3 pitfalls that directors may face in winding up
7th March, 2016
In my earlier post, I had set out a summary of the winding up law in Malaysia. Now, I touch on the three possible pitfalls and liabilities which directors may face if their company is wound up. The list is by no means exhaustive but I will only deal with three topics:
- The impact on the director’s credit rating.
- The need to cooperate with the liquidator.
- The possibility of being personally liable for the debts of the wound up company.
As an introduction, the term ‘director’ means any person who holds the position of director by whatever name called. A question I am sometimes asked, especially by the director in trouble, is whether the law will differentiate between an “ordinary” director, and a managing director or executive director. For the purposes of the potential risks and liabilities, the law will not differentiate between any of such directors. All directors can potentially face the same level of liability.
Adverse effect on the Director’s credit rating
I have sometimes encountered the issue where the director of that company suffers an adverse credit rating as a result of the winding up. The credit reporting agencies such as CTOS would have picked up on the public information on the winding up. Such information may result in banks being more cautious in providing bank facilities to a director.
For example, I had a case where a winding up petition was filed against a company. Eventually, the winding up petition was withdrawn as there was a settlement of the dispute. However, even 2-3 years later, the director of that company was still experiencing credit rating issues. The credit reporting agencies had maintained an entry on the filing of the winding up petition. The director therefore had difficulties getting a bank loan. Even where the report may state that the petition was eventually withdrawn, that entry may still be listed in the credit report.
Must cooperate with the Liquidator
In the situation of a Court-ordered winding up, the liquidator of the company will then turn to the directors to get information. The law requires the director to prepare a document called a Statement of Affairs which will essentially list out all the company’s assets and debts, and list of creditors. This will help the liquidator to quickly obtain information in order to manage the winding up process.
Hence, it will be very common for directors to be called in to meet with the liquidator. You may need to answer questions and the liquidator will be expecting you to prepare this Statement of Affairs. The failure to cooperate with the liquidator can lead to criminal sanctions, such as imprisonment and fines.
Directors would also be obliged to hand over, or to cause to be handed over, all books, property, and records over to the liquidator.
The liquidator does have the power to apply for the public or private examination of directors in Court. This is often sought where there is suspected wrongdoing by the director or there has been a lack of cooperation. A director can then be ordered to attend Court in order to be cross-examined and questioned by the liquidator.
Personal liability for the debts of the company: May face legal suits
Finally, there is the risk that a director may be held personally liable for the debts of the wound up company. Ordinarily, a creditor would have to turn to the company’s pool of assets and share in the proceeds with other creditors. But the law recognises the exceptional situation where there has been some form of fraudulent trading. A director may then be made personally liable for the debts of the company.
Essentially, if any business of the company had been carried on with the intent to defraud creditors, then a Court may declare a person to be personally liable for the debts of the company if that person was a party to the carrying on of such business.
So take the example where the directors allow the company to carry on business and to incur debts when the directors know that there was no reasonable prospect of the creditors being paid. This could amount to fraudulent trading and where the Court may order the directors to bear those debts instead and to pay the creditors personally.
There have been instances where the Courts have upheld the personal liability under fraudulent trading. For example, in the case of Par-Advance Sdn Bhd, the liquidator successfully obtained a Court declaration that the directors of that company were personally liable for more than RM1.2 million. Prior to winding up, the directors had caused the company to pay millions in dividends when the creditors were about to execute on Court judgments against the company.
In recent years, I find that creditors are now more willing to attempt this route under fraudulent trading to try to attach personal liability on a director. As an example, I acted in a case where two directors had signed a company cheque to pay the company’s debt owing to a creditor. The cheque was dishonoured due to a winding up petition having been filed. The company was eventually wound up. The disgruntled creditor filed an action under fraudulent trading to attempt to attach personal liability on the directors for the amount due under that cheque. This action eventually did not succeed but there was still lengthy litigation.
A company is a separate legal entity from its shareholders and directors. But a director will still be open to personal liability and may face criminal and civil sanctions in the winding up proceedings.
Written by Shih Lee