Intan Salwani Mohd Yusof & 1 Lg v Chong Yee Heon @ Simon & 5 Lg (22NCC-315-07/2017)

INTAN SALWANI MOHD YUSOF (IC No.: 701008-10-5504)

SYED OMAR SYED AHMAD (Passport No.: S7114395C) … PLAINTIFFS

CHONG YEE HEON @ SIMON (IC No.: 470529-71-5003) - a bankrupt – now struck off from the action 2. TAN SWEE HONG (IC No.: 490511-08-5822)

CHONG U KIDD (IC No.: 761102-14-5523)

CEKAL SEMPURNA SDN BHD (Company No.: 271351-M)

BERNAS VISTA SDN BHD (Company No.: 630474-T)

GENGGAM HASIL SDN BHD (Company No.: 1043317-W) … DEFENDANTS

This is an action by the Plaintiffs against the Defendants inter alia for fraudulent trading pursuant to section 540 of the Companies Act

After a full trial, I allowed the Plaintiffs’ claim partially. These are the full reasons for my decision.

The Plaintiffs are husband and wife.

Ms Sarahani is a business colleague of the Plaintiffs.

The 1st Defendant was a former business acquaintance of the Plaintiffs and was at all material times an undischarged bankrupt.

The 1st Defendant is the husband of the 2nd Defendant and the father of the 3rd Defendant. The 2nd and 3rd Defendants are the directors of the 4th Defendant and the 6th Defendant. The 2nd Defendant is a director of the 5th Defendant.

The Plaintiffs contend that the 5th Defendant is indebted to the 1st Plaintiff by virtue of advances made by the 1st Plaintiff to the 5th Defendant through the 1st Defendant. At the material time when the advances were given, the Plaintiffs contend that they did not know that the 1st Defendant was a bankrupt.

The Plaintiffs contend that as of late 2013, they had already advanced sums in excess of approximately RM1,850,000.00 to the 5th Defendant.

The 4th Defendant is the registered proprietor of lands held under H.S. (D) 109983 P.T. No. 19045 Mukim of Setul, District of Seremban, Negeri Sembilan which the Plaintiffs were interested in acquiring.

The Plaintiffs were told by the 1st Defendant that the 5th Defendant is the beneficial owner of all the shares in the 4th Defendant.

Accordingly, on 15.2.2013, the 1st Plaintiff executed a Share Sale Agreement with the 5th Defendant and agreed inter alia to: i) An increase in the 4th Defendant’s authorised share capital from RM100,000.00 to RM5,000,000.00; ii) An increase in the 4th Defendant’s paid up share capital, by the issuance of new ordinary shares, to RM1,500,000.00; and iii) A consideration of RM2,300,000.00 for the sale, purchase and transfer of the said 1,500,000 shares, with the transfer made in favour of the 1st Plaintiff’s nominees, these being the 2nd Plaintiff and Ms Sarahani.

The Share Sale Agreement was executed by the 1st Defendant and one director on behalf of the 5th Defendant.

On 5.3.2013, the registered owners of the 4th Defendant transferred: i) 10,002 shares to the 2nd Plaintiff; and ii) 5,000 shares to Ms Sarahani.

Subsequently, the 4th Defendant’s share capital was increased whereby: i) New shares were issued to the respective parties, reaching a total of 1,500,000 shares; ii) Ms Sarahani held her shares in trust for the benefit of the 1st Plaintiff; and iii) A total of 675,000 shares were held by Ms Sarahani and a total of 825,000 shares were held by the 2nd Plaintiff.

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However, a disagreement ensued between the Plaintiffs and the 1st Defendant and the Share Sale Agreement was aborted and the sum of RM1,905,000.00 was refunded to the Plaintiffs.

The 1st Plaintiff and the 5th Defendant executed a Settlement Agreement dated 4.6.2013 whereby the parties agreed that for reason of the mutual termination of the Share Sale Agreement, the 5th Defendant shall pay the 1st Plaintiff a total sum of RM1,850,000.00 in the manner set out therein. It is also provided that pending full payment of the entire amounts, the share certificates representing the shares in the 4th Defendant shall be held by the 1st Plaintiff’s solicitors as stakeholders.

The Plaintiffs contend that the sum of RM1,850,000.00 represent the total of the advances that were made by the 1st Plaintiff to the 5th Defendant but it is not explained why the said sum was represented in the Settlement Agreement as the sum payable by reason of the termination of the Share Sale Agreement.

On subsequent dates, another 2 Settlement Agreements were entered into between the 1st Plaintiff and the 5th Defendant (even though one settlement agreement was prepared but not signed by the 1st Plaintiff) and the sum outstanding was reduced from RM1,850,000.00 to

All the Settlement Agreements were executed by the 1st Defendant on behalf of the 5th Defendant.

Sometime in December 2016 and pursuant to documents which the Plaintiffs allege were forged by the 1st Defendant, the 1st Plaintiff, the 2nd Plaintiff and Ms Sarahani resigned as directors of the 4th Defendant and the 1,500,000 shares registered in the names of the 2nd Plaintiff and Ms Sarahani were transferred to the 6th Defendant. In relation to this transaction, directors’ resolutions were signed by the 2nd and 3rd Defendants as directors of the 4th Defendant accepting the resignation as directors of the Plaintiffs and Ms Sarahani and the transfer of the 1,500,000 shares in the 4th Defendant from the 2nd Plaintiff and Ms Sarahani to the 6th Defendant.

The Plaintiffs brought this action against the 6 Defendants alleging fraudulent trading on the part of the 1st, 2nd and 3rd Defendants which resulted in them losing the shares in the 4th Defendant which were held by the 2nd Plaintiff and Ms Sarahani as security pending the full payment of the advances of RM700,000.00. The Plaintiffs alleged that they and Ms Sarahani never resigned as directors of the 4th Defendant and their letters of resignation were forged by the 1st Defendant. The Plaintiffs also alleged that the 2nd Plaintiff and Ms Sarahani never transferred their shares in the 4th Defendant to the 6th Defendant and alleged that the transfer forms were forged by the 1st Defendant and that the 2nd and 3rd Defendants aided and abetted the 1st Defendant by signing the directors’ resolutions. The Plaintiffs also claimed against the 6th Defendant on the basis that the 6th Defendant is a constructive trustee of the shares in the 4th Defendant.

The claim against the 1st Defendant has been struck out as the 1st Defendant was an undischarged bankrupt. The Plaintiffs’ case

The Plaintiffs alleged that the 1st, 2nd and 3rd Defendants were guilty of fraudulent trading under section 540 of the Companies Act

The allegation is that the 1st Defendant had forged the letters of resignation as directors by the 1st Plaintiff, the 2nd Plaintiff and Ms Sarahani and had also forged the share transfer forms, transferring the shares in the 4th Defendant from the 2nd Plaintiff and Ms Sarahani to the 6th Defendant. The Plaintiffs allege that the 2nd and 3rd Defendants assisted in the fraud of the 1st Defendant.

The Plaintiffs also alleged that the 2nd and 3rd Defendants failed to disclose to the Plaintiffs that the 1st Defendant was at all material times an undischarged bankrupt. If the Plaintiffs had known that the 1st Defendant was a bankrupt, they would not have dealt with the 1st Defendant and would not have made advances to the 5th Defendant.

The Plaintiffs allege that at all material times, the 1st Defendant was the de facto controlling shareholder and director of the 4th, 5th and 6th Defendants.

The Plaintiffs prayed for the following relief: a) A declaration that the 2nd Defendant and the 3rd Defendant being knowing parties to the carrying on of business with intent to defraud the Plaintiffs and for a fraudulent purpose, are personally responsible, without any limitation of liability, and jointly and severally, for all the above sums and interest and all or any of the debts or other liabilities owed by the 4th Defendant, the 5th Defendant and/or the 6th Defendant to the Plaintiffs. b) An order that: i) The 2nd Defendant and the 3rd Defendant pay, surrender and/or make restitution of the sum of RM700,000.00 to the Plaintiffs within 7 days from the date of service of this judgment; and ii) The 2nd Defendant and 3rd Defendant pay damages being the sum of RM202,980.82 and being payable to the Plaintiffs for loss of earnings, within 7 days from the date of service of this judgment. c) interest; d) A declaration that the 6th Defendant: i) From 27.12.2016 holds 1,500,000 shares in the 4th Defendant as constructive trustee for the 2nd Plaintiff and Ms Sarahani; and ii) Is liable to make restitution of the 1,500,000 shares to the 2nd Plaintiff and Ms Sarahani. e) An order that the Defendants and/or any of the relevant defendants or their officers, agents cause the transfer of the 1,500,000 shares to the 2nd Plaintiff and Ms Sarahani to restore the status quo within 21 days from the date of service of this judgment, failing which a Deputy Registrar of the High Court of Malaya be authorised to execute any and all relevant documents of transfer in favour of the 1st Plaintiff and Ms Sarahani in the above manner. f) Costs and all such further or other accounts, inquiries, directions or relief which this Honourable Court deems fit and fair. The case of the 2nd to 6th Defendants

The said Defendants denied all allegations of the Plaintiffs and alleged that they did not have knowledge of any dealings between the 1st Defendant and the Plaintiffs.

The following are the issues to be tried: a) Whether the 2nd Defendant and/or the 3rd Defendant i) had carried on the business of the 4th, 5th and/or 6th Defendants with the intent to defraud the Plaintiffs or for a fraudulent purpose; and/or ii) had committed and are liable for fraudulent trading under s 540 of the Companies Act 2016 and/or s 304 of the Companies Act 1965. b) With reference to 1,500,000 units of shares in the 4th Defendant that was formerly registered to the 2nd Plaintiff and Ms Sarahani: i) Whether the 2nd and/or 3rd Defendant had caused the transfer of those shares to the 6th Defendant wrongfully and/or unconscionably and/or by forgery or fraud; ii) Whether the 6th Defendant now holds the said shares as constructive trustee for the Plaintiffs and is liable to make restitution thereof. iii) Whether the 2nd Defendant and/or 3rd Defendant are liable for loss of money and earnings to the Plaintiffs. Whether The 2nd And 3rd Defendants Had Carried On The Business Of The 4th Defendant To Defraud The Plaintiffs Within The Meaning

S 540(1) of the Companies Act 2016 provides that if in the course of the winding up of a company or in any proceedings against a company it appears that any business of the company has been carried on with intent to defraud the creditors of the company or creditors of any other person or for any fraudulent purpose, the Court on the application of the liquidator or any creditor or contributory of the company may, if the Court thinks proper so to do, declare that any person who was knowingly a party to the carrying on of the business in that manner shall be personally responsible, without any limitation of liability, for all or any of the debts or liabilities of the company as the Court directors.

What were the acts which were affected by the 2nd and 3rd Defendants as directors of the 4th Defendant? They signed the directors’ resolution approving the resignation of the Plaintiffs and Ms Sarahani as directors and they signed the directors’ resolution approving the transfer of the 1,500,000 shares in the 4th Defendant in favour of the 6th Defendant, of which they are also the directors.

I find as a fact that the Plaintiffs and Ms Sarahani did not sign the resignation letters and the transfer forms for the transfer of the shares. The 6th Defendant has not adduced any evidence of any agreement between it and the Plaintiffs whereby the Plaintiffs ought to have transferred any of the shares in question to the 6th Defendant. The 2nd and 3rd Defendants, being directors of the 6th Defendant therefore had knowledge that there was no reason for the Plaintiffs to transfer any of their shares in the 4th Defendant to the 6th Defendant. The 2nd and 3rd Defendants therefore had knowledge that the 2nd Plaintiff and Ms Sarahani could not have signed the transfer form and, in any event, the share certificates were not produced because they were still held by the Plaintiffs’ solicitors as stakeholders. The 2nd and 3rd Defendants therefore had or should have had knowledge that the signatures of the 2nd Plaintiff and Ms Sarahani in the transfer forms were forged. In all likelihood, the 2nd and 3rd Defendants would also have or should have had knowledge that the various resignation letters were also forged. The 2nd and 3rd Defendants turned a blind eye and did not question the acts of the 1st Defendant in asking them to sign the various documents and resolutions. The 3rd Defendant in his evidence clearly said that he had no knowledge as to the affairs of the companies of which he was director and merely signed whatever documents he was asked to sign by the 1st Defendant his father. The 2nd Defendant did not give evidence and the Plaintiffs were unable to serve the subpoena on the 1st Defendant even though the Defendants’ solicitors kept a watching brief on behalf of the 1st Defendant.

It is submitted by the Plaintiffs that the passing of resolutions constituted the carrying on of business of a company. The following is stated in the Court of Appeal decision in Siow Yoon Keong v H Rosen Engineering BV [2003] 4 MLJ 569: “…Was the business of the company being carried out? We have no problem answering the question in affirmative, without even referring to any authorities. Resolution was passed to ratify the investments and the use of the company’s funds for the purpose of investments, perhaps more correctly, ‘speculations’. The company’s funds were used to pay the losses of the appellant. Rosen, to whom RM 423,000 was due, was not paid. These acts in our view constitute ‘carrying on of business of the company’. … It must be stressed that the passing of the resolution was done when it was already clear that losses had been incurred and that there was no way of recovering them. It is at that stage that the company passed the resolution, the effect of which was that the losses were fully transferred to the company. Not only that. By paying the appellant, the appellant escaped from his personal losses and the company was left with no funds to pay the debt owed to Rosen. It is very clear that the intention was to defraud Rosen, the creditor. It is also equally clear that it was all done for a fraudulent purpose.”

However, I am of the view that s 540(1) is not applicable even if the signing of the directors’ resolutions by the 2nd and 3rd Defendants could be said to have constituted the carrying on of the business of the 4th Defendant. This is because the Plaintiffs are not creditors of the 4th Defendant. The 4th Defendant does not owe any money to the 4th Defendant. It is only the 5th Defendant which is allegedly indebted to the 1st Plaintiff. I accordingly find that the 2nd and 3rd Defendants have not carried on the business of the 4th Defendant with intent to defraud the Plaintiffs as creditors of the 4th Defendant because the Plaintiffs are not creditors of the 4th Defendant. Whether The 2nd Defendant Had Carried On The Business Of The 5th

The only allegation that can be made against the 2nd Defendant as a director of the 5th Defendant is that she failed to inform the Plaintiffs of the fact that the 1st Defendant was at all material times a bankrupt.

The Plaintiffs’ allegation is that the 2nd Defendant had met them once or twice but there was no elaboration of what transpired at the said meetings. There was no evidence that they even had a proper conversation with the 2nd Defendant. The 3rd Defendant said that he had never met the Plaintiffs whereas the Plaintiffs said that they had met the 3rd Defendant once at his wedding. In any event, the 3rd Defendant is not a director of the 5th Defendant. I find that the failure on the part of the 2nd Defendant to inform the Plaintiffs of the fact that the 1st Defendant was a bankrupt cannot constitute the carrying on of the business of the 5th Defendant. Accordingly, I find that the 2nd Defendant has not carried on the business of the 5th Defendant with the intent to defraud the Plaintiffs as creditors of the 5th Defendant even if it has been proven that the Plaintiffs are creditors of the 5th Defendant.

On that issue, the Plaintiffs’ own evidence is contradictory with the contemporaneous documents. On the one hand, the Plaintiffs testified that the 1st Plaintiff had given friendly loans over a period of time to the 5th Defendant through the 1st Defendant. On the other hand, it is provided in the settlement agreements signed by the 1st Plaintiff and the 1st Defendant on behalf of the 5th Defendant that the amount agreed to be paid by the 5th Defendant to the 1st Plaintiff was in consideration of the abortion of the Share Sale Agreement.

There is also the issue as to whether the settlement agreements, being signed by the 1st Defendant on behalf of the 5th Defendant is binding on the 5th Defendant.

It appears that there is nothing to say that a bankrupt is incapable of making a contract. Section 204 of the Companies Act 20 provides that the acts of a director or manage or secretary shall be valid notwithstanding any defect that is discovered after his appointment or in his qualification.

The High Court in Heng Poh Glass Sdn Bhd v Chong Lan Moy & Anor [2014] 9 MLJ 628 said this: “[18] As against this plaintiff referred to ss 10 and 11 of the Contracts Act 1950 as to what agreements are contracts and competence to contract. The persons competent to contract are those of age of majority, sound mind and not disqualified from contracting by any law to which they are subject. Sections 20 and 21 of the Probate and Administration Act 1959 were also referred where only minors and lunatics are not to be appointed administrators. Kwan Chew Shen v Citibank NA [1987] CLJ (Rep) 704 was cited to the effect there is no provision a bankrupt is incapable of making a contract. …while persons of unsound minds are specifically excluded from being competent persons to enter into contracts by s 11 of the Contracts Act, bankrupts are not. …there appears to be no blanket provision anywhere to the effect that a bankrupt is incapable of making a contract”.

The evidence shows that the 1st Defendant had held himself out as the CEO of the 5th Defendant. However, this is different from the 1st Defendant being held out by the directors of the company as the CEO and even if a bankrupt is not incapable of making a contract, there is nothing to show that the directors of the 5th Defendant had authorised the 1st Defendant to sign the settlement agreements on behalf of the 5th Defendant. In fact, there is nothing to show that the 2nd and 3rd Defendants knew about the settlement agreements with the 1st Plaintiff. Accordingly, I hold that the settlement agreements are not binding on the 5th Defendant.

In any event, it does not matter that the 1st Plaintiff is a creditor of the 5th Defendant as I have held that the 2nd Defendant cannot be said to be carrying on the business of the 5th Defendant simply because she did not inform the Plaintiffs that the 1st Defendant was a bankrupt. Whether The 2nd And 3rd Defendants Had Carried On The Business Of The 6th Defendant With Intent To Defraud The Plaintiffs As Creditors Of The 5th Defendant Within The Meaning Of S 540 Of The

I find that the 2nd and 3rd Defendants have not carried on the business of the 6th Defendant with intent to defraud the Plaintiffs as creditors of the 6th Defendant because the Plaintiffs are not creditors of the 6th Defendant. Further it is not alleged that the 2nd and 3rd Defendants have done anything in their capacity as directors of the 6th Defendant. Whether The 2nd And 3rd Defendants Had Caused The Transfer Of The Shares To The 6th Defendant Wrongfully, Unconscionably

The allegation of forgery is only made against the 1st Defendant and the 2nd and 3rd Defendants are not guilty of forgery. However, for the reasons already set out, which is that the 2nd and 3rd Defendants who are also directors of the 6th Defendant knew or ought to have known for a fact that there was no reason for the shares in the 4th Defendant to be transferred to the 6th Defendant, I find that the 2nd and 3rd Defendants had caused the transfer of the shares to the 6th Defendant wrongfully and/or unconscionably. The 3rd Defendant who gave evidence did not know anything about the affairs of the companies of which he was a director, relying only upon the instructions of the 1st Defendant. The 2nd Defendant did not even give evidence. Since the shareholders did not sign the transfer forms and did not intend to transfer away their shares in the 4th Defendant, the transfer of shares to the 6th Defendant approved by the 2nd and 3rd Defendants as directors of the 4th Defendant was wrongful and unconscionable. Whether The 6th Defendant Is A Constructive Trustee Of The Shares

Since the 6th Defendant is fully aware that it has no right to the shares in the 4th Defendant, and since the share transfer forms in favour of the 6th Defendant were not signed by the 2nd Plaintiff and Ms Sarahani, the 6th Defendant is a constructive trustee of the shares and ought to return them to the 2nd Plaintiff and Ms Sarahani.

Although the shares in the 4th Defendant are registered in the name of Ms Sarahani and not the 1st Plaintiff, the undisputed evidence shows that Ms Sarahani is the nominee of the 1st Plaintiff so the 1st Plaintiff is the beneficial owner of the said shares. As beneficial owner, I find that the 1st Plaintiff has locus to claim for the re-transfer of the said shares back to Ms Sarahani.

I appreciate that the provision that the share certificates of the shares registered in the names of the 2nd Plaintiff and Ms Sarahani should be retained by the 1st Plaintiff’s solicitors as stakeholders pending the payment of sums due from the 5th Defendant to the 1st Plaintiff is not binding on the 5th Defendant. However, that provision has nevertheless been implemented already and the shares were registered in the names of the 2nd Plaintiff and Ms Sarahani and the share certificates were with the 1st Plaintiff’s solicitors. Since the 5th Defendant did not make any claim to the shares in these proceedings, status quo ante should be restored by re-registering the shares back into the names of the 2nd Plaintiff and Ms Sarahani. If the 5th Defendant claims to be the beneficial owner of the said shares, it is for the 5th Defendant to make a claim for them.

In the circumstances, I cannot make any monetary order against the 2nd and 3rd Defendants but I make a declaration that the 6th Defendant from 27.12.2016 holds 1,500,000 shares in the 4th Defendant as constructive trustee for the 2nd Plaintiff and Ms Sarahani and is liable to make restitution of the 1,500,000 shares to the 2nd Plaintiff and Ms Sarahani.

I further order that the 2nd and 3rd Defendants or their officers or agents cause the transfer of the 1,500,000 shares in the 4th Defendant (together with the share certificates) to the 2nd Plaintiff and Ms Sarahani to restore the status quo as at prior to 27.12.2016 within 21 days of date of service of this judgment, failing which a Deputy Registrar of the High Court of Malaya be authorised to execute any and all relevant documents of transfer in favour of the 2nd Plaintiff and Ms Sarahani and other necessary documents.

I also order that the parties be at liberty to apply and I award costs of RM20,000.00 in favour of the Plaintiffs subject to allocator. Wong Chee Lin Judicial Commissioner Kuala Lumpur High Court Dated: 9th July, 2018 Solicitors For The Plaintiffs Wan Zafran Bin Pawancheek Messrs Wan Marican, Hamzah & Shaik Advocates & Solicitors E 3A-3A (Suite B), 4th Floor Jalan Selaman ½, Dataran Palma 68000 Ampang Selangor Tel: 03-4270 1844 Fax: 03-4270 6844 Solicitors For the 2nd, 3rd, 4th, 5th & 6th Defendants Cheong Sek Kwan Messrs SK Cheong Advocates & Solicitors Level 36, Menara Citibank 165