top of page

Cases & Deals

Case update

Fraudulent Trading: Dishonesty is a Key Element
June 2024

In a claim for fraudulent trading under s. 540 of the Companies Act 2016, an essential ingredient of establishing liability is an ‘intent to defraud creditors’. The phrase ‘intent to defraud creditors’ is not defined in the statute. However, the jurisprudence has established that the element of dishonesty is key to finding fraud or intent to defraud and whether dishonesty exists is a question of fact.  

In Universal Health Care (R&D) Sdn Bhd (formerly known as SSI Health Care Sdn Bhd) v Ramli Bin Md Saleh & Ors [2023] MLJU 1783, the plaintiff claimed that Talam Transform Berhad (Talam), being the sole shareholder of Pandan Indah Medical Management Sdn Bhd (PIMM) and having absolute control over PIMM’s affairs, sold a hospital owned by PIMM and moved the monies out of PIMM to avoid paying the plaintiff under a consent judgment with PIMM and to rescue Talam from its commercial insolvency. The plaintiff contended that Talam ought to be made liable for PIMM’s debt owed to the plaintiff because the disposal of the property was a business of PIMM which was carried out with intent to defraud the plaintiff as a creditor of PIMM or for a fraudulent purpose.  

The High Court observed that the Plaintiff’s case is primarily founded on the entries in PIMM’s financial statements showing (1) PIMM’s property was pledged or charged for the Sukuk financing undertaken by Talam; (2) the proceeds of the sale were utilised to partially redeem the Sukuk on behalf of PIMM and three other participating related companies; (3) because the proceeds were ‘used’ by the other Sukuk entities, entries were inserted into PIMM’s financial statements to reflect these sums as advances owing to PIMM from these entities; (4) during this time, Talam was in severe financial difficulties, under PN17 and in the process of implementing a regularisation plan; (5) PIMM’s directors did not make a provision for doubtful debts as they were confident that once Talam regularised its financial position, it would ‘settle’ these debts; and (6) PIMM, however, subsequently undertook an assignment and waiver exercise resulting in the amounts owing to PIMM by Talam and its related companies being written off or waived.

Both sides called accounting experts to assist the Court on the interpretation of the financial statements, particularly concerning the key issue of whether the proceeds from the disposal of the property belonged to PIMM. The High Court accepted the evidence of Talam’s expert that (1) the proceeds from the disposal of PIMM’s property did not belong to PIMM. This is because under the Sukuk, the ownership right of the property had already been conveyed to the Sukuk holders upon issuance of the Sukuk; (2) the proceeds from the disposal of the property were deposited into the Sukuk collection account operated by the facility agent for the purpose of redemption of the Sukuk for the benefit of the Sukuk holders and did not belong to PIMM; (3) Talam and its related companies did not receive money as advances from PIMM; (4) the accounting entries were made to reflect the default descriptions in PIMM’s financial statements to merely record the application of the sale proceeds by the facility agent pursuant to the terms of the Sukuk; (5) the disposal of the property was approved by the Sukuk holders, the Sukuk trustee and the Securities Commission subject to the proceeds from the disposal being utilised for the redemption of the Sukuk before any surplus is made available to the original vendor, PIMM. As there was no surplus from the disposal after redemption, then there were no proceeds available to PIMM and for PIMM to advance to Talam and its subsidiaries; and (6) the waiver of the debts was part of the internal settlement exercise and are not uncommon, especially between holding companies and their subsidiaries and related companies.

 

The High Court found that the plaintiff has failed to prove that Talam had carried out the business of PIMM with intent to defraud the creditors of PIMM. There is no proof of any act of dishonesty on the part of Talam. The decision was upheld by the Court of Appeal on 27.5.2024.

Our Kelvin Seet Wan Nam and Dennis Yuean Jin Han represented Talam in the High Court.

bottom of page