One of my more memorable debt recovery files started with a debtor confidently telling my Client:
“Go ahead and sue la. We have nothing already.”
Let's call the debtor ABC Sdn. Bhd.
ABC had ply defaulted on a number of my Client's invoices; and informed my Client that they had no ability to pay because the company was going into winding up/liquidation.
The stupid part is that they subsequently sent WRITTEN NOTICES to a number of their suppliers/customers stating explicitly:
"Kindly place orders with our new company XYZ Sdn. Bhd.; as ABC Sdn. Bhd. has ceased operations. Business continues as usual."
Furthermore, everyone in the industry knew that this new XYZ Sdn. Bhd. was run by the same people (same directors); had the same office; same website; same phone number; and sold the same goods/services to the same customers.
The only difference was the SSM entity.
This commercial phenomenon is sometimes called a ‘phoenix arrangement’ or ‘phoenix activity’ where a business leaves liabilities behind and continues operations through a new entity. It is potentially an offence under S.540 of the Companies Act 2016.
On my first test-water approach to the debtor, they responded in an arrogant manner: "Please go ahead and sue us, we have nothing already, ABC Sdn. Bhd. is about to be liquidated. We have given no personal guarantee."
For academic sake, I will reproduce the text of s.540 here:
"540. (1) If in the course of the winding up of a company or in any proceedings against a company it appears that any business of the company has been carried on with intent to defraud the creditors of the company or creditors of any other person or for any fraudulent purpose, the Court on the application of the liquidator or any creditor or contributory of the company, may, if the Court thinks proper so to do, declare that any person who was knowingly a party to the carrying on of the business in that manner shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court directs."
In simple terms, if a company’s business is carried on with intent to defraud creditors, and a person knowingly participates in that conduct, the Court may in appropriate circumstances impose personal liability.
Long story short, I drafted and serve a simple demand on the directors of XYZ Sdn. Bhd. informing them that their conduct potentially exposed them to a Fraudulent Trading suit under S.540 CA 2016.
After the directors presumably obtained legal advice and discovered the wonders of s.540 CA 2016; the tone and leverage of their replies shifted completely from "go ahead and sue" to "let's try and work something out".
Within a month; we discussed and agreed upon amicable settlement terms and the case has been amicably concluded.
Debtors who think they can leave debts behind by changing company names and continuing business as usual may be surprised to learn that limited liability is not a failsafe cheat code.
Rudi Cheu (rudi@rulecolaw.com) is a content creator under the Newswav Creator programme, where you get to express yourself, be a citizen journalist, and at the same time monetize your content & reach millions of users on Newswav. Log in to creator.newswav.com and become a Newswav Creator now!
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