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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 5, 2015 at 04:25
by   jeff005
edited Sep 27, 2016 at 05:50
 
Hi Eric

will it be better to completely skip the account for now, to make it harder for them to decide the feasibility if I totally didn't 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.
One fine day these uncharted issues can come back to haunt you.

Questions:
1. How old are you?
2. Do you want to remain a wage earner or aspiring entrepreneur?
3. Are you into any specialty product?
4. Do you want to go back into business once you have cleared this hurdle?

You should be in the region of 35-40. Young and can still make a comeback in business. In order to do so, you should not leave behind any "loose ends". My personal opinion is to get it Audited and then dormant it. Example, if your tenancy agreement end on 31st march, you can do a 15 month "last submission" to terminate the business company. Check with your Company Secretary and Auditors. I believe it is possible by making application to the Registrar of Companies (ROC). With a lawsuit (depending on dates) you may NOT be able to wind it up. With advance electronic data storage, your records can reach backwards 20 years. Never leave loose ends, you can be blacklisted on ROC records for life.

However if you are 60 as I would be next day, then leave things as it is.. So it is up to you, what you want to be and what lies ahead.

Conclusion (FOR YOUR CASE ONLY)
1. It is futile to sue or windup a RM2 Issued and Paidup Share Capital Company.(For Judgement Creditor)
2. Never leave loose ends at ROC as in Debts issues in Banks. Things can come back to haunt you 20 years later as in credit card debts.

If you "closed" your business
1. What had happened to all the inventories?
2. The Renovations?
3. Furniture and Fittings (esp for Food Business)
4. List of Accounts Payable
5. List of Accounts Receivables
6. Depreciation of Assets computations
7. Assets written off
8. Stocks written off
9.
10...

What about informing EPF, SOCSO? Closed all the accounts, paid up all remittances? Someone posted on this forum that SOCSO slapped his company with RM200K fines for not paying 1, yes, one worker for the past 18 years! Another posted that he was made Bankrupted by EPF as he was the appointed local managing director (MD) and all the overseas shareholders 'hilang'! Another poor guy was bankrupted for bank debts AND subsequently EPF, Jabatan Insolvensi Malaysia (JIM) opened 2 separate files on him! I suspect that once he reaches 55, his own EPF savings will be deducted to pay back what he "owed" EPF for failing to contribute to his workers EPF account plus penalties/fines awarded by the High Court (Personal speculation, don't ask me to prove or show you those accounts). Now people will start shooting at me saying that EPF savings is protected by LAWS... But what happens if EPF is the one who bankrupted you??

You just cannot declare "everything gone", ROC won't accept.. there must be verified documentations. This is SDN BHD. Company laws, business laws must be adhered to. Compliance to LAWS. If there is no impeding lawsuits, fine.. IF there is, what if there is a court order to get your Audited accounts out by 3 months? What happened if your Company Auditor and Company Secretary go missing in action (MIA), and do you have the cash to do all things simultaneously?

Do be cautious. If there is an element of doubt your Judgement Creditor would petition the winding up of the Sdn Bhd, a court order can be obtained to produce the Audited Account within stipulated period. Non Compliance means breaking of Company Laws, unlike Bankruptcy Laws, Heavy penalties Plus Jail Term. It is in Company ACTS. Please don't ask me which ACT, I am aware there is, never bother to find out as it can never happen to me.
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answered on Sep 7, 2015 at 14:16
by   vkpc
edited Sep 27, 2016 at 05:51
 
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?
Authorised Capital - Paid Up Capital = Unpaid Capital.  (get it into your head).
Capital Shortfall due from you = RM 50k - RM 1 = RM 49,999.00  (your share after divide by 2 shareholders)

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?
It might cost them RM50k, so as I mentioned earlier, they will not take things further.
Why keep worrying over nothing?  It is not helping your cause.
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answered on Sep 10, 2015 at 06:11
by   Hopeful
edited Sep 27, 2016 at 05:56
 
Dear Jeff,

Thank you for your advice sir, my apology for the late response. I am now on an outstation trip these few days, hence I am overwhelmed by the lack of time in the schedule a bit.

Questions:

1. How old are you?
I am 33 Years old.

2. Do you want to remain a wage earner or aspiring entrepreneur?
I hope to continue to be an entrepreneur.

3. Are you into any specialty product?
My product are more like commodity, trying to differentiate itself from the market.

4. Do you want to go back into business once you have cleared this hurdle?
Yes, from young I was made the director/shareholder of my family company, due to my father's limitation, e.g. bankruptcy status at that point of time. So, I am hoping to be able to continue to put in my effort for the family business, and also be able to start a new venture again, hopefully one day.

Thanks for your advice Jeff, I agree that it is better not to create loose ends in ROC issues for the long run. From my situation, I will probably wait for a little for 2 reasons... 

The first reason is due to personal cash flow problem that I hope it will be temporary, I will try to save some money to clear the Comp Secretary, Auditor, and Accountant, so that they will also be happy to finish wrapping up the final year account, and then dormant it. They are all close friends, and I am just their client. Previous years fees I usually pay up on their invoice, but the recent ones were not yet paid as well after the business failed tremendously, as at that time, the business can't pay its bill anymore, and I am still uncertain on what will happen next, or what is my next plan.

The 2nd reason is, if the landlord planning to take any action, I am guessing it will be some time very soon. So, I am thinking to wait a short while to see what happens next in the next few months, instead of rushing to finish the account. If there is nothing happens, hopefully, then once I can afford to clear the payment for the com sec, auditor and accountant, I will discuss with them to complete asap.

If you "closed" your business
1. What had happened to all the inventories?
There are not much inventories left, as we did clearance in the final month before moving out.

2. The Renovations?
The renovations were taken out, or dismantle completely, as the landlord would need the unit to be in its original condition.

3. Furniture and Fittings (esp for Food Business)
Not much loose fixture moved out, or due to the dismantling event, might "officially" say its being thrown away completely by the contractor.

4. List of Accounts Payable
Yes, more like the com secretary, auditor, accountant, courier service. The rest are paid.

5. List of Accounts Receivables
There are no more accounts receivables, as the payment were all bank in already.

6. Depreciation of Assets computations
7. Assets written off

No major assets, except the renovation, which I believe the dismantling event is proper to write it off.

8. Stocks written off
The "Leftover" are neglected quantity after clearance, shall be written off in the account.

What about informing EPF, SOCSO? Closed all the accounts, paid up all remittances? Someone posted on this forum that SOCSO slapped his company with RM200K fines for not paying 1, yes, one worker for the past 18 years! Another posted that he was made Bankrupted by EPF as he was the appointed local managing director (MD) and all the overseas shareholders 'hilang'! Another poor guy was bankrupted for bank debts AND subsequently EPF, Jabatan Insolvensi Malaysia (JIM) opened 2 separate files on him! I suspect that once he reaches 55, his own EPF savings will be deducted to pay back what he "owed" EPF for failing to contribute to his workers EPF account plus penalties/fines awarded by the High Court (Personal speculation, don't ask me to prove or show you those accounts). Now people will start shooting at me saying that EPF savings is protected by LAWS... But what happens if EPF is the one who bankrupted you??
True, very thoughtful advice, this is one of the "Risk" area, especially dealing with EPF and SOCSO, I have talk to one of the office in EPF when making the final payment few months ago, and she recommend to close the account, she say is possible, just need to settle final payment including late interest, and then chop and sign a form to close the account, then the EPF account will be close forever. I better close the EPF account and ask SOCSO how to close it as well.

You just cannot declare "everything gone", ROC won't accept.. there must be verified documentations. This is SDN BHD. Company laws, business laws must be adhered to. Compliance to LAWS. If there is no impeding lawsuits, fine.. IF there is, what if there is a court order to get your Audited accounts out by 3 months? What happened if your Company Auditor and Company Secretary go missing in action (MIA), and do you have the cash to do all things simultaneously?

Do be cautious. If there is an element of doubt your Judgement Creditor would petition the winding up of the Sdn Bhd, a court order can be obtained to produce the Audited Account within stipulated period. Non Compliance means breaking of Company Laws, unlike Bankruptcy Laws, Heavy penalties Plus Jail Term. It is in Company ACTS. Please don't ask me which ACT, I am aware there is, never bother to find out as it can never happen to me.

Thanks for your great advice again Jeff, I will arrange to get the account audited and dormant it once the situation allow, it is an invaluable opinion that never create "loose ends".
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answered on Sep 10, 2015 at 06:40
by   Hopeful
edited Sep 27, 2016 at 05:58
 
Dear vkpc,

Authorised Capital - Paid Up Capital = Unpaid Capital. (get it into your head).
Capital Shortfall due from you = RM 50k - RM 1 = RM 49,999.00 (your share after divide by 2 shareholders)

Thanks for your reply. Is it possible to share from which angle/laws that is explaining about the Unpaid shares being Authorised Capital - Paid up Capital? and not Unpaid = Allocated Shares - Paid up Shares? To be frank, I am concern about this angle, but somehow from the little research, it seems like unpaid shares is not common in many company, and unpaid is unpaid only at the point when the shares are issued/allocated, and not authorized...

From my understanding, Authorized shares has no legal obligation, for bigger company can be increase gradually, so for example if one company increase from RM100k to RM500k, then from my understanding, it doesn't means that the shareholder will be oblige to pay up the RM400k, from my understanding, it only means that the company can issue/allot up to RM500k.

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.

Source #3
http://www.informdirect.co.uk/shares/what-are-unpaid-shares/
Why would a company issue unpaid shares?

Although unpaid and partly paid shares are far less common than fully paid shares, there are a number of reasons why a company might choose to issue them:

It might form part of a pre-planned schedule of payments, whereby the shareholder commits to the full price but needs time to access funds.
Convenience when first setting up a company – perhaps because the circumstances do not warrant setting up a bank account into which to pay the nominal value of the shares issued.
In line with a strategy to implement an acquisition or merger of companies.
To retain the option to forfeit the shares at a later date.

In many cases, however, unpaid shares exist without the directors ever having really made a conscious decision to opt for them instead of fully paid shares. Sometimes this happens inadvertently when the company is formed – where an incorporation agent only offers formation with unpaid shares or the wrong box is accidentally ticked and the wrong details confirmed to Companies House.

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?
It might cost them RM50k, so as I mentioned earlier, they will not take things further.
Why keep worrying over nothing? It is not helping your cause.

I understand that there are lots of work to do for winding up, but wow the fees seems really high. Thanks for your advice vkpc, much appreciated it.
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answered on Sep 10, 2015 at 16:31
by   jeff005
edited Sep 27, 2016 at 06:00
 
Hi Eric

Just a short note. Your posting has generated some interests from unknown silent readers. One took the trouble to email me and ask to meet up with me to "show" me a "book", 3 days ago. We did. The book was actually the latest Audited Accounts of a big company as at 31/12/2014. RM300M Authorized Share Capital, with Paidup Share Capital of RM220M with yearly incremental Issued Share Capital of RM10M for the past 5 years! But the big deal was the Total Capitalisation of the Company is RM500M. It was a real eye opener to me. After my layman explanations to him, he presented the Audited "Book" to me. It is an overwhelming gesture of a "new" friend. Your post has actually benefited me with additional knowledge. Thanks.
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answered on Sep 12, 2015 at 05:24
by   Hopeful
Dear Jeff,

It is interesting to hear that this topic has generated some interest by fellow forumer, and some more by some big time business owner 

I have learned a lot from this forum by fellow taiko, and while discussing the concern that I hope to find out, I was thinking it is better to maintain an objective based thread, so that the outcome can be backed by more facts and finding, for the benefits of others big or small businesses who may be interested to know more or continue to dwell into this topic for the benefit of their own corporation.

Thanks for all your input Jeff, it has been very helpful. Have a great weekend 
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