Are Directors Liable For Company Debts? (Yes, Sometimes)
Good news for creditors: Under the Companies Act 2016, directors can be found personally liable for company debts even without a personal guarantee.
If you can prove that there has been wrongful or fraudulent trading, that shiny Ferrari in their garage isn’t as safe as they think!
Below, we explain both and end with what to do if they apply to your situation.
Let’s begin.
Wrongful trading
Wrongful trading is covered under subsection (1) of Section 539 of the Companies Act:
📄Section 539 Companies Act 2016
If in the course of winding up of a company or in any proceedings against a company, an officer of the company who knowingly was a party to the contracting of a debt had, at the time the debt was contracted, no reasonable or probable ground of expectation, after taking into consideration the other liabilities, if any, of the company at the time, of the company being able to pay the debt, commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding five hundred thousand ringgit or to both.
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If in the course of winding up of a company or in any proceedings against a company, an officer of the company who knowingly was a party to the contracting of a debt had, at the time the debt was contracted, no reasonable or probable ground of expectation, after taking into consideration the other liabilities, if any, of the company at the time, of the company being able to pay the debt, commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding five hundred thousand ringgit or to both.
Let’s restate that in plain language!
This means you can prove a director knew (or should have known) their company could not afford any more debt, and yet continued to take on debt without taking steps to reduce losses for creditors.
Fraudulent trading
Fraudulent trading is covered under Section 540 of the Companies Act:
📄Section 540 Companies Act 2016
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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 credit or 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.
Let’s simplify that again 🙂
This means you can prove a company director took on debt through their business fully intending to defraud creditors..
For example, if a director accumulates debt knowing from the start their company cannot possibly repay it, with the intention of later hiding behind limited liability protection.
Takeaway for creditors
Although a Sdn Bhd gives directors limited liability protection, they cannot:
- contribute to the company’s insolvency, or
- defraud creditors
Whether done knowingly or through gross negligence, it still means they have breached their duy and can be held liable for a company debt.
Now their personal assets become fair game (they could even be sent to prison).
If you believe you are a victim of wrongful or fraudulent trading, we recommend engaging a debt recovery lawyer who can accurately determine your chances of debt recovery.
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