Lifting of Corporate Veil – Whether action can be taken against the directors of a company for a company debt.

Chin Chee Keong v Toling Corporation (M) Sdn Bhd [2016] 4 MLRA 180 CA

• The plaintiff [Toling] is a supplier of a plastic resin used in the manufacture of plastic products.
• The plaintiff supplied resin to Pacific Plastic Industries Sdn Bhd (the ‘company’) for the period between 9 October 2003 and 24 February 2004.
• The company failed to pay for the supply. The plaintiff sued the company and obtained judgment in default.
• The company failed to pay the judgement sum.
• The plaintiff then sued the directors of the company (the ‘defendants’) [Chin Chee Keong] under s.304(1) of the Companies Act (the ‘Act’) for the directors to be personally liable for the payment of the debt contending that the defendants carried out the business with the intention to defraud the plaintiff.
• The High Court allowed the plaintiff’s claim, hence the present appeal.
• The main issues raised before the Court of Appeal are;

1. Whether the defendants were liable under s.304(1) of the Act and the burden of the proof undersubsection;
2. whether the plaintiff who defrauded the creditor to be personally liable for the debt of the company s.304(1) of the Act.

• The primary object underlying s.304(1) of the Act was to provide for the lifting of the veil of incorporation in the specific circumstances of fraudulent trading with a view to ultimately pin personal accountability on the directors.
• The following elements are to be proven on a balance of probabilities under s.304(1) of the Act;  (i) the business of the company has been carried out with the intent to defraud creditors; (ii) the defendants were knowingly a party to the carrying on the business in that manner and (iii) the discovery of the fraudulent trading.
• An action against the directors of a company is best taken in separate proceedings instead of in the same proceedings against the company.
• On a practical note, s.304(1) of the Act is not to be read literally as the court must first make a finding against the company before it can make any other consequential orders against its directors.
• Despite knowing that it was not able to pay for its purchases, the company under the discretions of the defendants proceeded to place unusually large orders of raw material from the plaintiff.
• The company did not have a profit generating busines at the material time and the defendants were unable to explain how they were going to honour the company’s obligations.
• There is sufficient evidence to establish on a balance of probabilities that the defendants were dishonest when they incurred company debts with the plaintif knowing at that time the debts owed to the plaintiff will not be repaid or there was a substantial and unreasonable risk that the plaintiff will not be paid.
• Therefore, given the circumstances, the court was entitled to infer that the defendants knowingly were parties to the fraudulent trading of the company.