Tradewinds Properties Sdn Bhd v Zulhkiple Bin A.Bakar & 2 Lagi (W-02(NCVC)(W)-1734-08/2017)

PERUNDING ZNA (M) SDN BHD

PERUNDING ZNA (ASIA) SDN BHD … RESPONDENTS (COMPANY NO: 871000-H) [In the High Court of Malaya in Kuala Lumpur (Civil Division) Civil Suit No: WA-22NCVC-680-11/2016 Between Tradewinds Properties Sdn Bhd … Plaintiff (Company No: 10912-V) And

Zulhkiple Bin A.Bakar

Perunding ZNA (M) Sdn Bhd (Company No: 361752-W)

Perunding ZNA (Asia) Sdn Bhd … Defendants] (Company No: 871000-H) (An appeal against the decision of YA Nantha Balan High Court Judge, High Court at Kuala Lumpur 25.7.2017) CORAM MOHD ZAWAWI SALLEH, JCA VERNON ONG LAM KIAT, JCA HASNAH DATO’ MOHAMMED HASHIM, JCA JUDGMENT OF THE COURT [1] This is an appeal from a judgment of S. Nantha Balan J, sitting in the High Court of Kuala Lumpur, dismissing the appellant’s claim after full trial. [2] We heard the appeal on 11.4.2018. After hearing both counsel for the appellant and the respondent, we accordingly, at the end of the arguments, allowed the appeal with costs of RM45,000.00 here and below subject to payment of allocator fees. Our reasons for doing so now follow. [3] For the purpose of the judgment, the parties will be referred to as they were in the High Court. Brief Facts [4] The pertinent facts are as follows –

4.1 On or about 16.2.2009, the plaintiff commenced an action against the 1st defendant and 2nd defendant vide Kuala Lumpur High Court Civil Summons No.S-22-93-2009 (“Suit 93 ”). At the material time, the 1st defendant was one of two directors and held 100% shareholding in the 2nd defendant.

4.2 A Consent Judgment (“CJ”) was entered between the parties on 9.2.2011.Pursuant to the CJ, the plaintiff together with the 1st defendant and 2nd defendant agreed to settle the Suit 93. The material terms of CJ are as follows –

(a) The 1st defendant and 2nd defendants shall pay RM1,150,000.00 to the plaintiff as full and final settlement (“Settlement Sum”). The 1st defendant’s liability is discharged after the first RM500,000.00 is paid.

(b) The Settlement Sum is to be paid by instalments in accordance with a schedule set out in the CJ.

(c) In the event of a default on the terms of payment, the plaintiff must first issue a notice to the 1st defendant and/or the 2nd defendant (whichever is applicable), giving a five (5) months period to remedy the default (“5-Month Notice”).

(d) In the event the 1st defendant and/or the 2nd defendant still fail to remedy the default, the plaintiff can execute the CJ for the sum of RM1,450,000.00 (“Full Judgment Sum”) together with interest at 5% per annum from the date of default until full realisation, minus the sums already paid under CJ.

4.3 The 1st defendant and/or the 2nd defendant paid a total of RM654,000.00 in accordance with the terms of the CJ and towards satisfaction of the Settlement Sum. At that stage, the obligation to pay the balance of the Settlement Sum, i.e. RM496,000.00 was solely on the 2nd defendant.

4.4 Subsequently, the 2nd defendant breached the CJ when it failed, refused and/or neglected to pay the instalments for the months of March 2013 to June 2013 as prescribed under the CJ. To this end, the plaintiff issued 5-Month Notices in respect of each of these breaches, all of which expired without any of the default being remedied.

4.5 The Full Judgment Sum of RM796,000.00 (RM1,450,000.00 + interest of 5% per annum – the sum already paid by the 1st defendant/2nd defendant under the CJ (i.e. RM654,000.00)) remains outstanding and due to the plaintiff.

4.6 The plaintiff became aware three (3) Consultancy Projects that the 2nd defendant was engaged with PLB-KH Bina Sdn. Bhd., Tech-Art Sdn. Bhd. and Putrajaya Holdings Sdn. Bhd. (“the 3 Projects”). In 2011, the 2nd defendant passed 3 resolutions (“the Resolutions”) to reassign the consultancy fees due to the 2nd defendant for the 3 Projects to the 3rd defendant, a company incorporated on 4.9.2009 (of which the 1st defendant is a director).

4.7 The plaintiff contended that the Resolutions were made to defraud the plaintiff as a creditor the payment of the balance sum due under the terms of the CJ.

4.8 The plaintiff then initiated an action against 1st defendant, 2nd defendant and 3rd defendant in Kuala Lumpur High Court on 3.11.2016, seeking the following principal reliefs –

(a) A declaration that the 1st defendant has carried on the business of the 2nd defendant with intention to defraud the plaintiff, as the 2nd defendant’s creditor.

(b) Consequential to prayer (a) above, an order that the 1st defendant be personally liable to pay the plaintiff the sum of RM796,000.00 together with interest thereon of 5% per annum from 8.3.2013 until full realisation (“Outstanding sum”), being the debt owed by the 2nd defendant to the plaintiff under the judgment.

(c) In the alternative to prayer (b) above, an order that the 1st and 3rd defendants be jointly and severally liable to pay to the plaintiff the Outstanding Sum.

(d) Exemplary damages against the 1st and/or 3rd defendants.

4.9 The 2nd defendant contended that it had only received RM362,980.90 in relation to the payment of fees for the 3 Projects despite that defendants have paid a total sum of RM654,000.00 to the plaintiff.

4.10 On 25.7.2017, learned High Court Judge dismissed the appellant’s suit against the defendants. Hence, this appeal before us. Findings of the High Court [5] The learned Judge found that the plaintiff had failed to discharge its burden of proving an intention to defraud. The reasoning of the learned Judge in reaching the conclusion that he did, may be summarised as follows –

5.1 In terms of timelines, it was “too incredulous” and/or “too far-fetched” to suggest that the 3rd defendant’s incorporation (which took place about 17 months prior to the recording of the CJ) was done to defraud the plaintiff under the CJ.

5.2 The 3rd defendant only received RM362,980.90 from the 2nd defendant’s clients under the Consultancy Projects, which is clearly less than the amount which was paid under the CJ, i.e. RM654,000.00 and there is no evidence that the 3rd defendant received anything more.

5.3 The 1st defendant’s liability under the CJ was only up to RM500,000.00. The fact that the plaintiff was paid RM654,000.00 (i.e. beyond RM500,000.00) does not suggest that there was an intention to defraud the plaintiff.

5.4 In summary, there was every intention on the part of the 1st defendant/2nd defendant to pay what was outstanding under the CJ based on the following –

(a) The fact that payments continued to be made after the resolutions were passed, until February 2013;

(b) The fact that 1st defendant/2nd defendant paid RM654,000.00, which was RM154,000.00 above and beyond the RM500,000.00 threshold; and

(c) The absence of any evidence to show that the 3rd defendant received anything more than RM362,980.90.

5.5 The corporate veil should not be lifted due to lack of evidence to show intention of the defendants attempting to defraud the plaintiff, or to prove that the 3rd defendant received more than RM362,980.00 from the 3 assignments. The Appeal [6] In the memorandum of appeal, various grounds are raised assailing the impugned decision but before us, learned counsel for the plaintiff focussed his arguments on the following issues –

(a) whether the business of the 2nd defendant has been carried out with intend to defraud its creditors and satisfied the principles of fraudulent trading under section 304 of Companies Act 1965 (CA 1965”);

(b) whether the facts of this instant case justified lifting of the corporate veil, and

(c) whether the plaintiff is entitled to exemplary damages? Parties’ Competing Submissions [7] The main crux of learned counsel’s submission is that the learned Judge’s inferences and/or conclusion from the evidence were plainly wrong, and that there was insufficient judicial appreciation of the evidence. Learned counsel further submitted that the evidence adduced by the plaintiff at the trial are more than sufficient to prove that there was intention to defraud. [8] Learned counsel posited that the plaintiff’s intention to defraud was apparent from the following facts –

(a) On 16.2.2009, the plaintiff brought an action against the 1st defendant/2nd defendant via the Suit 93;

(b) In the face of the Suit 93, the 3rd defendant was incorporated by the 1st defendant on 4.9.2009;

(c) The CJ was entered on 9.2.2011;

(d) In March and May 2011 (i.e. 1 to 3 months after the CJ), the resolutions were passed by the 1st defendant, essentially transferring the 2nd defendant’s future income to the 3rd defendant;

(e) By the 1st defendant’s own admission, the value of future income that was transformed from the 2nd defendant to the 3rd defendant totalled over RM2.3 million. There was more than sufficient to have satisfied the CJ in full; and

(f) After paying a total of RM654,000.00 under the CJ, the 2nd defendant is now incapable of paying anything more. [9] Learned counsel for the plaintiff argued that the learned Judge had misconstrued the plaintiff’s case – it was not the plaintiff’s case that the incorporation of the 3rd defendant was in itself done to defeat the CJ. The timing of the 3rd defendant’s incorporation cannot be considered in isolation. [10] In conclusion, learned counsel submitted that the crux of the plaintiff’s case in that the passing of the resolutions to assign the 2nd defendant’s fees to the 3rd defendant (totalling over RM2.3 million) was sufficient evidence to establish intent to defraud. [11] With regards to the issue of separate legal entities, learned counsel submitted that the learned Judge erred in law and in fact in holding that there was no justification to lift the corporate veil. It was the contention of learned counsel for the appellant that the learned Judge failed to appreciate that the defendants are in truth and in fact are single commercial unit and is the alter ago and/or controlling mind of the 2nd defendant and/or the 3rd defendant. [12] In support of his submission, learned counsel took us through the following evidence –

(a) At the material time, the 1st defendant was 1 of 2 directors in the 2nd defendant and held 100% of the shareholding in the 2nd defendant. The 1st defendant admitted that he is in total control of the 2nd defendant.

(b) The 1st defendant is also one of two directors in the 3rd defendant and holds 85% of the shareholding in the 3rd defendant. The 1st defendant agreed that 3rd defendant’s projects to the world that the 1st defendant is the only person behind the ZNA “brand”.

(c) Despite the fact that the 2nd defendant and the 3rd defendant are separate entities, the 3rd defendant’s website also represents that the business of 3rd defendant is “established since 1992”, when this year must in fact refer to the establishment of the 1st defendant’s previous sole proprietorship “Perunding ZNA” i.e. a different entity altogether.

(d) The 1st defendant gave evidence that the 3rd defendant was incorporated to receive the reassignments of the 2nd defendant’s fees. These were professional fees for work already done by the 2nd defendant before the CJ was entered. If the separate legal entity principle is observed, there is no justification for the 3rd defendant to receive such fees.

(e) The 1st defendant testified that the 2nd defendant’s expenses are borne by the 3rd defendant and that the 3rd defendant gave money to 2nd defendant to pay off the 2nd defendant’s debts.

(f) The 5-Month Notices, which were served on the 2nd defendant at its business address, were acknowledged by the 3rd defendant with the 3rd defendant’s company stamp, despite the fact that the 2nd defendant (and not the 3rd defendant) was the addressee. [13] In the light of above, learned counsel for plaintiff submitted that the corporate veil ought to be lifted against the 1st defendant and/or the 3rd defendant to make them liable to the 2nd defendant’s debt under the CJ, as fraud at common law or in equity had been committed against the plaintiff. [14] With regards to exemplary damages, learned counsel submitted that the circumstances of this instant case falls within the 2nd categories which the exemplary damages may be awarded which the exemplary damages may be awarded (See: Rookes v Barnard [1964] 1 All ER 367). [15] In reply, learned counsel for the defendants submitted that the learned Judge was correct in concluding that the plaintiff’s claim of fraudulent trading must fail in the absence of sufficient proof. The plaintiff had merely pleaded fraud under fraudulent trading without showing the particulars of fraud nor giving evidence of instances of fraud taking place. [16] The learned Judge was correct in holding that the corporate veil should not be lifted due to lack of evidence to show intention of the defendants attempting to defraud the plaintiff or to prove that the 3rd defendant received more than RM362,980.90 from the 3 assignments. [17] Concerning exemplary damages, learned counsel contended that there is no legal basis and evidence to support the plaintiff’s claim for the same. Our Findings Fraudulent trading under section 304 of CA 1965 What constitute an “intent to defraud” [18] Fraudulent trading is dealt with in subsection 304(1) of CA 1965. The subsection provides – “(1) 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 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 it 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.”. [19] In the case of Chin Chee Keong v Toling Corporation (M) Sdn. Bhd. [2016] 4 MLRA 180, this Court stated – “[16] 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 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. [17] This court recently had opportunity to consider the operation and ambit of sub-s. 304(1) of the Companies Act 1965 in the case of Aneka Melor Sdn Bhd v. Seri

Sabco (M) Sdn Bhd & Another Appeal [2016] 2 CLJ His Lordship, Justice Mohd Zawawi Salleh JCA, writing for the court succinctly observed that: [37] Section 304 of the Companies Act 1965 is aimed 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. As an exception to these principles, there are circumstances when the law duly acknowledges, and for which it accordingly provides the possibility, in very specific situations, for the corporate veil to be pierced. Once the corporate veil has been pierced the creditors of the company whose veil has been pierced may satisfy their claims from the personal assets of the company's shareholders. [18] In another recent decision of Lama Tile (Timur) Sdn Bhd v. Lim Meng Kwang & Anor [2015] 3 CLJ 763, the Court of Appeal said: [23] Section 304 is a specific statutory provision which allows the corporate veil to be lifted in the limited situations specified. Earlier in this judgment we have underlined that it is applicable in a situation where in the course of proceedings against a company, it appears that the business of the company has been carried on with intent to defraud creditors, a creditor can make an application to court to request that the court declare that any person who was knowingly a party to such carrying on of the business of the company, to be personally responsible. The evidence in this appeal shows precisely that. The directors and shareholders of LMK Edaran proposedly and knowingly engaged in a course of conduct to mislead the appellant (by adding the 'S' to the signboard), and but by the same token transferred the business of LMK Edaran to SLMK Edaran (previously Southern Taipan Sdn Bhd) to render LMK Edaran a dormant company.”. [20] In broad terms, there are two elements to establishing an application under subsection 304(2) of CA 1965. These are –

(a) that the business of the company has been carried out “with intent to defraud creditors …” or for any fraudulent purpose; and

(b) that the defendant who was knowingly a party to the carrying on of the business in that manner. [21] The central element of fraudulent trading is “an intent to defraud” or “fraudulent purpose”. The first reported decision to address this issue was Re William C. Leitch Bros Ltd., (No.1) [1932] Ch 71 (Ch D). The Court of Appeal in R v Grantham [1984] BCLC 270 provided clarification by citing Maugham J in Re Leitch (William C) Bros Ltd [1932] Ch 71: “In my opinion I must hold with regard to the meaning of the phrase “carrying on business with intent to defraud creditors” that if a company continues to carry on business to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of those debts, it is in general a proper inference that the company is carrying on business with intent to defraud, …” . [22] The court also considered R v Sinclair [1968] 1 WLR 1246 in which the jury was directed with the following instructions to find “intent to defraud”: “It is fraud if it is proved that there was the taking of a risk, which there was no right to take, which would cause detriment or prejudice to another. You have to be sure that it was deliberate dishonesty”. The court rejected that the defendant had to prove that he knew at the time when debts were incurred that there was no reasonable prospect of creditors ever receiving payment of their debts. It was enough if the defendant realized at the time when the debts were incurred that there was no reason for thinking that funds would be available to pay the debt when it would become due or shortly thereafter. These words import a criterion that is partly subjective and partly objective. Thus, in order to establish dishonesty under subsection 304(1) of CA 1965 the court must find that –

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

“Defendants further refers to paragraphs 17, 17.1, 17.2, 3, 17.4, 17.5, 17.6, 17.7 and 17.8 SOC and assert that the decision to set up D3 was premised on commercial considerations and internal problems faced by D2 in respect of management of D2. D2’s business and reputation was damaged due to the internal issues which had resulted in the loss of confidence by clients of D2 and not as otherwise contended by the Plaintiff. Defendants shall refer to such evidence during trial.”. (Emphasis added) (See: paragraphs 18.1. Statement of Defence (page 66 ROA Part [A])). [32] As we have alluded to earlier in this judgment, in order to attach personal liability to another, the following elements must be fulfilled –

(a) there is an “intent to defraud” in the manner by which the business of the company is being conducted; and

(b) that the person was “knowingly a party” to the carrying on of the business in the fraudulent manner so described. [33] Therefore, for the plaintiff to be able to successfully sustain a claim for fraud on the part of the respondent, firstly, there must be proof to show that the business of the 2nd defendant had been conducted with intent to defraud its creditors’. Secondly, the 2nd defendant must be proven to be a person who was “knowingly a party” to the carrying on of the business in the fraudulent manner however there is no evidence to support either one of the elements listed above. [34] The basic rule is that he who alleges fraud has the burden of proving them. The court has stressed time and again that allegations must be proven by sufficient evidence because mere allegation is definitely no evidence. Moreover, fraud is not presumed – it must be proved by clear and convincing evidence. [35] On 16.2.2009 the plaintiff filed an action against the 1st and 2nd defendants, Suit 93. This was followed with the incorporation of the 3rd Defendant and the CJ on 9.2. 2011.Sometime between March and May 2011 the Resolutions were passed by the 1st defendant transferring the 2nd defendant’s expected future earnings to the 3rd defendant. The 1st defendant had admitted in evidence that the value of the future earnings transferred from the 2nd defendant to the 3rd defendant totalled more than RM2. 3million.The 1st defendant himself had admitted that the 3rd defendant was in fact incorporated to receive assignments of the 2nd defendant’s consultancy projects. The Resolutions were subsequently passed naming the 3rd defendant as the benefactor of the 2nd defendant’s fees. [36] The consequence of the aforesaid assignment led to the 2nd defendant’s business being transferred to the 3rd defendant. The 2nd defendant is now a dormant company. We are of the view on the facts and evidence of this instant appeal it is impossible to conclude that there was no intention to defraud the creditors by the 1st defendant. The Resolutions passed had caused monies due and owing to the 2nd defendant in excess of RM2.3million to be assigned to 3rd defendant. [37] Section 304(1) CA 1965 only uses the term "if it appears" which indicates that a lower degree of proof is required. But, even on a higher degree of proof, the result would be the same – that there is clear evidence of an intention to defraud by the defendants to evade payments of debts due by the 2nd defendant. Lifting of Corporate Veil [38] Learned counsel for the plaintiff argued that the 1st defendant, 2nd defendant and 3rd defendant are in reality a single commercial unit and the 1st defendant is clearly the alter ego or controlling mind of the 2nd and the 3rd defendant. [39] One of the fundamental principles of company law is that a company has a personality that is distinct from that its shareholders. This rule enunciated by the House of Lords in Salomon v. Salomon & Co. [1897] A.C 22 in which it was held that even if one individual held almost all the shares and debentures in a company, and if the remaining shares were held on trust for him, the company is not to be regarded as mere shadow of that individual. Lord MacNaughten stated at page 51 – “The company is at law a different person altogether from the subscribers to the Memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.”. [40] A rigid application of the principle, however, may sometimes cause damage to the rights of parties who deal with the corporate because its controllers may be using the corporate structure as a facade to perpetrate wrongdoing. [41] Thus, there are certain statutory exceptions to the rule in Salomon which involve a director being made liable for debts of the company because of breach of the companies or insolvency legislation. This is known as lifting the corporate veil. [42] Subsection 304(i) of CA 1965 is the statutory exception of the common law position that the corporate veil can be lifted in circumstances where dishonest conduct amounting to fraud at common law or in equity is established on the facts of the case. (See: Chin Chee Keong v Toling Corporation (M) Sdn Bhd (supra)). [43] In Faiza Ben Hashem v Shayif [2008] EWHC 2380 (Fam), Munby J applied the following principles which are a useful summary of the current state of the law –

(i) Piercing the corporate veil is appropriate only where special circumstances indicated that it is a mere facade.

(i) Are the relevant entities in common ownership?;