Jalex Sdn Bhd v City Properties Sdn Bhd dan 2 yang Lain (WA-22NCC-247-06/2017)

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ASHAK BIN HASSAN DEFENDANTS JUDGMENT Introduction [1] The first defendant sought to strike out the plaintiff’s claim on the grounds that it was scandalous, frivolous, vexatious, or is otherwise an abuse of the court’s process, pursuant to O. r. 19(1)(b) and (d) of the Rules of Court 2012. [2] The plaintiff in gist is attempting to make the first defendant liable for the debts incurred by its wholly owned subsidiary company under s. 540 Companies Act 2016 (‘CA 2016’). This judgment calls for the discussion of the scope of s. 540(1), in particular, whether the section governs individuals only or encompass corporations as well. 2 Brief facts [3] The wholly owned subsidiary of the first defendant in question is KL Landmark Development Sdn Bhd (‘KL Landmark’). It had appointed the plaintiff as a contractor, and was entrusted to carry out architectural and interior design works for the shopping complex known as ‘Avenue K’, which is situated across Jalan Ampang, opposite the iconic Petronas Twin Towers. [4] The plaintiff’s appointment was done through two letters of award. The plaintiff claimed to have also done additional works through several variation orders and additional works. The plaintiff completed its part of the bargain and expected to be paid. It’s expectations however were not met. [5] This led the plaintiff to commence two adjudication proceedings against KL Landmark pursuant to the Construction Industry Payment and Adjudication Act 2012. The plaintiff succeeded in both adjudication proceedings. The debts however remain unpaid. [6] The plaintiff then commenced winding-up proceedings against KL Landmark, which resulted in a winding-up order against the latter in September 2016. Much to the plaintiff’s dismay, it was notified by the Official Receiver that KL Landmark had only RM3,000.00 in its estate balance, which incidentally was the deposit that the plaintiff had paid to the 3 Insolvency Department when it commenced the winding-up proceedings. As at the date of the winding-up order, the plaintiff was out of pocket to the tune of RM9,252,342.52. This was the total amount owing by KL Landmark, inclusive of the adjudication proceedings costs. [7] The plaintiff’s claim against the first defendant was premised on the fact that the latter is the owner and developer of the Avenue K, and that the work done was for its benefit. The plaintiff claimed that the first defendant had merely used KL Landmark, being its wholly owned subsidiary, as a vehicle to enter into contracts with companies engaged to carry out works at Avenue K. [8] In essence, the plaintiff alleged that the first defendant was the alter ego of KL Landmark. The business of KL Landmark, the plaintiff claimed, was carried out under the direction and control of the first defendant. The plaintiff adamantly claimed that the first defendant had carried on business with an intention to defraud creditors, such as the plaintiff, through KL Landmark. [9] The plaintiff also claimed that the first defendant had in 2013, obtained a RM47 million loan from the United Overseas Bank (Malaysia) Berhad, premised on a fixed and floating charge over KL Landmark’s rights, benefits and entitlements on all its contracts. Although the charge was eventually discharged, KL Landmark’s debts to the plaintiff remained unpaid. 4 [10] Through this suit, the plaintiff sought for amongst others, a declaration under s. 540 CA 2016, that the first defendant had carried on business through KL Landmark to defraud the plaintiff, and in consequence, for all the defendants to pay the plaintiff the sum of RM9,252,342.52 with interests. That in essence, was the plaintiff’s case against the first defendant. Findings [11] The plaintiff’s case is primarily grounded on the provisions of s. 540(1) CA 2016. Its predecessor was s. 340(1) Companies Act 1965 (‘CA 1965’). The contents of s. however has remained unchanged from its predecessor, and reads as follows:-

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 5 limitation of liability, for all or any of the debts or other liabilities of the company as the Court directs.

Where a person has been convicted of an offence under subsection 539(3) in relation to the contracting of such a debt as is referred to in that section, 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 the person shall be personally responsible without any limitation of liability for the payment of the whole or any part of that debt.

When the Court makes any declaration under subsection

or (2), the Court may give such further directions as it thinks proper for the purpose of giving effect to that declaration, and in particular may make provision for making the liability of any person under the declaration a charge on any debt or obligation due from the company to the person, or on any charge or any interest in any charge on any assets of the company held by or vested in the person or any corporation or person on his behalf, or any person claiming as assignee from or through the person liable or any corporation or person acting on his behalf, and may from time to time make such further order as is necessary for the purpose of enforcing any charge imposed under this subsection.

For the purposes of subsection (3), "assignee" includes any person to whom or in whose favour by the directions 6 of the person liable the debt, obligation or charge was created, issued or transferred or the interest created, but does not include an assignee for valuable consideration and consideration by way of marriage, given in good faith and without notice of any of the matters on the ground of which the declaration is made.

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.

This section shall have effect notwithstanding that the person concerned is criminally liable under this Act in respect of the matters on the ground of which the declaration is made.

On the hearing of an application under subsection (1) or

(2), the liquidator may give evidence or call witnesses himself. [12] Section 540(1) CA 2016 was designed to circumvent any company from being used to perpetrate fraudulent trading on unsuspecting creditors. The court is empowered to declare the culprit be responsible for all the debts and liabilities of the company. 7 [13] The plaintiff is obviously attempting to implicate the first defendant for the debts owed to it by KL Landmark under s. 540(1) CA 2016, and seeks to make the first defendant liable for KL Landmark’s debt. [14] The crucial issue now is whether s. 540(1) CA 2016 was also designed to make a company liable for conducting business through another company with an intent to defraud. The first defendant maintained that the plaintiff’s presumption is misplaced, as the section only concerns individuals, and not corporations. [15] The key phrase in s. 540(1) CA 2016 for the purposes of the plaintiff’s suit is „any person‟. The issue here is whether the first defendant, a corporation, can be deemed as „any person‟ within the meanings of s. 540(1). [16] It would be most useful to refer to settled authorities on s. 304 CA 1965, the predecessor to s. 504 CA 2016. [17] In Chin Chee Keong v Tolling Corporation (M) Sdn Bhd [2016] 3 MLJ 479, Mary Lim Thiam Suan JCA delivering judgment for the appellate court, had described the objective of s. 340(1) CA 1965 as follows:- “The primary object behind subsection 304(1) of the Companies Act 1965 is to statutorily provide for the lifting of the veil of incorporation in the specific circumstances of 8 fraudulent trading with a view to ultimately pinning personal accountability and liability on the directing minds behind such trading of the company. Subsection 304(1) affords the creditor of the company a civil remedy personally against such persons.” (p 487) [18] It is therefore necessary for the corporate veil of a corporation be lifted in order to ascertain the „directing minds‟ behind the company’s trading. Could a company then possess a „directing mind‟? I take the view that it would be quite an extraordinary proposition. A corporation could not possibly be said to possess a mind. A company can only be run through the will and act of the persons governing it. [19] Lord Denning’s judgment in HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159 (CA), is most relevant:- “A company may in many ways be likened to a human body. They have a brain and a nerve centre which controls what they do. They also have hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what they do. The state of mind of these managers is the state of mind of the company and is treated by the law as such. (p 630) (Emphasis added) 9 [20] The first defendant, being a company, could not be said to possess a mind or will that intentionally used KL Landmark to perpetrate what has been alleged as fraud on the plaintiff. Its actions could only be a result of the decisions and actions taken by the directors. [21] Furthermore, under s. 504 CA 2016 the words „knowingly a party‟ comes after the words „any person‟. This could only mean that the person concerned must have had knowledge of the business complained of. It would be stretching one’s imagination to suggest that a company possesses knowledge. [22] I am fortified in my view by the Federal Court’s decision in Prem Krishna Sahgai v Muniandy a/l Nadasan & Ors [2017] 10 CLJ 385, where the apex court held as follows:- “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 has 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 the business of the company with the intention of defrauding creditors.” (p 402) (Emphasis added) 10 [23] The Court of Appeal in Aneka Melor Sdn Bhd v Seri Sabco (M) Sdn Bhd and another appeal [2016] 2 CLJ 563, a case cited in both Ching Chee Keong and Prem Krishna (supra) similarly held:- “Section 304 of the Companies Act 1965 is aimed at principally at curbing the possibility on the part of the officers of a company to act opportunistically and take advantage of the principle of the separate legal personality of a company and the principle of limited liability”. (p 2252). Conclusion [24] I had no great hesitation in allowing the first defendant’s application, premised on the „obviously unsustainable‟ test laid down by the then Supreme Court in Bandar Builder Sdn Bhd & Ors v United Malayan Banking Corporation Bhd [1993] 3 MLJ 36 (SC). [25] The first defendant’s application is therefore allowed with costs of RM3,000.00 subject to allocatur. Dated: 27 April 2018 (Mohamed Zaini Mazlan) Judge Kuala Lumpur High Court (Commercial Division) 11 Counsel for the plaintiff P. Gananathan and Olivia Loh Yuet Ling [Messrs Gananathan Loh] Counsel for the first defendant David Thomas Mathews & S. Janagasutha [Messrs Mathews Hun Lachimanan]