Piercing the Corporate Veil: Directors' Personal Liability for Fraudulent Trading in Malaysia

Hold Directors Personally Liable for Siphoning of Assets

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Key Takeaways

• The principal legal tool in Malaysia is Section 540 of the CA 2016, which allows the corporate veil to be lifted in cases of fraudulent trading.

• To succeed, you must prove the company’s business was carried on with intent to defraud creditors, and the defendants were knowingly a party to this fraudulent conduct.

• Fraudulent trading encompasses not only incurring new debts with no intention of repayment but critically, also includes actions taken to actively avoid paying existing debts (e.g., selling assets at an undervalue or orchestrating a winding up).

• The standard of proof required is the civil burden of a balance of probabilities.

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Introduction

Have you ever encountered a situation where a debtor company has been owing you a significant amount of debt, only to discover later that the debtor company’s directors have seemingly emptied its coffers, selling off machinery, properties, or inventory to related entities? It is one of the most frustrating experiences for creditors. When a debtor company is wound up, the protective shield of the corporate veil—which treats a company as a separate legal entity from its directors and shareholders—often seems impenetrable.

However, Malaysian law provides powerful statutory mechanisms for debt recovery by allowing creditors to pierce this veil, holding the directors and other culpable individuals personally liable for the company’s debts where fraudulent activity (fraud) has occurred.

This article guides creditors—particularly small business owners—through the process of claiming against individuals responsible for the siphoning of assets, focusing on the key statutory tool of fraudulent trading under the Companies Act 2016 ("CA 2016").

1. The Statutory Weapon: Section 540 of the Companies Act 2016

The foundational principle of corporate law, established in the case of Salomon v Salomon & Co, is that a company is a legal person distinct from its members and directors. Section 540(1) of the CA 2016 operates as a critical statutory exception to this principle. This provision is designed to combat corporate misconduct by ultimately pinning personal accountability and liability on the directing minds behind the company’s fraudulent conduct.

Section 540(1) CA 2016 states that, if during a winding up or any proceedings against a company, it appears that any business of the company has been carried on “with intent to defraud the creditors... or for any fraudulent purpose,” the court may declare any person who was “knowingly a party” to this manner of trading personally responsible, without limitation of liability, for all or any of the company’s debts.

The Three Elements of a Fraudulent Trading Claim

To succeed in an action under Section 540 CA 2016, a creditor must establish three essential elements:

(i) Intent to Defraud: The business of the company must have been carried on with the intention to defraud creditors.

(ii) Participation: The defendant(s) must have participated in carrying on the business in that manner.

(iii) Knowledge: The defendant(s) must have done so knowingly.

Understanding "Intent to Defraud"

"Intent to defraud" requires actual fraud or dishonesty of some sort. This intention is often inferred from the surrounding circumstances and the subsequent conduct of the defendants, especially the concealment of material facts.

Crucially, "intent to defraud" also includes a course of conduct that avoids and denies repayment of existing debts. The phrase generally includes an intent to deprive creditors of an economic advantage or inflict upon them some economic loss.

For small business creditors, it is vital to understand that fraudulent trading is not limited to situations where a director incurs new debt knowing it cannot be repaid (though this is a classic scenario, as seen in Chin Chee Keong v Toling Corporation (M) Sdn Bhd  [2016] 4 MLRA 180, where directors placed unusually large orders despite the company’s insolvency).

Crucially, "intent to defraud" also includes a course of conduct that avoids and denies repayment of existing debts. The phrase generally includes an intent to deprive creditors of an economic advantage or inflict upon them some economic loss. The Court of Appeal in Tay Keong Kok & Ors v Eastmont Sdn Bhd [2025] 1 MLRA 85 confirmed that orchestrating a fraudulent winding up merely to avoid debt payment constitutes the carrying on of business with intent to defraud.

2. Identifying Red Flags for Fraudulent Trading

Small business owners should be vigilant and look for common signs that assets may be siphoned or dissipated fraudulently:

Red Flag	Description & Relevance
Undervalue Transactions	Assets (machinery, vehicles, property) are sold to related parties (directors, spouses, siblings, or another company the director controls) at a grossly undervalued price (e.g., "net book value" or even RM1 or RM2). This was a key finding in the case of SHVT Building Solution Sdn Bhd  v Tan Keng Meng & 2 Ors [2025] 1 MLRA 85, where machinery was allegedly transferred for nominal sums. Our firm acted for the plaintiff, who succeeded in this case.
Use of Dormant/Shell Companies	The company uses a newly formed or dormant company with no capital, assets, or trading history to enter into agreements, thereby insulating the primary actors from liability. This calculated insulation creates corporate layers designed to obfuscate the transaction. The Federal Court addressed this in Lai Fee & Anor v Wong Yu Vee & Ors [2023] 3 MLJ 503.
The "Twilight Period" Disposals	Transfers of assets or significant funds occur within six months before the commencement of winding up proceedings. Such dispositions, especially when benefiting related parties without bona fide reasons, are subject to being deemed fraudulent or void under the CA 2016 (Section 528 and Section 472, respectively).
Unsubstantiated Fund Transfers	Funds are transferred out of the company to directors, their spouses, or related companies (often disguised as "reimbursements" or "loan repayments") shortly before or after the winding-up petition is filed, but lack proper documentary support, board approvals, or are based on illegal loans.
Rapid Change in Directorship	A director resigns and replaces himself with a related party (like a spouse or business partner) in the beneficiary company immediately following a suspicious asset transfer, often aiming to distance themselves from the transaction.

3. Navigating the Claim Process

The Standard of Proof and Necessary Steps

Claims under Section 540 CA 2016 fall under the civil burden of proof. The statute uses the phrase "if it appears," indicating that the required standard is the balance of probabilities.

For a creditor relying on the second limb of Section 540 (where the fraudulent trading is discovered in proceedings against the company, rather than during winding up), the usual practice is to first secure a judgment against the company, thereby establishing the status of a creditor.

Crucially, personal liability is not limited to directors. Any "person who was knowingly a party" to the fraudulent conduct—which can include nominee directors, controlling shareholders, or even associated companies like the recipient of the siphoned assets—can be held personally responsible.

The action against the individuals (directors, agents, etc.) must then be taken in separate proceedings. This allows the defendants every opportunity to present evidence and defend themselves in a full trial, rather than relying solely on affidavit evidence from the original claim against the company.

Crucially, personal liability is not limited to directors. Any "person who was knowingly a party" to the fraudulent conduct—which can include nominee directors, controlling shareholders, or even associated companies like the recipient of the siphoned assets—can be held personally responsible.

The result of a successful claim is profound: the court compels the fraudulent party to be personally responsible for the company's debt to the creditor, without any limitation of liability.

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This article was written by Nicholas Hor, the Lead Counsel of Nicholas Hor & Co. Contact him at nicholas@nicholashor.com to discuss more on your legal issues.

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Looking to go after someone for fraudulent trading?

If your business faces mounting unpaid debts from a company whose owners appear to be stripping assets or closing down without justification, immediate legal action is necessary. The course of action to be taken could include filing injunctions to prevent further dissipation of assets, conducting background and forensic searches on the debtor and its directors/shareholders, appointing private liquidators and recovering assets from foreign jurisdictions.

At Nicholas Hor & Co., we help you handle everything from forensic tracing and obtaining judgments against debtors, to appointing liquidators, lodging fraudulent trading suits and execute against individuals found to have siphoned out assets and preventing you from receiving payments of debts.

Schedule a consultation with us today!