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Case Update: High Court sets out the guiding principles for the application of fraudulent trading

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COMPANY LAW
Fraudulent trading – Requirements for the application of fraudulent trading – Whether the delinquent directors bearing personal liability has to pay directly to the aggrieved applicant or to pay into the wound up company’s assets for the general benefit of all the creditors – Section 304 and 540 of the Companies Act 1965

Tetuan Sulaiman & Taye v Wong Poh Kun & Anor
(Suit No: WA-22NCC-364-08/2018), High Court
- see the grounds of judgment here

Facts Bistari Land Sdn Bhd (Bistari Land) owned certain pieces of land. The Defendants, Wong Poh Kun (WPK) and Wong Poh Lum (WPL), were the directors and mandatory signatories to the bank accounts of Bistari Land. The Plaintiff is a law firm, and was engaged by Bistari Land to render legal services in respect of various litigations involving Bistari Land’s pieces of land. The Plaintiff then issued a bill of MYR5.9 million for these legal services. As no payment was received from Bistari Land on the Bill, the Plaintiff initiated a civil suit against Bistari Land to recover the sum due. Subsequently, parties agreed for the bill to be taxed, and for the judgment in default and the suit to be withdrawn. The Plaintiff then filed Mareva injunction because of concerns that WPK would transfer the monies out of Bistari Land to himself or his companies overseas. WPL then affirmed an affidavit to oppose the Plaintiff’s injunction application and caused the Plaintiff’s aforesaid Mareva Injunction application not successful. Hence, the Plaintiff then filed an action for fraudulent trading against the two Bistari Land directors, WPK and WPL.

Issue The main issue in this case was whether the delinquent directors bearing personal liability has to pay directly to the aggrieved applicant or to pay into the wound up company’s assets for the general benefit of all the creditors?

Held The High Court held that any payments by the delinquent directors of the company or persons who knowingly are parties to the carrying on of the business in that manner, ought to be paid to the Liquidator as contribution to the company’s assets to avoid a situation where one creditor might be able to get paid fully following a fraudulent trading application but as a result of making the payment, the delinquent is left impecunious and unable to pay the other creditors. This is also to avoid a different result when a liquidator applies under the section from when the defrauded creditor makes the application.

ZUL RAFIQUE & partners
{28 August 2020}