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COMPANY LAW – DIRECTOR – TRANSFER OR DIVERSION OF FUNDS TO THIRD PARTY – WINDING UP

Q: Can a director of a company make payments to himself or divert funds to third party after a winding up petition is presented and served.

No, unless it is approved by the court.

Section 472(1) of the Companies Act 2016 (“CA 2016”) provides that “(a)ny disposition of the property of the company, other than an exempt disposition, including any transfer of shares or alteration in the status of the members of the company made after the presentation of the winding up petition shall, unless the Court otherwise orders, be void.”

Q: What can creditors do if the director diverted funds in breach of Section 472 CA 2016.

The creditors can pursue an action against the delinquent director and recover those funds under Section 541 of the CA 2016. Section 541(2) CA 2016 allows recovery from delinquent director the receipt of any money or property by him within the period of 2 years before the commencement of winding up.

Q: Can the director claim that the transfer was an exercise of business judgment and therefore he is protected by Section 214 of the CA 2016?

No. Section 214 of the CA 2016 places emphasis on the words “proper purpose”, “in good faith” and “in the best interest of the company”. When a transfer and diversion of funds are carried out after a winding up petition is presented and served, it lacks the element of proper and good faith in the best interest of the company.

Q: Can the director pay himself and claim that as his remuneration?

A director is not an employee of the company. He is doing business for the company. There is no implied term from the mere fact that he is a director, he should be paid. Section 230 CA 2016 provides fee and benefits of directors of a public listed company must be approved in a general meeting. For private company, the payment may be approved by the Board of Directors subject to provision of the constitution.

If payments of remuneration are made in contravention with Section 230 CA 2016, the director will be deemed to be breaching Sections 213 and 218 CA 2016 for making such payments – i.e. failure to act in good faith in the best interest of the company and breach the rule on prohibition against improper use of property of the company.

It follows that the creditors can claim for those breaches under Section 541 CA 2016 as explained earlier.

Case in point: CIMB Bank Bhd v Jaring Communications Sdn Bhd [2017] 4 CLJ 465. High Court Malaya (KL) – Companies (Winding-up) no: 28NCC-843-11-2014

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