A Guide to Wrongful and Fraudulent Trading Under Malaysia's Companies Act 2016

For business owners and creditors alike, the veil of a "Sendirian Berhad" (Sdn. Bhd.) is often perceived as an impenetrable shield that protects company directors from personal liability. However, the Companies Act 2016 makes it clear that this shield can be pierced, particularly in cases of wrongful trading and fraudulent trading. Understanding these provisions can be a powerful tool in dealing with unscrupulous debtors who attempt to evade their obligations.

What is Wrongful Trading?

Under Section 539 of the Companies Act 2016, wrongful trading occurs when directors of a company continue to incur debts despite knowing (or when they ought reasonably to have known) that the company cannot pay its debts and is headed toward insolvency. The law places a duty on directors to take steps to minimize potential losses to creditors once insolvency is foreseeable.

Key points to note about wrongful trading:

• Directors are required to act in the best interests of creditors when the company is insolvent or nearing insolvency.

• Failing to take reasonable steps to mitigate losses can result in directors being personally liable for the company’s debts.

• Wrongful trading is not about intent but rather negligence or failure to act prudently.
  

What is Fraudulent Trading?

Section 540 of the Companies Act 2016 addresses fraudulent trading. This provision deals with cases where a company’s business is carried on with the intent to defraud creditors or for any other fraudulent purpose. Unlike wrongful trading, fraudulent trading requires a deliberate intent to deceive or defraud.

Key aspects of fraudulent trading include:

• It applies to directors and any other person involved in the fraudulent conduct.

• The liability is both civil and criminal, meaning offenders can face financial penalties and imprisonment.

• Courts can order those found guilty to contribute personally to the company’s debts.
  

How I’ve Used These Provisions as a Strategy

Over the years, I’ve encountered numerous cases where directors of Sdn. Bhd. companies tried to use the corporate veil to dodge legitimate debts owed to my clients. Their typical defense? "It’s the company’s liability, not ours." This is where the concepts of wrongful and fraudulent trading become invaluable weapons.

When faced with such situations, I’ve often highlighted the risk of personal liability under Sections 539 and 540. For instance, I’d calmly inform the directors that if they persist in evading payment, I’d have no hesitation in pursuing them personally under these provisions.

Here’s an anecdote that illustrates how effective this can be:

A director of a struggling construction company repeatedly dodged payment claims, insisting the company’s insolvency protected him personally. When I pointed out that he had continued taking on contracts and incurring debts even after knowing the company was insolvent, he quickly realized the stakes. The prospect of being held personally liable—and potentially facing fraud charges—was enough to bring him to the negotiating table. My client was paid in full within weeks.

In many cases, the mere mention of wrongful or fraudulent trading provisions is sufficient to change the debtor’s tune. Directors understand the gravity of these claims: the potential loss of personal assets, the risk of criminal penalties, and the damage to their reputation.

Why This Matters for Business Owners and Creditors

For creditors, knowing about wrongful and fraudulent trading can be a game-changer. It empowers you to hold directors accountable when they attempt to hide behind their company’s insolvency. For business owners, these provisions serve as a reminder of the responsibilities that come with managing a company. Directors must act in good faith and prioritize the interests of creditors when insolvency looms.

Final Thoughts

The veil of incorporation is not absolute. Wrongful and fraudulent trading provisions under the Companies Act 2016 ensure that directors cannot abuse the Sdn. Bhd. structure to defraud creditors or shirk responsibilities. For creditors, these laws are powerful tools to recover debts. For directors, they’re a stern warning to act responsibly and ethically.

AUTHOR PROFILE

Rudi Cheu is the principal of Rule & Co. Advocates & Solicitors; a Malaysian law firm focusing on practical and cost-effective solutions for debt recovery and commercial disputes. With nearly a decade of debt recovery experience under his belt; Rudi is passionate about helping businesses navigate debt recovery challenges and shares insights at www.rulecolaw.com/blog and recoverdebt.my

He can be reached via Whatsapp: +60102028095 or via email: rudi@rulecolaw.com