds for personal benefit and no instruction to deny Jalex from receiving payments for certified works. The inference of dishonest intent premised only on their position as directors was wrong in law; d) Jalex never pleaded that KLL was a sham vehicle or that Yap and Ashak had agreed to a plan that Jalex would never be paid. Thus, the findings of the Learned HCJ went beyond the pleaded case; e) The Learned HCJ erred in concluding that Yap and Ashak were the directing mind and will of KLL. There was no such admission by them, and the evidence in fact shows that consultants and the project team handled the day-to-day operations; f) The Learned HCJ wrongly rejected the defence that since the Final Account was only completed in 2015, no intention to defraud could meaningfully be inferred in 2013 when the quantum of works, variations, and costs had not yet crystallised; g) The Retrofit Assignment was a non-issue. The Learned HCJ wrongly treated non-notification as concealment amounting to dishonesty, but failed to consider the undisputed evidence that assignments of this type commonly remain inactive unless triggered by the bank. In fact, UOB never invoked it; h) The Learned HCJ had erroneously treated the objections to the discovery application as evidence of fraudulent intent; i) Jalex, having pursued civil recovery remedies through CIPAA proceedings and winding up proceedings, is estopped or barred from pursuing a claim under section 540(1) as a “top-up” measure, especially since the foundation to claim under section 540(1) was known years before Jalex chose these civil remedies.

Both CPSB’s contentions and Yap and Ashak’s contentions shall be considered separately below.

It is instructive to set out the law on section 540(1) CA 2016 before considering the contentions canvassed in these Appeals.

The Federal Court in Lai Fee & Anor v. Wong Yu Vee & Ors [2023] 3 MLJ 503, has expounded that the “responsibility for fraudulent trading under s. 540 of the CA 2016 is the statutory exception to the corporate personality doctrine…”.

Section 540(1) CA 2016 provides as follows: “540 Responsibility for fraudulent trading

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” [emphasis added]

To succeed under section 540(1), the applicant must establish all of the following elements: a) the company is in winding up, or there is a proceeding against the company; b) it appears that the business of the company was carried on with intent to defraud creditors or for a fraudulent purpose; c) the defendant was a “person” who was “knowingly a party” to the carrying on of the business in the fraudulent manner; and d) there is a causative connection to the debts or liabilities for which the knowing party may be personally liable.

Once all the elements are established, the Court may order the knowing party to “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”. This suggests that the defendant may be ordered to assume personal liability even for the debts or liabilities of the company not forming the subject matter of the claims by the plaintiff. More will be said of this below.

We will elaborate on each of the elements for section 540(1) CA 2016. Company in the course of winding up or in any proceedings against the company

A material difference between section 332(1) of the UK CA 1948 and our section 540(1) of CA 2016 is that our section can be invoked even if the company is not being wound up. The fact that the company is in the course of winding up or there are proceedings against the company is a jurisdiction-triggering condition precedent to a claim for fraudulent trading under section 540(1). Once the gateway is met, the liquidator or any creditor or contributory of the company may apply under section 540(1).

To satisfy the first limb, it must be shown that a winding-up order has been made or that a winding-up is deemed to have commenced under the Act. It is not necessary to show that the fraudulent trading occurred during winding-up.

Where there is no winding up, the provision can be invoked if there is a civil suit where the company is a defendant or respondent. This limb is broader and should be liberally construed.

In the present case, there is no question that KLL has been wound up and is under liquidation. It appears the business of the company was carried on with the intent to defraud creditors or for a fraudulent purpose

The use of the words “if… it appears” in section 540 is significant. The Courts have held that this is indicative of a lower threshold to trigger section 540. The burden of proof to establish fraud is on the plaintiff, and the standard of proof is on the balance of probabilities [See: Siow Yoon Keng v. H Rosen Engineering BV [2003] 4 MLJ 569 at 582B (“Siow Yoon Keng”)].

The phrase “the business of the company was carried on” requires that the company is continuing to trade or is continuing to incur debts or incur new liabilities. This is usually not difficult to establish.

The central and usually the most difficult element is the carrying on of business with “the intent to defraud creditors or for a fraudulent purpose”. In this regard, it is settled law that the words “with intent to defraud creditors” or “for any fraudulent purpose” in section 540(1) are to be read disjunctively [See: Siow Yoon Keong].

The “intent to defraud creditors” requires actual dishonesty. There must be an intention that the creditors will not be paid or will be prejudiced. It is not sufficient that the business was risky and or that the directors were negligent or optimistic that the company would somehow satisfy its debts. The test is subjective dishonesty, inferred from objective facts.

The intention to defraud has been interpreted to include “an intent to deprive creditors, of an economic advantage or inflict upon them some economic loss” [See: R v. Grantham [1984] BCLC 270 at 276 (a–b); Re William C. Leith Brothers, Limited [1932] 2 Ch 71 at 77 and Lai Fee & Anor v. Wong Yu Vee & Ors [2023] 3 MLJ 503 at 519 (para 24(ii))]

On the other hand, “fraudulent purpose” is wider and may extend beyond creditors. Whilst the categories are not closed, some instances of “fraudulent purpose” would include raising funds knowing repayment is impossible, using a company structure to shift losses, concealment of the true financial position of the company, and incurring debts with no reasonable expectation of payment. “Person” who was “knowingly a party” (“the knowing party”)

In interpreting section 332 of the UK Companies Act 1948 (in pari materia to our section 540(1) CA 2016), Hoffman J in Re Augustus Barnett & Son Limited [1986] BCLC 170 held: “The words 'persons ... parties to' may be wide enough to cover outsiders who could not be said to have carried on or even assisted the carrying on of the company's business but who nevertheless in some way participated in the fraudulent acts.”

The UK Court of Appeal in Morris and others v. Bank of India [2005] 2 BCLC 328 has held that “person” includes third-party corporations and holding companies. The Court explained this rationale at paragraphs 111 and 112 of the judgment: “[111] In our judgment, Patten J was correct in his analysis of the policy of s 213. Compensation of those who have suffered loss as a result of the fraudulent trading is the paramount purpose of the provisions imposing civil liability to contribute to the loss suffered. [112] If knowledge were not attributed to an outsider company in cases such as this, the purpose of imposing liability upon such a company to pay compensation would, in our judgment, be emasculated. The crucial question is whose knowledge in the company counts, for the purposes of s 213, as corporate knowledge of the outsider company. In most companies of any size there will be a chain of command and delegation of authority and it is likely that the transactions with the fraudulent company will be dealt with at a level in the company below that of the board. It would in practice defeat the effectiveness of the section if liability were limited to those cases in which the board of directors was actually a direct privy to the fraud of the company with whom the transactions were entered into. The question is who had authority in BOI to deal with BCCI in respect of the relevant transactions. That requires a consideration of all circumstances surrounding the transaction...”

However, this Court in Zamzam Arabic Food Holding Sdn Bhd v. Johanjana Corporation Sdn Bhd [2022] 6 CLJ 692 (“Zamzam”) has held that a corporate entity cannot be held liable under our section 540(1). To appreciate the reasoning of the Court, we set out paras [25] to [31] of the judgment below: “[25] Learned counsel for the second defendant submitted that s 540(1) only applies to a person, ie, director and/or shareholder of the company who carried out the business of the company with intent to defraud a creditor. It was submitted that a plain reading of s 540(1) clearly shows that any offence or wrongdoing is intended against an individual person and not against a corporation or a company. It is submitted that the second defendant, as a company, does not have a mind and/or knowledge of its own to carry on its business with intent to defraud a creditor. It was submitted that the plaintiff is attempting to strain the statute to implicate the second defendant and this amounts to an abuse of court process. [26] As the word ‘person’ is not defined in the Companies Act, learned counsel for the plaintiff relies on s 3 of the Interpretation Acts 1948 and 1967 which defines the word ‘person’ to include a body of persons, corporate or unincorporate. Reading s 540(1) together with s 3 of the Interpretation Acts, learned counsel for the plaintiff contended that s 540(1) applies to a real person and a company. The learned JC accepted the plaintiff's contention. [27] We agree with the submission of the learned counsel for the second defendant. We take the view that s 3 of the Interpretation Acts could not be read into s 540(1) of the Companies Act as it would give effect to inconsistent meanings to s 540(1). The underlying purpose of s 540(1) 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. The wording in s 540(1) is plain and unambiguous. The word ‘person’ in s 540(1) in its ordinary and natural meaning meant ‘ a real person’. He could be a director, managing director or person in control of the company. Therefore, to give effect to s 540(1), the court must apply the ordinary meaning of ‘person’ and not the meaning assigned to it by the plaintiff. [28] To accede to the plaintiff’s contention would render s 540(1) meaningless because s 540(1) had a penal consequences. Only a real person could have an intention to defraud a creditor. Such an intention does not exist in a company. For example, the act of purchasing goods with knowledge or intention of not paying for the goods because the company had no funds can only be made by a director of the company who carries on the business in that manner because a company does not have a mind to cheat: see Kawin Industrial Sdn Bhd (in liquidation) v Tay Tiong Soong [2009] 1 MLJ 723; LMW Electronics Pte Ltd v Ang Chuang Juay & Ors [2010] 1 MLJ 185. [29] In Dato’ Prem Krishna Sahgal v Muniandy a/l Nadasan & Ors [2018] 2 MLJ 693; [2017] 10 CLJ 385, the appellant, who was the managing director of a company was found personally liable by the High Court and the Court of Appeal to pay arrears of salary and workers’ compensation amounting to RM2,910,201.78 for carrying on the business of the company with intent to defraud the employees pursuant to s 304 of the Companies Act 1965. On appeal to the Federal Court, on the question of law: whether an employee who makes a claim of statutory emoluments and contribution was entitled to make a claim as a creditor for the purpose of s 304(1) of the Act, under (held 1), the Federal Court said:

Section 304 of the Act deals with fraudulent trading or carrying on a business with an intention to defraud creditors. A person will not be able to hide behind the corporate veil and avoid liability for the company’s debts if he had used the company to perpetrate fraud and the company went into liquidation. The section provides for liability against directors personally on the basis that they carried on business of the company with the intention of defrauding creditors … [30] In Chin Chee Keong v Toling Corp (M) Sdn Bhd [2016] 3 MLJ 479, the Court of Appeal said: ‘The primary object behind sub-s 304(1) of the Companies Act 1965 is 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 company. Subsection 304(1) affords the creditor of the company a civil remedy personally against such persons’. [31] We, therefore, find that the learned JC had erred in law in accepting the plaintiff’s contention that the word ‘person’ in s 540(1) of the Companies Act includes a company. For this reason, we find there is merit in the first issue raised by the second defendant. We hold that the word ‘person’ in s 540(1) of the Companies Act 2016 does not include a company. It therefore follows that the plaintiff did not have a cause of action against the second defendant, which is a company”. [emphasis added]

As can be seen, Zamzam held that section 540(1) is intended to impose personal liability on natural persons (directors or persons in control of the company), not on corporate entities, and therefore a company cannot be a defendant under s 540(1). The Court in Zamzam was influenced by the existence of the penal consequences in section 540(5), which stipulates that every person who was knowingly a party to the carrying on of the business with the fraudulent intent commits a crime and on conviction is liable to imprisonment for a term not exceeding 10 years or a fine not exceeding one million ringgit or to both. Section 540(5) states: “(5) Where any business of a company is carried on with the intent or for the purpose mentioned in subsection

(1), every person who was knowingly a party to the carrying on of the business with that intent or purpose, commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding ten years or to a fine not exceeding one million ringgit or to both”.

The Court in Zamzam reasoned that the fraudulent intent in section 540(1) is personal and only a real or natural person can have such an intention, not a company where such an intention does not exist. To attribute the mind of the directors to the company would collapse the individual fraudulent trader and the trading company, in other words, since the individual director and the company are treated as one, there could be no distinction between the two for the purpose of section 540(1). This is all the more so since a company cannot be imprisoned.

Premised on the aforesaid reasoning, the Court held that the definition of “person” under section 3 of the Interpretation Act 1948/1967, which includes a body corporate, does not apply to section 540(1) since the definition applies only where “the context otherwise requires”.

With respect, we see there is no logical inconsistency in accepting that the company carried on business with the intent to defraud because its directing minds acted dishonestly, and treating those same individuals to be personally liable for knowingly participating in the fraud. The company’s fraudulent intent is established by attribution of its directing minds. The statement that “a company does not have a mind to cheat” is out of step with modern attribution jurisprudence, which has been adopted by our Federal Court, which has repeatedly accepted that corporations can commit fraud and that fraudulent intent can be attributed [See: Hoh Kiang Ngan v. Mahkamah Perusahaan Malaysia & Anor [1995] 3 MLJ 369 (“Hoh Kiang Ngan”)].

The Court in Zamzam treated section 540(1) as if it were primarily criminal and therefore incapable of applying to companies. With respect, we disagree. Section 540(1) is civil in form and function. The liability is primarily compensatory and is a remedy to augment the liquidation estate.

Whilst the mischief addressed by section 540(1) is the fraudulent trading of the company, that is, the carrying on of business with dishonest intent, the core purpose of section 540(1) is to pierce the corporate veil where the company’s business itself has been carried on fraudulently, and to impose personal liability on any “person”, whether director or otherwise, who was knowingly a party to that fraud.

The statute deliberately uses the phrase “any person who was knowingly a party”. This reflects the legislative intent that directors are not the exclusive targets and that liability turns on conduct and knowledge, not office.

Section 540 CA 2016 is the successor to section 304 CA 1965, which in turn was adopted from section 332 of the UK CA 1948. The section 213 of the UK Insolvency Act 1986 (“UK IA 1986”) is a later statutory descendant of the same English provision, it is not the direct source of the Malaysian section.

Significantly, under early UK companies legislation, fraudulent trading provisions were limited to directors and, by extension, shadow directors. Specifically, under the UK Companies Act 1928 and 1929 (“UK CA 1928/1929”), section 275(1) empowered the court to declare that directors of the company who knowingly carried on business to defraud creditors were personally liable. In other words, the statutory language explicitly referred to “director” and not “any person”.

The shift from “director” to “any person” was made pursuant to the recommendation by the Cohen Committee on Company Law Amendment (“the Cohen Report, 1945”), which suggested extending the scope so that the fraudulent trading provision would apply not only to directors, but also to other persons who were knowingly parties to the fraud. The UK Parliament implemented this change in the UK CA 1948. Section 332 of the UK CA 1948 contained the wording that all “persons who were knowingly parties to the carrying on of the business in a manner aforesaid” were liable. In other words, it was in the 1947– 48 reforms that the statutory language shifted from targeting directors specifically to a broader category of “persons”. This was a deliberate legislative choice to extend liability beyond just directors and shadow directors to any person knowingly involved in fraudulent trading.

The use of “any person” is deliberately expansive. The test turns on knowledge and participation, not human status. A company is fully capable of acting through its directing mind(s), having knowledge attributed to it and being “a party” to another company’s business. Section 213 of the UK IA 1986 adopted the same phrasing, and the UK Courts have repeatedly held that the broad language is kept intentionally wide and not restricted to directors or management of the company trading fraudulently [See: Re Gerald Cooper Chemicals Ltd. [1978] 1 Ch 262].

Thus, although many cases concern natural persons, the UK Courts have never confined “person” to individuals. Similar to ours, under the UK Interpretation Act, “person” also includes a body corporate unless the contrary intention appears. The position is the same in Singapore. In fact, in Tendcare Medical Group Holdings Pte Ltd (formerly known as Tian Jian Hua Xia Medical Group Holdings Pte Ltd) (in judicial management) and Anor v. Gong Ruizhong and Ors [2021] SGHC 80 (“Tendcare Medical Group”), the Singapore High Court had no issue extending “person” in section 340(1) of their Companies Act (which is in pari materia to our section 540(1) CA 2016) to include body corporates.

Indeed, fraud statutes must not be interpreted in a way that allows corporate structures to defeat liability. Knowledge and intent can be attributed to companies where appropriate [See: R v ICR Haulage Co. Ltd 30 Cr. App. R, 31]. This reasoning aligns with treating a company as a “person” capable of being a knowing party to fraudulent trading, and civilly liable under section 540(1) CA 2016. The word “person” in section 540(1) should be read consistently with its UK ancestor, and not cut down merely because section 540(5) provides for imprisonment.

With respect to the Court in Zamzam, the imprisonment provisions in section 540(5) CA 2016 do not define the scope of liability, but they define only the scope of punishment. Where a statute provides imprisonment or fine or both, courts routinely hold that where imprisonment is impossible, the fine applies. This is known as the alternative penalty principle (lex non cogit ad impossibilia). The principle may be stated narrowly as follows: where a statute creates an offence punishable by imprisonment or fine (or both), and the offender is a corporation, the court may impose the fine notwithstanding the impossibility of imprisonment, unless Parliament clearly intended to exclude corporate offenders.

We find that in this case, there is nothing in section 540 CA 2016 that indicates Parliament had intended to exclude corporate offenders. Indeed, in modern commerce, fraud is often executed by holding companies, group structures, and special purpose vehicles, and not merely by individuals. Excluding corporate entities will create a liability gap and incentivise the use of corporate intermediaries, thus defeating the object of section 540(1) CA 2016.

Further, the Court in Zamzam treated section 540 as a unitary provision when it is in fact a composite one. Section 540(1) deals expressly with civil declaration of personal liability, while section 540(5) deals with the offence and punishment. The placement of civil and criminal consequences in the same section should not, by itself, deprive section 540(1) of its ordinary meaning, especially where identical wordings in the UK and Singapore provisions are accepted as applying to corporate entities in the civil context. In fact, the fraudulent trading claims in Tendcare Medical Group were decided pursuant to section 340 of the then Singapore Companies Act that also contained section 340(5), which provides for criminal liability and punishment of a fine and or imprisonment similar to our section 540(5) CA 2016.

Accordingly, we find that section 3 of the Interpretation Act 1948/1967, which defines “person” to include “a body of persons, corporate or unincorporate”, which definition is to apply to all written laws, including the CA 2016, compels this Court to include a body corporate for section 540(1). There is nothing in the context of section 540 that excludes corporate entities or requires “person” to be read narrowly at all.

Given that we find that the Court in Zamzam had failed to apply the definition of “person” in section 3 of the Interpretation Act 1948/1967 which is a mandatory interpretative statute, misconstrued section 540(1) by ignoring its provenance or wording, overlooked UK or Singapore authorities that were already established and in fact conflicted with our Federal Court jurisprudence on statutory interpretation or attribution, it is open to us to decline to follow Zamzam on the ground that it was decided per incuriam.

The phrase “knowingly a party” is the mental and participatory threshold needed for the “person” to be personally liable. “Knowingly” imports actual knowledge of the fraudulent manner in which the business was carried out. In most instances, direct evidence of knowledge is rarely available. The Court, therefore, permits knowledge to be inferred from the circumstances. Such knowledge can be assumed when the facts indicate that the person must have been aware of the relevant state of affairs. The knowledge must relate to the fraudulent character of the trading and not the insolvency alone. Further, “knowingly” does not require the person 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 [See: Morris v. Bank of India [2004] 2 BCLC 279].

Being a “party” requires active involvement in the carrying on of the business in that fraudulent manner. These may include making or approving decisions to continue trading, authorising contracts, variations, or credit extension, and allowing business to continue despite known inability to pay.

Where the allegation concerns another corporate entity as the “knowing party”, the Court will have to apply the rules of attribution, determining who, for section 540(1), represents the mind of the corporate entity. Knowledge of the controlling officer may be attributed if consistent with the statutory purpose of preventing fraudulent trading. More will be said below on the rules of attribution. Causative connection to debts or liabilities

Under section 540(1) CA 2016, a declaration for fraudulent trading is not automatic once fraudulent intent is shown. There must also be a causative connection between the fraudulent carrying on of the business and the debts or liabilities in respect of which relief is sought. In short, the fraud must be the reason why those debts were incurred or increased.

Put differently, the fraudulent intent must be shown to have caused or materially contributed to the incurring of the specific debts claimed, not merely to have co-existed with them. The business must have been carried on with intent to defraud creditors or for a fraudulent purpose, and the particular debts or liabilities arose because of that fraudulent conduct.

However, there appears to be differences of view as to the extent the knowing party is personally liable for the fraudulent trading. Section 540(1) provides that the Court may, if it thinks proper so to do, declare that the person 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”.

Maugham J in In re William C Leitch Brothers Limited [1932] 2 Ch 71 (“William C Leitch”) on section 275(1) of the UK CA 1928/1929 opined at p. 79-80 that the words conferred a discretion to the Court to grant punitive relief such that the Court may, if thinks fit, make an order for all the company debts and liability to be paid by the knowing party including those that have no causative link to the fraudulent trading: “I am inclined to the view that s. 275 is in the nature of a punitive provision, and that where the Court makes such a declaration in relation to “all or any of the debts or other liabilities of the company”, it is in the discretion of the Court to make an order without limiting the order to the amount of the debts of those creditors proved to have been defrauded by the acts of the director in question, though no doubt the order would in general be so limited.” [emphasis added]

However, in Morphitis v Bernasconi and others [2003] EWCA Civ 289 (“Morphitis”), Chadwick J was of the view that the Court had no power to order a punitive remedy because of the existence of penal provisions that criminalise and punish the conduct of fraudulent trading. At paras [53] and [55], in relation to section 213 of the UK IA 1986, His Lordship said: “[53] The power under s 213(2) is to order that persons knowingly party to the carrying on of the company’s business with intent to defraud make such contributions (if any) to the company’s assets” as the court thinks proper. There must, as it seems to me, be some nexus between (i) the loss which has been caused to the company’s creditors generally by the carrying on of the business in the manner which gives rise to the exercise of the power and (ii) the contribution which those knowingly party to the carrying on of the business in that manner should be ordered to make to the assets in which the company’s creditors will share in the liquidation. … … [55] I am not persuaded that there is power to include a punitive element in the amount of any contribution which, in the exercise of the power conferred by section 213(2) of the 1986 Act, a person should be declared liable to make to the assets of the company. As I have said, I think that the principle on which that power should be exercised is that the contribution to the assets in which the company’s creditors will share in the liquidation should reflect (and compensate for) the loss which has been caused to those creditors by the carrying on of the business in the manner which gives rise to the exercise of the power. Punishment of those who have been party to the carrying on of the business in a manner of which the court disapproves – beyond what is inherent in requiring them to make contribution to the assets of a company with limited liability which they could not otherwise be required to make – seems to me foreign to that principle. Further, the power to punish a person knowingly party to fraudulent trading – formerly contained in section 332(3) of the 1948 Act – has been re-enacted (and preserved) in section 458 of the Companies Act 1985. It could not have been Parliament’s intention that the court would use the power to order contribution under section 213 of the 1986 Act in order to punish the wrongdoer.” [emphasis added]

Chadwick J’s view was shared by Patten J in BCCI v Bank of India [2004] EWHC 528 (Ch), where at para [122] of his judgment, His Lordship commented: “The power of the Court under s.213(2) to order a contribution to be made is framed in wide terms, but there has on authority to be some nexus between the loss caused to creditors as a result of the fraudulent trading and the contribution which the knowing party is required to make: see Morphitis v. Bernasconi [2003] 2 BCLC 53. I am not persuaded that the Court has jurisdiction to, or should, exercise this power so as to make a punitive award unconnected to and disproportionate to the loss which the Respondent can properly be regarded as responsible for. That said, any award, although essentially compensatory in nature, can only be a reasonable approximation to the damage which the Respondent’s conduct has caused or contributed to. This calculation is not and cannot be a matter of exact science and some elements of it will inevitably be broad-brush. Ultimately it is a matter of judgment whether the end figure represents reasonable compensation proportionate to BOI’s role in this matter.”

On this issue, we are also inclined to follow Chadwick J in Morphitis. While section 540(1) has a deterrent function, its primary civil purpose is compensatory. The object is to restore losses caused by fraudulent continuation of business, and to prevent the shifting of losses to creditors once insolvency is inevitable. A construction that imposes liability for debts unconnected to the fraud would transform section 540(1) into a penal confiscation mechanism, and collapse the distinction between civil fraudulent trading and criminal punishment, which is already provided for in the same section. Further, to impose personal liability on debts and liability without any causative link would be inconsistent with orthodox principles of civil liability.

The only “penal” feature, if at all, flowing from the Court’s discretion to declare that the person 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”, is where the Court does not only order the payment of the claims of the creditor who commences the action under section 540(1) but also order the knowing party to pay the debts or other liabilities of the company to the other creditors whose losses are causatively linked to the fraudulent trading but did not initiate the action for fraudulent trading.

Finally, in cases where the creditor is pursuing a claim against the knowing party to be personally liable only for its claims and not to make him personally liable for “all or any of the debts or other liabilities of the company” to other creditors, the Court of Appeal in Tetuan Sulaiman & Taye v. Wong Poh Kun and Anor and another appeal [ 2023] 3 MLJ 360 has held that our section 540(1) CA 2016 is wide enough to empower the Court to order the knowing party to personally pay the creditor directly if it is shown that the knowing party had acted wrongfully. This was the approach taken by the Federal Court in Dato’ Prem Krishna Sahgal v. Muniandy a/l Nadasan & Ors [2018] 2 MLJ 693 and the Court of Appeal in JCT Ltd v. Muniandy a/l Nadasan & Ors and another appeal [2016] 6 MLJ

635.

Having set out the law on section 540(1), CA 2016, we shall now consider the application of the law to the facts in the Appeals before us. Whether requirements of section 540(1) satisfied against CPSB

In this case, the original contract sum for the 1st Contract was RM19,608,243.50, subject to variation orders, prime cost adjustments, and provisional sums incurred during the course of the Retrofit and Upgrade works.

There is no dispute that Jalex achieved Practical Completion of the 1st Contract on 7.10.2013. A Final Account prepared as at 8.1.2015 reflected a revised final value of RM40,043,571.22, comprising substantial additions from variations, provisional sum adjustments, and prime cost items.

The Learned HCJ had found that Jalex had proven its case, establishing that Yap and Ashak had acted with dishonest intent, allowing KLL to incur debts with no prospect of repayment. At paras [95] and [96] of the Grounds of Judgment, His Lordship held: “[95] It is the firm finding of this Court that the elements of S. of the CA 2016, facts of the case, the liabilities of CPSB, Yap & Ashak have been established by Jalex. [96] The fraud occurred when CPSB, Yap and Ashak dishonestly and with intent allowed KLL to incur indebtedness with no prospect of repayment outside the limited financing available for the retrofit and upgrade works of the Avenue K. It is a finding of this Court that the conduct of the Defendants collectively violated s. 540 of the CA 2016.”

The Learned HCJ also found that not only had CPSB obtained the financing of the projects through the term loans from UOB, CPSB also controlled the drawdown process as part of its obligations to ensure compliance with the conditions precedent for disbursement under Term Loan 3 (“TL 3”), which was sole source of funding for the Retrofit and Upgrade works under the Contracts. Further, through Yap, CPSB was at all times conscious and aware of the financial position of KLL and the carrying on of the business of KLL, whilst KLL was in contract with Jalex as the retrofit contractors for Avenue K.

In fact, being in control of the financing for the Retrofit and Upgrade works meant that CPSB was intrinsically involved in the podium project and made all decisions regarding the expenditure and ordering of the Additional Works and Variation Orders under the project. Put simply, CPSB was the ultimate directing mind for the manner in which the business of KLL was being carried on.

Indeed, the Learned HCJ found that CPSB, as both the funder of the project and owner of Avenue K, meant that it “was in the best interest of CPSB that they handle and manage the project which saw CPSB and Yap actively participating in all decision-making processes pertaining to the Retrofit and Upgrade of the Avenue K”.

Of significance to the present case is the fact that TL 3 was a facility of RM35 million given by UOB to be strictly used to fund 100% of the Retrofit and Upgrade costs of the Podium. There were strict conditions precedent to be met for drawdowns under TL 3. Out of the RM35 million, RM2 million was to be used to service interest on both TL 3 and TL 4. Therefore, the budget available under TL 3 to finance and upgrade the Retrofit and Upgrade works was RM33 million. This included the costs of all nominated sub-contractors and the consultants, whom Jalex was responsible for.

The conditions precedent included obtaining the written Architect’s Confirmation, the Contractor’s Confirmation, and the Owner’s Confirmation.

The Learned HCJ found from the evidence that as at 24.8.2013, when IC No. 16 was issued, the total costs of the contractors and consultants sums had increased to RM36,242,059.20. At the time CPSB made the 14th and final drawdown request under TL 3, the budget had in fact been exceeded by more than RM3 million. This fact was admitted by DW1, who testified on behalf of CPSB.

It is this critical fact, namely, that CPSB and KLL, through Yap, had instructed further Variation Orders and Additional Works even after knowing that TL 3 had been completely drawn down, and yet continued to cause KLL to incur debts without regard to the ability of KLL to meet its obligations to pay that had given rise to the inference of fraudulent intent.

Before us, learned counsel for CPSB contends that in coming to his conclusion that the budget was burst in August 2013, the Learned HCJ had erred as His Lordship had omitted to consider the Interim Valuation No. 16 (“IV 16”), which provides a breakdown of the amount stated in the corresponding IC No.16. Learned counsel for CPSB pointed to the sum of RM 5,841,830.48 that was incurred for “Fit-Out” works: Main contractor’s Variation Works for Fit-Out RM 3,890,567.33 M&E’s Variation Works for Fit-Out

CPSB contends that the Fit-Out costs totalling RM5,841,830.48 were paid out from TL 4 and not TL 3, and had the Learned HCJ reconciled this sum paid from TL 4, the true position in August 2013 was that TL 3 still had a surplus of RM 2.6 million, not exceeded by RM 3 million.

With respect, we find no merit to this contention.

Firstly, the Learned HCJ quite rightly found that the fit-out of individual tenant units was not part of Jalex’s scope of works at all. Secondly, it is clear from the terms of TL 4 that the RM 12 million facility was intended only for the fit-out costs of the individual tenant units. Thirdly, Jalex’s scope of work under the Contracts also included fit-out works to the Podium and the external parts of the tenants’ individual units. The Fit-Out costs totalling RM5,841,830.48 were for works coming within Jalex’s scope.

Indeed, apart from the bare claim that the RM5,841,830.48 was part of TL 4, no evidence had been adduced by CPSB to substantiate the same. In fact, the claim that RM5,841,830.48 was paid out from TL 4 and not TL 3 was not even raised at the Court below when IC No.16 was introduced.

It was next suggested that because Jalex had continued to receive payments from September 2013 till May 2014, this must mean that TL 3 had not been exceeded at all. Furthermore, the Interim Certificates Nos: 17 to 20 and Interim Certificates No: 6 to 9 in respect of the 1st Contract and the 2nd Contract, respectively, were not even due for payment in August 2013. This means that there could not have been any fraudulent intent at the time the Additional Works and Variation Orders were instructed.

With respect, neither of the contentions answers the finding by the Learned HCJ that the debts were incurred when there was no honest or reasonable basis to believe they could be paid. With the finding that the TL 3 had been exceeded by August 2013 and with no evidence adduced of any identifiable source of funding thereafter, the Learned HCJ was justified in inferring fraudulent trading. Once the limit had been exceeded, further debts could only be honestly incurred if there was credible evidence of alternative funding, such as realisable receivables or committed shareholder support, or other identifiable cash inflows. None was shown in this case.

The fact that Jalex had continued to receive payments is immaterial and does not disprove fraudulent trading at all. Instead, the relevant question is what was known or ought to have been known at the time the post-August 2013 debts were incurred and not whether payments continued to be made to Jalex post-August 2013.

Similarly, the fact that the relevant Interim Certificates were not yet due for payments is also of no help to CPSB. Even if the Interim Certificates were not yet due for payment, if CPSB knew or ought to have known that there was no ability to pay when they fell due, the incurring of the debts would still be fraudulent.

Another argument proffered to dispute the existence of fraudulent intent, learned counsel for CPSB contends that the contractual framework of the Contracts stipulates the Architect as the person with authority to issue instructions and variation works. The works were also monitored by 4 independent consultants. It is contended that there is no evidence that the Variation Orders were all ordered by CPSB and that KLL was unable to pay the debts at the time when these Variation Orders were made. Further, because the valuation of the Variation Orders was not determined until much later, CPSB could not have known that the debts could not be paid.

Again, we see no merit to these contentions. Independent consultants, including the Architect, are not responsible for the solvency or funding capacity of KLL. There is no doubt in this case that it was CPSB who was responsible for the drawdowns of TL 3. It knew that by August 2013, TL 3 had been completely drawn down. Further, the reliance on the independent consultants to monitor the works has no bearing on the fraudulent intent under section 540(1) CA 2016. The monitoring dealt with the works done and not the issue of dishonest intent.

The fact that there was no evidence adduced to show that at the time the Variation Orders were issued, KLL was unable to pay is also misconceived. The test is not that KLL was unable to pay immediately at the time the Variation Orders were issued, but rather CPSB or KLL knew or ought to have known that there was no reasonable prospect of paying the debts as they fell due. This can be inferred from the knowledge of the exhaustion of the RM 33 million facility, the cost overruns, the absence of an alternative source of funds, and the continued instructions for Additional Works and Variation Orders.

Learned counsel for CPSB also takes issue with the Five Dishonest Inferring Events, contending that the findings and inference by the Learned HCJ of dishonest purpose therefrom were wrong. In particular, it is contended that these are mere procedural and circumstantial matters that cannot amount to proof of dishonesty without any evidence that the conduct forms part of a scheme to defraud creditors.

With respect, we disagree. The Learned HCJ, having found that the available funding had been exceeded and further works were instructed with no realistic prospect of alternative funds, was justified to rely on the Five Dishonest Inferring Events to support his finding of a subjective mental state of dishonest intent.

The non-disclosure of the Retrofit Assignment was a deliberate concealment of the fact that KLL had created a charge over its assets as security for the TL 3 given to CPSB. We also find that, contrary to the submission by learned counsel for CPSB, there is no evidence at all of any actual notice being given to Jalex. This, coupled with the blatant misrepresentation of the actual status of KLL and the failure by Yap and Ashak to comply with the Discovery Order, which required disclosure of the manner the financial facilities under TL 3 and TL 4 were utilised, and the omission to produce the Architect’s Confirmation, the Contractor’s Confirmation and the Owner’s Confirmation all point to active suppression of the insolvency status of KLL and cost overruns of the Contracts.

The failure to produce the 3 categories of Confirmation documents as required under the Discovery Order also carries another significant legal consequence. When the party that possesses documents material to the issues fails to produce them, and offers no credible explanation for the non-production, the Court is entitled to infer that production would damage its case. Indeed, the High Court in Tetuan Sulaiman & Taye v. Wong Poh Kun & Anor [2021] 8 MLJ 550 had drawn an adverse inference against the directors of the target company and found them liable for fraudulent trading when they failed to provide a satisfactory explanation on how the RM71 million received by the company was utilised. This was in the face of the creditors of the target company not being paid. The High Court held: “[57] What is crucial is the fact that WPL could not proffer any explanation, let alone satisfactory explanation to account for the RM71,310,616.46 received by the company. As the only two directors and cheque signatories to the company’s accounts, both the defendants have direct and personal knowledge as to how the said sum had been spent. They are in a position to give an account as to the whereabout of the money that was received. Yet, not a single documentary evidence has been produced to show how the money was spent... … [62] This court can draw an adverse inference that WPL’s inability to provide any explanation as to how the money was dealt with notwithstanding that he was a mandatory cheque signatory of the company’s account that the proceeds had been dissipated by both WPK and WPL with the intent to benefit themselves and to defraud the plaintiff and the Government of Malaysia. At the very least, WPL was knowingly a party to the carrying on of the dissipation under WPK’s directions. It is incredulous to think that WPL had no inkling as to the whereabout of the proceeds of sale of the lands on the pretext that he was merely acting on WPK’s instructions. To be knowingly 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 (see: Morris and others v Bank of India [2004] 2 BCLC 279). The circumstances in this case support attributing an element of dishonesty on the part of WPK and WPL.” [emphasis added] In fact, the invocation of the adverse inference by the High Court was affirmed by the Court of Appeal [See: Tetuan Sulaiman & Taye v. Wong Poh Kun and Anor and another appeal [ 2023] 3 MLJ 360]. The contention that all documents ordered to be disclosed had been produced is also contrary to the evidence. Also, the claim that UOB had waived the requirement of the Architect’s Confirmation of no cost overruns, the Contractor’s Confirmation, and the Owner’s Confirmation is not proven at all.

Regarding the timing of Yap and Ashak's resignations and the non-contestation of the winding-up proceedings against KLL, these are corroborative of the Learned HCJ’s findings, which indicate a premeditative plan to abdicate responsibility for the incurred debts.

Another challenge raised by learned counsel for CPSB is that the Learned HCJ had failed to apply the rules of attribution as required by section 540(1), which requires Jalex to establish that CPSB, a corporate body with a fictional persona that can only act through a medium, was a “knowing” party to the fraudulent trading. In particular, Jalex will need to identify whose acts and knowledge were to be attributed to CPSB pursuant to the rules of attribution. Learned counsel for CPSB contends that the pleadings and evidence do not justify imputing the acts and knowledge of Yap and Ashak to CPSB.

Since we have held that section 540(1) applies to a body corporate, and it is a prerequisite that the body corporate must be a person who was “knowingly” a party to the fraudulent trading, it is necessary to establish that the body corporate had the requisite subjective knowledge of the dishonest intent.

In this regard, our Federal Court in Hoh Kiang Ngan had considered and adopted the judgment of the Privy Council in Meridien Global Funds Management Asia Ltd v. Securities Commission [1995] 2 BCLC 116 (“Meridien Global”), where Lord Hoffman had identified 3 categories of attribution.

The rules of attribution, in particular the third category referred to in Meridien Global, permit the Court to fashion a statute-specific attribution rule to the extent necessary to give effect to the legislative purpose. However, where there is a finding that an individual is the directing mind and will of the company, there is no need to invoke the third category at all.

Thus, in the context of fraudulent trading under section 540(1), for CPSB to be fixed with liability as a “knowing party”, the Court must find a person who functionally embodied CPSB’s will, and that the person was acting for CPSB’s purposes and not merely for KLL.

We find that although the Learned HCJ did not directly refer to the rules of attribution in Meridien Global, nevertheless, the Learned HCJ had rightly determined that Yap’s knowledge could be attributed to CPSB. In this regard, the Learned HCJ had relied on the findings that Yap was the directing mind and will of CPSB, that Yap, as the director of CPSB, was directly involved in making decisions on incurring Additional Works and Variation Orders by attending site meetings and signing off on the drawdowns from the bank. In short, the person who actually exercised decision-making authority for CPSB was Yap.

Further, Yap’s action in instructing Additional Works and Variation Orders was for CPSB’s benefit, who stood to gain from the works, as KLL was merely a special purpose vehicle used to enter into the Contracts with Jalex. As the owner of Avenue K, CPSB had derived benefits from the completion of the Retrofit and Upgrade works of the Podium and at level four.

On the issue of pleadings, we note in the Statement of Claim, the following facts were alluded to: a) Yap was a director of CPSB and KLL at the material times; b) The contracts, variation works, and prime costs or provisional sums were made or ordered by Yap, who represented CPSB; c) CPSB had used KLL as a vehicle to contract with contractors to carry out the fit-out and refurbishment works at Avenue K; d) Yap had created a charge vide the Retrofit Assignment in favour of the Bank for the benefit of CPSB; e) Yap had created a substantial indebtedness and liability over KLL to benefit CPSB.

Based on the above, we find that the Statement of Claim has pleaded sufficient material facts to inform CPSB of Jalex’s claim that Yap was the individual who was the directing mind and will of CPSB and whose acts were done on CPSB’s behalf. Further, in coming to his conclusion attributing Yap’s knowledge to CPSB, the Learned HCJ had expressly identified “the directing mind” doctrine as the applicable rule of attribution to the “knowingly a party” element of section 540(1) CA 2016, and that this attribution is justified by the purpose of section 540(1). This is clear from the grounds of judgment at para [56], [57] and [70]: “[56] CPSB which was controlled by Yap as the directing mind had clear intention to defraud creditors of KLL as for the facts established, it was impossible that KLL could make payment to its creditors. [57] Given that CPSB is but a mere vehicle where it is controlled by the directing minds of its directors, the issue of intent must necessarily be the intent of the directing mind of the company. In this case, it was Yap who was controlling CPSB. The issue of intent and dishonesty will be discussed at length in the following paragraphs in these Grounds of Judgment. [70] S.540 was enacted to deal with the exact scenario to cater for facts as in the current case. It allows the law to reach out to the persons who were the actual perpetrators of the fraudulent act. Actual perpetrators of the act cannot hide behind the corporate veil of an incorporated entity”. [emphasis added]

For the reasons above, we also dismiss the contention that the Learned HCJ had failed to apply the proper rules of attribution in this case. We disagree that the pleadings are devoid of any material facts and particulars to engage the rules of attribution.

As regards the contention that the Learned HCJ had placed undue weight on the credibility of the witnesses as the core issues revolved around the interpretation of documents rather than the credibility of witnesses, we respectfully beg to differ. A section 540(1) claim requires proof that KLL’s business was carried on with the intent to defraud and that CPSB was a knowing party to that conduct. These hinge on what the witnesses knew and what they believed about the funding and solvency, and why they nevertheless continued trading. This makes credibility findings particularly significant.

The final ground put forth by CPSB is that KLL ought to be made a party to the action. This is wholly without any merit. The operation of section 540 (1) does not require the target company to be named as a party. In Chin Chee Keong v. Toling Corp (M) Sdn Bhd [2016] 3 MLJ 479 (“Chin Chee Keong”), the defendant sought to argue that the action against both the target company and the defendant must be taken in the same single action. The Court of Appeal rejected this argument. At p. 494, para [43], the Court held: “[43] Having examined our provision very carefully, and bearing in mind the third requirement that must be met before a right of action under sub-s 304(1) may be invoked, we therefore agree with the learned High Court judge in this regard, that the defendants do not need to be sued in the same suit taken against the company. Indeed, separate proceedings ought to be taken. Since the plaintiff is relying on the second limb of sub-s 304(1), the plaintiff necessarily has to sue the company first, secure judgment in its favour which renders it the status of ‘creditor’ before the plaintiff can initiate an action under sub-s 304(1)”

In light of the aforesaid, we find no merit to CPSB’s appeal in Appeal 1226.

In relation to Appeal 1223, it is contended that KLL did in fact carry on business, contrary to its “dormant” status stated in its Financial Statements. This means that KLL was never a façade for a fraudulent purpose. The Learned HCJ therefore erred in drawing a negative inference from the misstatement of KLL’s status in its Financial Statements.

With respect, the contention fails to appreciate the Learned HCJ’s Grounds of Judgment on this point. It was never Jalex’s pleaded case that KLL was set up as a façade for a fraudulent purpose. The focus of its claims is that KLL had continued to carry on business even after the funds under TL 3 had been exceeded, with no expectation of any alternative source of funds, such that there could be no reasonable expectation that the debts incurred for the Additional Works and Variation Orders issued could be paid. This event occurred sometime in August 2013.

The representation of the status of KLL as “dormant,” contrary to the fact, was relied upon by the Learned HCJ not to support a direct finding of dishonest intent at the time the debts were incurred, but as corroborative of his findings of Yap and Ashak’s conduct to conceal the true financial position of KLL from the creditors.

As directors of KLL, Yap and Ashak must know that the representation of KLL’s status as a ‘dormant” company was contrary to the truth, and yet they had no qualms in asserting the same, suggesting a dishonest mindset. As such, we see no error in the Learned HCJ drawing a negative inference from the said fact.

The aforesaid also addresses the contention that Jalex never pleaded that KLL was a sham vehicle or that Yap and Ashak had agreed to a plan that Jalex would never be paid. This was never Jalex’s case to begin with.

It is also contended that the present case is nothing more than an inability to pay debts, which is part and parcel of the usual commercial risks that are inherent in every contract of this nature. There is no evidence that KLL had intended to defraud Jalex at all. Works were certified by independent consultants, payments made pursuant to drawdowns under the TL 3 with no evidence of diversion of funds, and substantial payments were actually made to Jalex till May 2014.

We have addressed this issue in extenso at paragraphs 102 to 123 above and do not wish to repeat the same here. Suffice it to say that we do not see any appealable error on the part of the Learned HCJ in his findings, based on the facts proved before him, that the business of KLL was carried on with the intention to defraud its creditors.

As regards Yap and Ashak’s position as persons who were “knowingly party” to KLL’s fraudulent trading, the Learned HCJ did not arrive at his conclusion merely on account of their position as directors of KLL, as contended. On the contrary, the Learned HCJ found that Yap, in particular, had knowingly allowed KLL to continue to carry on incurring debts despite his express knowledge of KLL’s financial status and contracting capacity. Yap had knowledge of the term loans obtained from UOB, particularly, the limit of TL3. He controlled the drawdown process for TL3 and was aware of the conditions precedent. Significantly, Yap knew or would have known of the cost overruns by August 2013 as the contract costs stated in IC No. 16 had already exceeded the budget by over RM 3 million. Notwithstanding the aforesaid, Yap had proceeded to instruct Additional Works and allowed the Architect to issue Variation Orders, with no evidence that he expected alternative available funds to meet the debts incurred.

The contention that the Additional Works and Variation Orders were instructed by the Architect and not Yap rings hollow when the facts show that Yap knew by August 2013 that TL 3 had been completely drawn down, and by the time IC No. 16 was issued, the budget had already been exceeded. In any case, whilst the Contracts may provide for the delegation of execution of the Contracts to the consultants, as directors, Yap and Ashak cannot delegate responsibility for KLL’s financial position and compliance with the financial conditions for drawdowns. Further, the mere fact that Variation Orders were issued by the Architect and valuation for the same was assessed by quantity surveyors cannot absolve the directors in this case. The relevant question is whether Yap and Ashak knew that there were already cost overruns and yet continued to allow further debts to be incurred with no reasonable prospect of making the payments. There is no question that Yap knew of the Architect’s Variation Orders as he received the IC Nos. 17 to 20 after being aware that the budget had already been exceeded under IC No. 16.

Learned counsel for Yap and Ashak also contended that the Learned HCJ erred in concluding that Yap and Ashak were the directing minds of KLL when there was no such admission by them, and the evidence in fact shows that consultants and the project team handled day-to-day operations.

On this issue, we note that at para [58] of his Grounds of Judgment, the Learned HCJ had made the following finding: “[58] In determining the role played by Yap and Ashak, it is not disputed that they were the directing minds of KLL. They were not just mere servants and agents of KLL. As the directing minds of the company, they control the company. The state of mind of the company is their state of mind.” [emphasis added]

Although there was no express admission by Yap and Ashak that they were the directing minds of KLL, it is not in dispute that, as the only directors of KLL, they were unequivocally the persons who controlled and performed the managerial role over the company. The evidence clearly shows that it was Yap who had contracted with Jalex, placed the orders on behalf of KLL as the contracting parties, caused KLL to incur additional costs and debts on behalf of KLL, knowing full well that KLL would not be able to repay the debts. He was the person who “speaks and acts” as KLL and not merely one who carries out instructions. He made the decision for KLL to continue to trade even after knowing of the cost overruns.

Accordingly, we also see no error in the Learned HCJ’s determination that Yap and Ashak were the directing will and minds of KLL. For the record, Ashak had opted not to testify, and the Learned HCJ was right to invoke an adverse inference against him under section 114(g) of the Evidence Act 1950.

Another contention put forth is that the Learned HCJ had wrongly rejected the defence that since the Final Account was only completed in 2015, no intention to defraud could meaningfully be inferred in 2013 when the quantum of works, variations, and costs had not yet crystallised.

Again, we have dealt with this issue above. The fact that the quantum of works, variations, and costs were only known in 2015 when the Final Account was completed is not the point. The relevant test is whether CPSB or KLL knew or ought to have known that there was no reasonable prospect of paying the debts as they fell due. With the knowledge of that RM 33 million facility had been exhausted, the overruns to the costs of Contracts, the lack of expectation of any alternative source of funds, the continued instructions for Additional Works and Variation Orders without any evidence of any beliefs that KLL would be able to pay the debts incurred is sufficient, without the need to have the quantum of works, variations, and costs being crystallised.

It is also contended that the Retrofit Assignment is a non-issue, that the Learned HCJ had wrongly treated non-notification as concealment amounting to dishonesty, but failed to consider the undisputed evidence that assignments of this type commonly remain inactive unless triggered by the bank, and that UOB never invoked it.

As stated, we find that the non-disclosure of the Retrofit Assignment is just one of the facts that corroborate the Learned HCJ’s determination of dishonest intent on the part of KLL and CPSB.

Another contention raised relates to KLL’s non-compliance of the Discovery Order. It was submitted that the Learned Judge had erroneously treated the objections to the discovery application as evidence of fraudulent intent.

We also disagree with KLL’s contention on the issue relating to the Discovery Order. With respect, it was not the objection to the discovery application that troubled the Learned HCJ. Instead, it was the fact that KLL had failed to comply with the Discovery Order, in particular, the production of the Architect’s Confirmation that there were no cost overruns as required for the drawdowns under TL 3 that had prompted the Learned HCJ to infer dishonest intent on the part of KLL. Thus, we see nothing improper in the Learned HCJ drawing inferences from their conduct, evasiveness, and from their inability or refusal to produce documents they ought to have had. In fact, the Court is entitled to draw an adverse inference as discussed above.

Finally, it was contended that having pursued civil recovery remedies through the adjudication proceedings and winding-up proceedings, Jalex is estopped or barred from pursuing a claim under section 540(1) as a “top-up” measure.

While we agree that section 540(1) is not a residual debt-collection mechanism or a “top-up” measure, it is a statutory sanction against dishonest trading with the object of protecting the integrity of commercial dealings. Neither the adjudication proceedings nor the presentation of winding-up proceedings would estop a creditor from pursuing the directors personally.

Adjudication determines interim payment rights under the construction contract, whilst winding-up proceedings seek to enforce insolvency consequences against the company. On the other hand, section 540(1) creates a distinct statutory cause of action imposing personal liability on persons who were knowingly parties to the carrying on of business by the company with the intent to defraud its creditors. There is no inconsistency in rights asserted when a creditor pursues cumulative remedies permitted under the law.

A creditor will indeed need to assume the commercial risk of non-payment when it engages in a contract to provide services and or goods, but this does not mean that the creditor also consents to the company continuing to incur debts dishonestly when the funding is exhausted, when the cost overruns are known, with no reasonable prospect of payment exists. To permit a finding of waiver or estoppel just because adjudication proceedings and winding-up proceedings were pursued would undermine the deterrent purpose of section 540(1). In fact, far from barring the claim, winding-up is the jurisdictional gateway to the claim under section 540(1).

Accordingly, we also find no merit to the Appeal 1223.

In the premises and based on the grounds set out above, we are unanimous in our decision that both the Appeal 1226 and Appeal 1223 have no merit and accordingly, we order both the Appeals to be dismissed with costs fixed at RM50,000.00 each, subject to payment of the allocatur. Dated the 27th day of April 2026 -sgd-ONG CHEE KWAN JUDGE COURT OF APPEAL APPEAL NO.: W-02(NCC)(W)-1223-07/2022 For the Appellants : Ms. Magdalene Wong Sui Hua (Messrs. Shafee & Co.) For the Respondent :

Mr. P. Gananathan;

Ms. Yeoh Kai Ying; and

Ms. Koo Jia Ying (Messrs. Gananathan Loh) APPEAL NO.: W-02(NCC)(W)-1226-07/2022 For the Appellant :

Datuk Ben Chan Chong Choon;

Ms. Sangeetha Vasanth Kumar; and

Puan Nik Auni Syahirah binti Nik Azizi (Messrs. Ben Chan) For the Respondent :

Mr. P. Gananathan;

Ms. Yeoh Kai Ying; and

Ms. Koo Jia Ying (Messrs. Gananathan Loh)