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Lifting/Piercing Veil of Incorporation in Malaysia

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asked on Aug 31, 2015 at 07:10
by   Hopefull
edited on Sep 27, 2016 at 04:44
 
I am wondering if anyone can give some advice on our risk of our Judgement creditor who obtained Judgement order against my Sdn. Bhd., so effectively, my Sdn. Bhd. is a judgement debtor. Here are some facts about our situation/case:

We have previously signed a tenancy agreement with a shopping mall, business for many outlet surrounding the area is not doing well, we are doing bad with very little business, with the sales barely reaching the rental rate only, and we have so many other expenses to cover, like staff, inventory etc etc. Due to such... our Sdn. Bhd. has been running loss for the past few years, cash flow problem and then we are hunger to close down the business hoping to stop the bleed.

We have pumped in our life savings in this business and accumulated many credit card debts, family loans, when we are unable to pay for the rental, or trying to revive the business but it doesn't work. So we have requested from the landlord to find other tenant in replace of our unit, but the landlord refuse to find tenant, and asked us to have to "think and Find" money to pay regardless of what and continue to serve the remainder of the 3 years tenure from the tenancy agreement. At the end of the tenancy period, we have accumulated a big amount of outstanding.

Due to the outstanding rental, the landlord sued us, and recently won a judgement order against our appeal after trial... We have loss a lot of monies and our Sdn. Bhd. is no longer running business. Here is my question

1. Will the judgement creditor able to lift/pierce the Veil of Incorporation? and sue the shareholder for personal assets or bankruptcy? How strong is the Veil/wall of incorporation in Malaysia?

2. In what situation will the court grant order to pierce the Veil of Incorporation? The Sdn. Bhd. is running loss for many years, pay by director/shareholder loan.

3. How is the process after the landlord won judgement order? Will they go for execute Writ of Seizure an​d Sale (WSS) first, then after they find out that there is nothing in the RM2 paid up and money losing company, what will they do? Or they will go directly to Lift/Pierce the veil?

4. Do I really have to "think and find" ways to borrow money to pay... or promise them to pay in installment, but I am worried that I might not be able to keep my promise to pay, as the amount is rather large, about RM100k, I have so much debt to settle, and more expenses... with a new family member recently.

5. Shall I be concern, or shall I ignore, wait and see what steps they take next, or shall I approach the landlord and offer to pay back?

6. Any other advice would be very much appreciated.

I am concern after hearing from a lawyer friend, saying that they can go after the director/shareholder since they are the same party by lifting the veil of incorporation. Thank you very much in advance...

Happy Merdeka and Happy holidays
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answered on Sep 1, 2015 at 06:05
by   Hopefull
Does anyone has some experience/knowledge about implementation of lifting/piercing Veil of Incorporation in Malaysia? will the Judgement Creditor able to lift/pierce Veil of Incorporation for a losing money sdn bhd, genuinely unable to pay its bill, never sign any guarantor, 2 same directors/shareholders? If they can succeed... then it means that Sdn bhd is very much NOT a separate legal entity in reality, here in Malaysia? as I was told by my lawyer friend that the judgement creditor can/will still go this route to claim from shareholders personally or make them bankrupt, if the judgement debtor (sdn bhd) is unable to pay.

I will try to make this thread more informative for anyone who might want to know more about this issue, and hope all sifus can share more details to assist us and others who might want to know more.

Here are some links about "lifting/piercing Veil of Incorporation" in Malaysia, for the benefits of others who may be facing/like to know the same situation.
http://www.lawteacher.net/free-law-essays/company-law/a-company-is-a-legal-entity-company-law-essay.php
http://bicaradarikamar.blogspot.com/2014/02/veil-of-incorporation.html

One of the consequences of incorporation is the separation of an individual from the legal liabilities of a company. The veil of incorporation ensures that a company is a separate legal entity from its directors, employees and shareholders, thus protecting their personal assets from lawsuits. Such protection also helps a company attract investment.
The law recognises that a company is a separate legal entity distinct from its directors and shareholders. Therefore, the courts usually do not look behind the veil of incorporation to inquire why the company was formed or who really controls it.

However, there are a number of circumstances where the courts are prepared to depart from this principle. This is referred to as ‘lifting the veil of incorporation’. Such lifting of the veil of incorporation may occur either by virtue of statutory provision.

The occurs will lift the veil of incorporation if the veil has been misused to protect the owners or management of a company such that creditors and third parties are disadvantaged. In such instances, the veil of incorporation must be lifted to identify the person(s) responsible and make them liable.

Lifting the Veil of Incorporation Under Statute

Section 36, CA 1965: If the number of members of a company fall below two and the company carries on business for more than six months, that member is personally liable for the company’s debts incurred after the six months.

Section 67(1) and 67(3), CA 1965: A company is prohibited from giving financial assistance to anyone to buy shares in the company itself. If it does so, the officers are liable.

Section 121(2)(c), CA 1965: An officer of a company who signs or authorises to be signed on the company’s behalf any bill of exchange, cheque or promissory note where the company’s name is not properly or legibly written thereon, will be personally liable for the amount if unpaid by the company.If there is improper use of a company’s name, the officer who signs so, is personally liable unless the company is willing to be bound: s 121(2), CA 1965. This would include cases where the officer did not use words such as ‘Sdn Bhd’ or ‘Bhd’.

Section 169, CA 1965: Directors of a holding company must prepare consolidated accounts for the group of companies.

Section 304(1), CA 1965: Any person who is involved in a company’s fraudulent trading is liable for the company’s debts. Since the provision uses the term ‘any person’, it can include members, officers as well a company since a company is a person in the eyes of the law. Generally, it is not easy to prove fraud.

Section 304(2) and 303(3), CA 1950: An officer who knowingly contracts a debt with no reasonable of expectation of the company being able to pay the debt is guilty of an offence, and a conviction may be the basis for a court to declare that the officer concerned shall be personally liable to pay that debt. As the element of fraud is not required, this is much easier to prove.

Section 365(2)(b), CA 1965: A director or manager is liable if dividends are paid although there were no available profits. Thus, dividends can only be declared if there are profits.

Section 140(1), Income Tax Act 1967: The Director General of Inland Revenue can revoke and do whatever he thinks fit to counteract transactions which have the effect of avoiding for evading tax: SBP SDN BHD v DIRECTOR GENERAL OF INLAND REVENUE (1988) MSTC 243.

Lifting the Veil of Incorporation under Case Law 

1. Avoidance Of Legal Duty And Fraud
The court has lifted the corporate veil if a company is used to avoid legal duty.
GILFORD MOTOR CO LTD v HORNE (1933) Ch 935
Facts:
The defendant was an employee in the plaintiff company. Under his employment contract, he was prohibited from soliciting the plaintiff Company’s customers if he left his employment. Subsequently, he left the plaintiff Company and formed a company. His wife and another person were the directors and shareholders. He solicited the plaintiff company’s customers. The plaintiff brought an action against the defendant. The defendant argued that the new company, which solicited customers from the plaintiff company are separate. Hence, he is not liable for the actions of the company. The company could solicit the customers because the company is not a party to the contract of employment and therefore not bound by the contract. The restriction is only on him.
Held:
The court lifted the corporate veil and found that the defendant controlled and managed the company. Hence, the formation of the company was a sham. The defendant was trying to avoid his legal obligations. An order of injunction was made against the defendant and the new company.

The veil can also been lifted if a company is used to avoid contractual duty.

JONES v LIPMAN [1962] 1 WLR 832
Facts:
Lipman agreed to sell his land to Jones but later changed his mind and endeavoured to put the land out of the reach of an order of specific performance by conveying it to a company which he had formed for this express purpose. He effectively owned and controlled this said company. In fact, Lipman was also willing to pay damages to Jones but was not prepared to transfer the land to Jones.
Held:
The court lifted the corporate veil and found that the company was a mere sham. Lipman’s main purpose in creating the company and selling the land to the company was to avoid his contractual duty to Jones. The court therefore treated the company and Lipman as one and made an order of specific performance against Lipman

2. Agency
A subsidiary company can be considered as an agent of its holding company if the following requirements are satisfied as stated in SMITH STONE & KNIGHT LTD v BIRMINGHAM CORPORATION [1939] All ER 116. This is the most familiar ground argued in the courts:
—  the profits of the subsidiary must be treated as the profits of the holding company
—  the persons conducting the business must be appointed by the holding company
—  the holding company must be the head and brain of the trading venture
—  the holding company must govern the venture and decide what should be done and what capital should be embarked on it
—  the profits of the business must be made by the holding company’s skill and direction, and
—  the holding company must be in effectual and constant control.

In this case, the court lifted the corporate veil to enable a subsidiary company operating business on land owned by the holding company to claim compensation on the ground of agency.
In Firestone Tyre and Rubber Co Ltd v Lewellin (1957), agency was the trigger for lifting the veil where a British company manufacturing types for an American holding company was held to be its agent.

3. Group of Companies
It is quite common for businesses today to be carried out as groups of companies. This is done mainly to share risks and take advantage of economies of scale.
As a general rule, every company within a group of companies is separate .
THE PEOPLE’S INSURANCE CO (M) SDN BHD v THE PEOPLE’S INSURANCE CO LTD [1986] 1 MLJ 68
Facts:
The plaintiff, which was a company incorporated in Malaysia, was a subsidiary of the defendant company incorporated in Singapore. Four senior officers of the holding company were the directors of the subsidiary company. The auditors of the subsidiary company stated that the company might not be able to meet claims amounting to $2,001,725. At the Board of Directors’ meeting, the four directors said that the holding company would guarantee any shortcomings faced by the subsidiary company. Subsequently the subsidiary company claimed the amount from the holding company on the basis of the guarantee given. However, the holding company denied liability on the grounds that every company is a separate entity of its own.
Held:
The court found that the holding company is a separate entity from its subsidiary company. The four officers who sat in the board meeting, sat as directors and agents of the subsidiary company and not to the holding company. A company cannot be made liable or responsible for the debts or actions of another company within the group. Thus, the debts of the company belong to itself.

However, sometimes the courts are prepared to treat groups of companies as a single entity because there is essential unity of group enterprise –

HOTEL JAYA PURI BHD v NATIONAL UNION OF HOTEL, BAR & RESTAURANT WORKERS [1980] 1 MLJ 109.

The plaintiff in this case was the holding company and a restaurant within its premises was a subsidiary company. The workers in the restaurant were retrenched and the issue before the court was whether the holding company was liable to pay. The court held that the holding company had to pay the compensation. This was because the hotel and the restaurant were inter-dependent – there was functional integrity and unity of establishment between the hotel and the restaurant; and a number of senior officers were common to both the hotel and the restaurant. Therefore the hotel is the employer of the employees.

4. Where Justice Requires the Veil to be Lifted
In recent times, the Malaysian courts have shown a greater willingness to lift the veil of incorporation where justice requires it.
ASPATRA SDN BHD & 21 ORS v BANK BUMIPUTRA MALAYSIA & ANOR [1988] 1 MLJ 97, the court stated: ‘The generality of the judicial power already vested in the superior Courts by the supreme law of the land is unlimited, and for the purpose of achieving justice, the power of the Courts to do what is just under any law requires no special legislation.’

5. When the Law Shows an Intention that the Veil be Disregarded
In some cases, the courts have found that a particular legal rule should be interpreted as requiring them to lift the veil of incorporation. For instance, in times of war in order to determine whether a company is controlled by enemy aliens. In Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd (1916) the court lifted the veil of incorporation to look at the nationality of the persons in effective control of the company.
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answered on Sep 1, 2015 at 14:09
by   vkpc
In your case, it has nothing to do with the "Lifting of Veil of Incorporation".
Over enthusiastic reading of the law can cause wrong analysis of the situation.
It is a simple matter of if the company is ordered to be Wind Up by a Court and if the Receiver orders the shareholders to pay up the capital shortfall, then the shareholders pay up lah.

To get to this stage, the Creditor still have to petition the High Court to wind up your company.
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answered on Sep 1, 2015 at 14:42
by   jeff005
edited Sep 27, 2016 at 04:55
 
The situation is complicated if the company directors are the sole shareholders too.
This is what roughly what I meant by my above statement. There are other scenarios which is not relevant to your case.

A lot depends on your M&A, the initial filings on the incorporation of your company AND THE 1ST SET OF AUDITED ACCOUNTS FILED WITH REGISTRAR OF COMPANIES (ROC)..!!

The 2nd yearly audited accounts are supposed to rectify any shortcomings with regards to "financial health" of the Sdn Bhd.

Company Books of accounts and audited accounts to ROC are slightly different.. e.g.
Directors Loans
1. Loans TO Directors/ Shareholders
2. Loans FROM Directors/ Shareholders
3. Directors Remuneration
3. Directors Expenses (in the course of work)
5. Directors Bonuses
6. Dividends paid to Directors

Some types of accounts MUST be "offset" by accounting standards by year-end and/or reclassified. Minuted Loans from Directors should be converted as paidup share capital if the situation warrants by the 2nd audited accounts to make the business "healthy". Increased in Share Capital would/could be initiated subsequently.

If the company Authorised Capital is RM100k, the Issued Share Capital is RM50K, BUT the Paidup Capital is only RM2... Yes, the shortfall of RM48K can be subjected for recovery by Creditors IF the creditors wants to do it.

So, by now you would understand the complexity of your case and the circumstances of other legal actions.

A lot of circumstances/situations depends on your
1. Company M&A
2. Initial Filings of Incorporation of Company
3. 1st and 2nd Audited Accounts
4. Personal Financial Health of Directors cum Shareholders.

Personal Opinions:
1. Get the Audited Accounts for 2014 and 2015 out asap and immediately "Dormant" the company.
2. Then sit down and wait for any Lawsuit from the Landlord. There is nothing much more you can do.

Any aspiring lawyer wants to pierce the Veil..?? Thousands would sure like to.. The lawyers fees can start at RM30K possibly because of the enormous no of legal work. Losers pay all. Best case scenario, each party pay their own legal and court fees. The LAWYERS sure wins. We MAY not be talking about RM100K! If the landlord wants to play hard and if you cannot afford even to pay for Company Secretary and Auditors fees, what else more can you do?
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answered on Sep 2, 2015 at 05:38
by   Hopefull
edited Sep 27, 2016 at 04:57
 
Dear vkpc,

Thanks for your reply bro, much appreciated it.

"In your case, it has nothing to do with the "Lifting of Veil of Incorporation".
Over enthusiastic reading of the law can cause wrong analysis of the situation.
It is a simple matter of if the company is ordered to be Wind Up by a Court and if the Receiver orders the shareholders to pay up the capital shortfall, then the shareholders pay up lah.

To get to this stage, the Creditor still have to petition the High Court to wind up your company."


Truthfully, I am very concern recently, so have been reading more details about what may be coming... my lawyer friend (anyway... he usually represent plaintiff of big corporation on this kind of litigation case, so for defendant side for my small case might not be his cup of tea), he opined that the Judgement Creditor is not stupid to sue me in the court knowing that my Sdn. Bhd. is a RM2 company, so now that they have obtained the Judgement Order, he belief that the landlord will proceed to lift the veil easily with the judgement order obtained and by simply doing a search on the company that will tell that the directors and shareholders are the same, and sue shareholder for bankrupt and seize all shareholder own assets  If it is really so serious... you might understand why I became very concerned...

Bro vkpc, do you mind clarify a little on the paying back of shortfall, for my Sdn. Bhd. situation, I have tried to do some digging online, and here is the closest that I manage to find in regards to winding up and paid up capital:

Source #1
https://www.ssm.com.my/acts/fscommand/act125s0214.htm
Section 214. Liability as contributories of present and past members.
(d) in the case of a company limited by shares, no contribution shall be required from any member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as a present or past member;

Source #2
http://www.insolvensi.gov.my/faqs/liquidation
12. What is the effect of winding up towards contributory of the company?
The contributory is not personally liable towards the company's debts. However, the liquidator has power to direct the contributory to pay any unpaid shares.

I have noticed the word "unpaid shares" in both sources, that the Judgement Creditor are able to recover unpaid shares from the contributory, from my understanding and research today... "unpaid shares" means shares that were allocated for that particular shareholder, supposingly paid to increase the paid up capital, but somehow was not paid into the company account yet, is that right, or there is other law that will enable the judgement creditor to claim authorized capital minus (-) paid up capital difference.

1. My Sdn. Bhd. capital structure is rather simple, authorised RM100k, paid up RM2, no allocated but unpaid/partially paid shares. Does it means that this paying capital shortfall will not be applicable to me?

2. How much will the estimated lawyer costs for a slightly reputable (not prestigious) lawyer firm, to handle the winding up petition in high court? Is it feasible for them to do it on a RM100k debt?

3. When you say that "Lifting veil of incorporation" is not applicable to me... can you kindly advice why you think so? is it because the lawyer costs are too high, as compared to recover a 100k debt? or is it because it is not widely practice in Malaysia, or very few who attempted to lift the veil succeeded?

Hope bro vkpc can kindly shed some lights... Thanks very much for your valuable input and sharing.
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answered on Sep 2, 2015 at 06:38
by   Hopefull
edited Sep 27, 2016 at 05:01
 
Dear JeffOO5,

Thanks for your details explanation and info, I have some questions, would appreciate your advice...

Personal Opinions
1. Get the Audited Accounts for 2014 and 2015 out asap and immediately "Dormant" the company.

I now understand the complexity of the case, and the "financial health" of the Sdn. Bhd. is unique for each company, it seems like in my situation, the "financial health" is not well planned of to improve the "Financial health" part seems like there is no obvious "holes" for the creditor like wrongdoing of a money losing company. Looking forward, I better complete the audited accounts for 2014 and 2015 as soon as possible, and then dormant it..

Question 1:
Is it correct that since there is a Judgement order, it is impossible for me to voluntarily wind up right? So I have to keep it dormant until the Landlord take any lawsuit, or if better no action taken then only I can wind it up like in 6-7 years later right?

2. Then sit down and wait for any Lawsuit from the Landlord. There is nothing much more you can do.

Any aspiring lawyer wants to pierce the Veil..?? Thousands would sure like to.. The lawyers fees can start at RM30K possibly because of the enormous no of legal work. Losers pay all. Best case scenario, each party pay their own legal and court fees. The LAWYERS sure wins. We MAY not be talking about RM100K! If the landlord wants to play hard and if you cannot afford even to pay for Company Secretary and Auditors fees, what else more can you do?


Question 2:
The lawyer fees is so high? Just to make sure I get your meaning right, meaning to start the case already estimated about RM30k, then for the whole case maybe more than RM100k each side? most likely the loser side will pay all legal fees.. meaning RM200k+? lucky if pay only own side of lawyer fees example RM100k+?

Question 3:
Bro Jeff05, what is your opinion on the likelihood that Judgement creditor going the route of "Piercing the veil of Incorporation" for a rather not too large debt of RM100k? Is it practice regularly in Malaysia? or is an isolated practice, that maybe will be practice for a large debt and/or director/shareholder wrongdoing etc.

Question 4:
Can the Judgment creditor "jump" step, and skip the winding up petition? proceed directly to lawsuit on "Piercing the veil of incorporation" like what my lawyer friend told me? and then if worst case they win the case, "jump" again, instead of demanding the debt with/without the lawyer costs from the shareholder, directly proceed to sue the shareholder for bankrupt and seize all assets?

Question 5:
From my understanding, once obtained the Judgement order, if the creditor decided to proceed with winding up petition, it will be a unilateral action, meaning they will do all the filling in court etc and court will decide to grant or not granting the petition, then we will have to cooperate by law to provide the necessary details to the liquidator right?

On the other hand, how about if proceed with the suit to ""Pierce the Veil of incorporation", it will be inter-party right? meaning the Creditor file the suit as a plaintiff, against the Sdn. Bhd. as defendant, or the individual as defendant, or both? then there will be affidavit by both sides, and the judge decide.

Question 6:
Just to determine what is the worst case scenario... is the following order correct, can they skip any of the steps below and go to the next step:
1. Judgement order, or Judgement in default obtained by creditor.
2. File Winding up petition, and grant petition approval.
3. Liquidator will come in to investigate company accounts, assets, funds, any unpaid shares etc.
4. If the obtained value by liquidator is insufficient, they will decide whether to attempt "Piercing the Veil of incorporation"
5. If worst case they won, they will demand the debt + lawyer fees for the winding up petition and ""Piercing the Veil of incorporation" suit, with a standard rate as fixed by court right, and not the rate as charged by their lawyer firm to the creditor right, in case they use some prestigious lawyer firm?
6. Letter of demand to shareholder to pay
7. If unable to pay, will be bankrupt...

Thank you very much for the great details and advice Jeff05, it has been very helpful to help understand the situation... much appreciated, thanks again.
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answered on Sep 2, 2015 at 19:17
by   jeff005
edited Sep 27, 2016 at 05:30
 
Dear Hopefull..
(wish you can denote a name)

To answer all your questions directed to me is draining my senses and may take me hours to answer the best I could. Bear in mind I'm an old man plus non legal guy. I shall find a simplified method.

Personal Opinions

1. Your contradictory Info
as I have no money to pay accountant and auditor...
or promise them to pay in installment
It can also mean you do have assets that exceeds the RM100K or in a financial position to be able to negotiate with the landlord. And you are trying to "save" your personal assets.. rite? But how to negotiate, when at the same time you have a cash flow issue?

My view is that
1. Your business is a straight forward type and the litigation arises from a tenancy issue.

2. From your info, your Sdn Bhd is a RM100K Authorized Capital, Issued and Paid Up RM2 consisting of Ordinary Share Capital (am I correct?). Then the legal part hinges the fact what is stated in your company M&A on the term "Ordinary Shares". If nothing is specific, then ordinary is ordinary, what additional liability (ies). If your company has also issued "preferential" "non voting" shares, then liability can be debatable if there are 7 directors and 10 shareholders. All these scenarios happens to RM10M & above Paid Up Share Capital companies. Your is just RM2! You cannot stop people from trying to sue or windup a RM2 company. This is a PRIVATE LIMITED CO. "LIMITED LIABILITIES" limited by shareholdings!

3. Look at this simplified assessment. My audited accounts up to date is like that.. just initiate "winding up" procedures if the Judgement Creditor wants to. To windup a Sdn. Bhd. is very costly, self winding up is also. The "blip" is the Judgement Creditor Lawsuit. It must be stated in the Audited Accounts or else Company Laws and Business Laws has been breached and there are penalties to pay for apart from late filings. So, the most logical step for you to to follow what I have suggested. Audit uptodate and Dormant it! Wait for a few years then apply for self winding up hoping that the Complex have changed Management. You cannot wind it up without notifying your creditors as stated in the Audited Accounts.

4. Once you have updated Audited accounts, to wind up the company, the legal firm has to make searches at Registrar of Companies (ROC), and report to the client on the feasibility of winding up. If there are 50 other creditors with a lot of debts, feasible to wind up? They may end up with nothing.!! and ended up with legal costs.

5. "Piercing Veil of Incorporation".. my personal view is that when it involves high values, and most important the element of "intended fraud" is there. Under ideal circumstances, yes, it does goes into personal. For eg.. You have secured, a hook or by crook, a permit to import 2000 foreign workers and a RM2 company is formed to facilitate the process, only those involved is aware of this highly capitalised business. In the event of "failure" (almost impossible situation), where is the recourse for the creditors. 30 years ago this type of RM2 'ali baba' companies existed worldwide.

6. Your RM2 is a simple company. Who misformed the owner to rent out to RM2 company. Due negligence. Not your fault.
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answered on Sep 3, 2015 at 03:58
by   jeff005
edited Sep 27, 2016 at 05:34
 
@ Hopefull

Do you mean the Judgement creditor will consider this option by reviewing the financial health of all the Judgement Debtor shareholders cum directors right (that is reviewing our financial health)?
But is the Landlord willing to spend massive legal costs in a futile attempt to sue?
Notice my term "futile".. Your litigation is by Trade Creditors, unlike banks. The Landlord lawyers has to rely on privileged info of your financial status via business associates otherwise they have to go blindly searching for your assets at Land Office and JPJ. Their lawyers may encourage the clients to sue, based on this law and that law, misleading their clients, if not where got business?? Even if you have personal assets, what actually can they do to sue a RM2 company (Issued and Paidup Capital). They can try other modes of lawsuit but.. can they win? You cannot blame the lawyers, it is their ricebowl. Clients winning or losing they still get paid for their "services". It is their policy to "entice" (like a sexy models) their client to sue.

There is a column with loans from director, is it possible to convert it into paid up capital? In reality, we have lost more than the authorize capital, but all the capital is pump in as a loan, and never convert into paid up. If the loan is able to convert, it can reach the full amount of authorize capital.
It is possible (and suppose to) to convert "Loans From Director" to Issued and Paidup Share Capital. It is part of the Boardroom tussles (irrelevant to small companies). If it is an actual loan, the company secretary must minute these transactions and signed by all shareholders (for Sdn Bhd) and file with ROC to make it "effective". It should be stated whether it is interests payable or not and the tenure too. Your case is just "temporary loans" aka "disbursements" should be classified under the Director/Shareholder current account in the books of the company.

In your case, no material difference whether to convert it to share capital. It should be classified as "amount owing to shareholder a/c". Give your company secretary and auditors to work for the services!

Impromptu increase in share capital have to be proven by actual cash injection via banking systems to reflect "transparency". Still all relevant paper documentation work has to be carried out by the company secretary.

Caution: DO NOT NAVIGATE YOUR ISSUED AND PAIDUP SHARE CAPITAL now.. leave it RM2! (Note.. this is only personal opinion. Best you get professional advice from your company auditors.)
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answered on Sep 3, 2015 at 07:31
by   Hopeful
edited Sep 27, 2016 at 05:37
 
Dear Jeff,

Thank you very much for your detailed reply, I am learning a lot from experience guy like you, 30 years ago , I was still in my infancy  my apology for the long list of question, and no intention to cause any pressure, my wife always say that I am very 'chiong hei'...  Truthfully I find that your advice and feedback are very useful and comes from a neutral party trying to help, thanks again. My lawyer friend did give some advice that day, but somehow he is usually representing big firm plaintiff in this kind of winding up/lifting veil etc... so maybe he is always siding the recovery side no matter how... with his comment asking me to sell off my own asset to pay, or the landlord lawyer can easily make me bankrupt by showing the Judgement order obtained, and simply showing the search done that we are the director/shareholder of the Sdn. Bhd., then they can make us bankrupt, we lost everything. It scared me, I am suddenly worried that director/shareholder are and can be a same entity as that comment comes from a lawyer ... my father used to be a bankrupt since 1980's and just clear off about 10 years ago, the family went through many inconvenience since my childhood... so I am very paranoid when hear about the word bankrupt, really wish no one will have to go through that.

Yes, you assess it correctly, due to the failed business, I am having serious cash flow problem recently, and trying to make sure that my limited asset are really limited from the Sdn. Bhd. creditor, so life can still goes on for the family... to be frank, previously when I am having more and more difficulty in paying for the rental, I sell off almost everything and accumulated a huge CC debts just to pay the rental. I am now still working on clearing the debts bit by bits, it will be a long and tedious process... I believe I try my very best to do my part already and try to revive the business and pay the rental with my own capacity, not company's capacity, many retailer are suffering in that mall too, they are some who just abandon their shops halfway into tenancy, some who are able to cover their operating costs, but none as far as I know prosper... At that time, I did ask the management to give rental discount, or find other tenant urgently, still relatively possible to find tenant at that time with the tenancy having about a year left. But the management insists that we serve the 3 years as stipulated in the Tenancy Agreement, or threaten they will sue me, they did eventually.

Yes, the issued and paid up shares are ordinary shares, I just checked the M&A, it does also have a standard clause in M&A saying that "The liabilities of the members are limited", meaning it is generally limited liability, in this circumstances, it sounded more like a "wall" to me than a "Veil" that are easy to break through, as I am very sure our Sdn. Bhd. did not conduct any fraud etc, and our case as compared to the lawyer fees are small civil case, just a plain failed and honest business unable to pay its trade creditor.

Thanks for your advice on making the account up to date, and also the necessary to state the judgement credit suit. My accounting period is ending 31st December 2014, and the shop is closed during end of last year as well, meaning the period of overdue account that is supposed to submit asap,the business is still consider "active". From your suggestion that the lawyer and/or the landlord management shall be doing a search to determine the feasibility of the next course of action, I am guessing it will be soon knowing that our dateline for filing account is about this time. I am concern that it will give a wrong picture that the business is still "active" when the look at the upcoming financial statement if we quickly file it and/or they might think that our Sdn. Bhd. is still running this year, hence will encourage them to take any action swiftly or persuade their landlord to pay them to do it, winding up petition, lifting the veil or other actions. The next account for this year ending 31st December 2015, is the very inactive ones...

Question...will it be better to do both account together say asap on beginning of the year, so that when the lawyer or the landlord management look at the 2 accounts file at once, they will know that it is a closing down company, so hopefully will discourage them to take any action for the benefits of both parties. I am hoping there will be no penalty, if there is penalty, maybe will visit Suruhanjaya Syarikat Malaysia (SSM) to reduce or ask for waiver, with valid reason of -  there is a Judgement order against us, we were lost as maybe the Creditor will wind up the company and we are having cash flow problem as company is losing money and we end up need to pay lawyer fees etc. Then will dormant it for few years and try to wind it up. If considering the risks of paying for the costs of lawsuits again with the need to hire lawyer and spent time to defend, or worst case affect our personal assets, as opposed to the penalty by SSM and attempt to reduce/waive it, the latter sounds like a better bet, hope I don't miss out anything.

Yes, you're right, the loans are more like temporary loans, and classified under "Amount due to director", it should be neutral in the case or winding up right especially for our RM2 paid up company? or will the "Amount due to director" also be added as a creditor in the event of winding up petition, if it is superseding their Judgement Creditor priority it will be good to deter their progress on any winding up petition. To be frank, if it is the company capacity, any creditor shall not be able to obtain anything, as there is no assets for the company, even the renovation are all gone when closing down the shop as need to dismantle and throw almost everything.

Notice my term "futile".. Your litigation is by Trade Creditors, unlike banks. The Landlord lawyers has to rely on privileged info of your financial status via business associates otherwise they have to go blindly searching for your assets at Land Office and JPJ. Their lawyers may encourage the clients to sue, based on this law and that law, misleading their clients, if not where got business?? Even if you have personal assets, what actually can they do to sue a RM2 company (Issued and Paidup Capital). They can try other modes of lawsuit but.. can they win? You cannot blame the lawyers, it is their ricebowl. Clients winning or losing they still get paid for their "services". It is their policy to "entice" (like a sexy models) their client to sue.
I like your example on the sexy models part, agreed on your points .

Caution: DO NOT NAVIGATE YOUR ISSUED AND PAIDUP SHARE CAPITAL now.. leave it RM2! (Note.. this is only personal opinion. Best you get professional advice from your company auditors.)
Agreed, since there is no legal risk arising from the share capital point of view, example no unpaid shares, and only the authorized capital (that is neutral), and also issued and paid capital RM2 (that is also neutral in this case), at this uncertain juncture, it is better to not navigate any capital structure now.

Thank you so much again Jeff05.

Regards,
Eric
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answered on Sep 3, 2015 at 16:06
by   jeff005
edited Sep 27, 2016 at 05:42
 
Dear Eric,

Am Happy and Glad you have found your way by yourself. I could have comment earlier on "some" issues, instead I instigate and provoke to find the answers yourself with keywords. Now that you have equip yourself with tremendous knowledge of Company and Business Laws, supposing your lawyer friend happens to represent the landlord, you would be in a good position to set aside this particular lawsuit, rite? But my MO does not work everytime to stimulate people to find answers by themselves, instead I do get rude remarks, eg.
https://www.lawyerment.com/answers/questions/10340/clash-with-mdi-unnoticed-bankruptcy

Bashing me up, calling me "attention seeking W H O R E".. trying to chase me out from a public forum..
https://www.lawyerment.com/answers/questions/10294/semakan-status-kawalan-imigresen-sila-rujuk-ke-pejabat-imigresen

By now you are experienced enough to attend court by yourself, not needing a lawyer (save hell a lot of lawyers fees for Company Laws cases). You Self Represent in court and be able to kick the *******s of some unprofessional lawyers. And request for costs of proceedings be paid to you. A lot of self representing samples are found under the bankruptcy section in this forum. The current ones are @ Aurora and @ Ayzek. A notable person is Mr. "notalawyer". Please don't ask me.. I am nuts in Melayu and court procedures. Talking about court rules and regulations.. The ROC Rules and Regulations is equally enormous, not for ordinary Auditors and even Company Secretary to understand enough to contest in Litigation Lawsuits. They just can learn just by reading Law Books and trying to interpret from it. Lawyers can't do Accounting Practices and Auditors can't interpret Debt Litigation cases.

Let me focus tonight and pen my opinions on how to window dress your accounts for Year-End (Y/E) 31/12/2014. You need only 1 more Audited Account and dormant it after 1 month by filing at ROC.. The last account is very, very critical, believe me and hell a lot of window dressing can be done. But, to be effective, have to understand your whole business process. Prepare for more Q & A's..

Regards
Jeff
double_OO_5
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answered on Sep 4, 2015 at 07:51
by   Hopeful
Dear Jeff,

To be frank, me and many others I believe are overwhelmed by the number of heart-warm help to many people in this forum, so I am quite surprise to see those people who is trying to ask people for help and then ended up bashing those people who try to help them or size up the situation, it is uncomprehending.

I believe some people missed the point that when they met good people who try to help them, by way of guiding and/or discussion is more than golden already, and not spoon feed them to pull them out of trouble.
Maybe some people are in bad mood when facing legal case, it is like some people who get drunk and start to get into bad mood, IMO everyone facing problem should chill a bit... and think of how to best understand and solve their problem.

Now, I saw the latest episode of Avengers in this forum, it is awesome, glad that there are great break thru  I hated those collection agent as well, they are well disguise in all shapes and forms, last year, I have been receiving more call from collection agency/banks everyday than my family/friends/contacts, it is depressing everyday when the phone rings. Now, with some converted into term loan and settlement with discount for the smaller debt etc, I have a lot little unwanted calls and felt more relax.

I hope the Plaintiff side will not take any action, though if they do, then have to face it , as life has to go on. I am just freak out when I hear about the word bankruptcy previously, partially also due to own childhood scar lol.

Thinking aloud, beside the option to window dressing the audit account YE 31/12/2014 (there are some transaction beginning of this year as well), to show them the real picture also that it is not feasible to proceed. If we are expecting them to do a search and evaluate the feasibility, will it be better to completely skip the account for now, to make it harder for them to decide the feasibility if I totally didnt file the account at all? then my risks will be to deal with ssm alone, or I will be creating new trouble in uncharted waters.

I heard from a close friend of mine in Penang whose few years back has a sdn bhd doing IT business with telco and losing money, hence the last 2-3 years of account, didnt complete the auditted account at all, ssm write notice to penalty, he inform to ssm that the company has been losing money and no longer doing business and have no money to do account and pay penalty, at the end the company secretary also resign fearing penalty for non compliance, finally ssm strike off the company without pursuing for penalty, now 7-8 years later already.

Thank you very much for your time and efforts in helping, really appreciated it Jeff, cheers and have a great weekend ahead
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