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Frodd Sdn Bhd, a firm that deal with manufacturing of aluminium
Frodd Sdn Bhd is a firm that deal with the manufacturing of aluminium. Last week, Frodd went into insolvency liquidation. Study shows that it has been take on losses in the past 2 years and is hopelessly insolvent. Fred as managing director of the company, and Mr. Chin Chai as general manager, has been advised that they should take an action to end up the firm into consideration. However, Mr. Chin Chai and Fred, despite the advices, and proceed to ordered on credit raw material that worth RM2 million from Besi Sdn Bhd. The liquidator is now willing to sue or charge any of the directors to make them personally liable for all or any part of the RM 2 million debt.
In companies act 1965 section 304(1), it stated that any directors of a firm can be held to be personally liable if the directors of the firm with knowledge on the company will be running on a business with an intention to deceive the creditors as it will eventually results in bad financial affairs to the company Applying to this case, Fred, the managing director of the company, and Chin Chai, the general manager may be sued under sections 304(1) for fraudulent trading and held to be personally liable because they were advised to winding up the company as yet he still proceed with the order on credit raw material that worth RM 2 million from Besi Sdn Bhd. In other words, a debt that worth RM2 million is proceeded when Fred and Chin Chai understand that the company was not able to pay the debt. In other words, the company is in a act to running a business with the intent to defraud.
An example that related to this section refers to the case of SIOW YOON KEONG v. H ROSEN ENGINEERING BV . The case stated that, an amount of RM423000 that Ventura failed to pay to Rosen and used of it to invest in the share market under his own name. When the investments realized to be incur losses, Ventura cause a resolution to pass by the Board of Directors to escape his responsibility by using the company’s money. In result, he is charged under the section 304(1) of CA 1965 as it was done for a fraudulent purpose.
Further by s 304(5), anyone that with the purpose that mentioned in subsection (1) can be charged due to the business is to be continued in a dishonesty way. Thus, Fred and Mr. Chin Chai can be charged and shall be guilty of an offence against this act as parties to the decision of carrying forward on the business with such intention.
Section 303(3) also stated that any officers that recognized as parties shall be guilty of an offence that contracted at the time was unreasonable or probable ground of expectation by company that the company was able to pay the debt and results in winding up the company. Therefore, both and Mr. Chin Chai being officers of the company who was knowingly a party to the contracting of the debt by knowing that the company was not able to pay that debt will eventually results on both the officers to be guilty of an offence in this section.
Applied in section 304(2), where Fred and Mr. Chin Chai has been convicted of an offence under subsection 303(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 of the company may declare that the person, who are Fred and Mr. Chin Chai shall carry the responsible of personally liable to the debt of RM 2 million without any limitation.
Next, there are some situation where corporate veil can be lifted which the company will not be separated from its members hence the members or directors remain liable for the company’s wrong. There are two ways of lifting the veil, by court or by statute.
Situations that corporate veil can be lifted by court are when it is in the public interest to hold the members or directors responsible, the company was established for a fraudulent purpose, a company that has been used to avoid legal obligations of an individual or both entities are within a single group enterprise. One of the case that corporate veil lifted by court is Jones v Lipman , Lipman had sold the land to Jones but he changed his mind into achieve specific performance. Lipman and the company were one single personality because Lipman had used the corporate form as “a device and sham, a mask", to hide his obligations to Jones while Lipman must perform the contract with Jones.
However, by statute, corporate veil can be lifted by Sec.36 , Sec. 304(1) , Sec. 365(2), and Sec.121. Applying it to the case, although Frodd was registered under private limited company, Fred is the person who has been a party of the business shall be personally liable because they have been with the intention to defraud creditors or for any fraudulent purpose. Therefore, Fred and can be charged under Sec.304(1) as corporate veil can be lifted. The other two directors, Ali and Rodney can bring a separate action against Fred in order to lift the corporate veil as they may pull Fred as individual personal liable.
Ultra vires defined as any activities that gone beyond the power of a company. According to Section 20(2)(a) once a company is intend to sell company’s property without the knowledge of members, the party can apply to stop them. Further by Section 20(2)(b) of, an ultra vires act is defined when an action is to bring against the former or present officers. Section 20(2)(c) stated that the act that petition by a minister to end up a company business is recognised as ultra vires. In result, Section 20(2)(b) is one of these applies in the case of Frodd. Thus, the contract is not binding as it is considered as ultra vires.
In example, one of the case of ultra vires is Introductions Ltd v National Provincial Bank Ltd 1968. The company, Introductions Ltd, was with the main purpose of providing accommodation for overseas students but the company end up doing business on pig breeding with the loan from bank. In result, the bank loan was recognized as ultra vires and void.
As a result, liquidator can actually take action into sue Fred as the managing director in the court for the debt of RM2 million from Besi Sdn Bhd that was contracted unreasonable nor improbable ground of expectation that leads a bad financial affairs to the company purposely under Section 303(3) and also charge Fred with intent to defraud creditors by any carry on any act for any fraudulent purpose under section 304(1) CA 1965.