Corporate Fraudulent Misrepresentation

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Fraudulent misrepresentation is an act that occurs when a person intentionally makes a false existing fact before or during the preliminary stages of a contract and has the effect of inducing the victim to enter into a contract with that person.

It is pertinent to specifically plead with certainty in the pleadings that the action is grounded on fraudulent misrepresentation. Failure to do so, the court would refuse to hear a matter which was not specifically pleaded. This is seen in the Court of Appeal case of Bounty Dynamics Sdn (formerly known as Media Development Sdn Bhd) v Chow Tat Ming & 175 Ors [2016] 1 MLJ 507 whereby the court dismissed the fraudulent misrepresentation claim as the particulars of the claim were not pleaded.

The Elements Of Fraudulent Misrepresentation

There are five elements that must be pleaded and proven to establish the fraudulent misrepresentation:

a) There must be a representation of fact made by words or by conduct and mere silence is not enough.

b) The representation must be made with knowledge that it is false i.e. it must be wilfully false or at least made in the absence of any genuine belief that it is true or recklessly i.e. without caring whether his representation is true or false (Derry v Peek [1889] 14 App Cas 337).

c) The representation must be made with the intention that it should be acted upon by the claimant or by a class of persons which will include the claimant in the manner which resulted in damage to him.

d) It must be proved that the claimant acted upon the false statements.

e) It must be proved that the claimant has sustained damage by so doing (Bradford Third Equitable Benefit Building Society v Borders [1941] 2 ALL E R 205)

The test of the fraudulent misrepresentation was laid down by the Privy Council in Baron Akerheilm v Rolf De Marc [1959] AC 789 PC as follows:

“The question was not whether the defendant in any given case honestly believed the representation to be true in the sense assigned to it by the court on an objective consideration of its truth or falsity, but whether he honestly believed the representation to be true in the sense which he understood it albeit erroneously, when it was made.”

This test was applied with approval by the Federal Court case of ALW Carworkshop Sdn Bhd v AXA Affin General Insurance Bhd [2019] 4 MLJ 561.

Burden Of Proof & Standard Of Proof

The burden of proof lies on the party who assert and prove the existence of fraudulent misrepresentation. Once the burden of proof has been discharged, the evidential burden shifts to the other party.

The standard of proof for fraudulent misrepresentation is on the balance of probabilities.

Whether A Director Could Be Sued For Fraudulent Misrepresentation Committed By The Company?

A company is a separate legal entity as distinct from its members which can sue and be sued in its name, and this has been stated clearly in the Companies Act 2016 (CA 2016). This principle has long been established in the English case of Salomon v Salomon & Co Ltd [1897] AC 2. This principle protects the members of the company wherein the members will not be personally liable for the liability of a company.

However, this does not discharge a director’s duty and responsibility to exercise his power for a proper purpose and in good faith at all times in the best interest of the company pursuant to Section 213 of the CA 2016.

The question is when a director has made the fraudulent misrepresentation to a party for the purpose of inducing the latter to enter into a contract with the company, should the director be held liable personally?

English law does not allow a director who has acted fraudulently to hide behind the company. In Standard Chartered Bank v Pakistan National Shipping Corporation (2002) UKHL 43, the House of Lord held that “No one can escape liability for his fraud by saying `I wish to make clear that I am committing this fraud on behalf of someone else and am not to be personally liable”. A director who knowingly and deliberately made a false statement, he shall be personally liable for the deceit.

Our court in Victor Cham & Anor v Loh Bee Tuan [2006] 5 MLJ 359 held that “a director is not to be held liable merely because he is a director but may be liable when he participates in or orders a tortuous act and cannot escape personal liability by asserting that his act was merely the act of the corporation. In other words, the 'corporate veil' is not to be used as a shield to protect shareholders and directors when they have been guilty of wrongdoing”.

A director is the actual person who represents the directing mind and will of the company. His actions bind the company and hence, he cannot hide behind the veil of incorporation to escape from his misconduct. This was also confirmed by the Federal Court in Gurbachan Singh Bagawan Singh & Ors v Vellasamy Pennusamy & Other Appeals [2015] 1 CLJ 719 and Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & Ors [2021] 3 MLJ 622 whereby the court will lift the corporate veil if a company was set up for a fraudulent purpose.

Remedies

When a fraudulent misrepresentation claim is established, the innocent party is entitled to rescind the contract pursuant to Section 19 of the Contracts Act 1950. The aim of rescission is to restore the parties back to their original positions before they contracted. Parties return back whatever they have obtained under the contract to each other. Further, the innocent party is allowed to claim damages for fraudulent misrepresentation. The purpose of damages is to restore the innocent party to the position he occupied before the representation had been made. The innocent party is entitled to compensation for all the actual loss, including consequential loss as a result of the fraudulent misrepresentation.

Authored by Josephine Chew Chee Yen, an Associate with the firm’s Disputes Resolution practice.

9 February 2023