"The company owes me money. Can I sue the director personally?"

A supplier delivers RM180,000 worth of materials to a private company.

The invoices remain unpaid. After several reminders, the company says it is experiencing cash-flow problems and asks for more time.

A search then shows that the company has few assets. Its director, however, appears to own several properties and vehicles.

The supplier asks:

“The director was the one who negotiated everything. Can we sue him together with the company?”

Not necessarily.

A director manages the company, but the company’s debt does not automatically become the director’s personal debt.

1. A company is legally separate from its directors and shareholders

Section 20 of the Companies Act 2016 provides that an incorporated company is a body corporate with a legal personality separate from that of its members.

This generally means that:-

• the company owns its assets;

• the company enters into its contracts;

• the company incurs its liabilities; and

• legal proceedings arising from those contracts are ordinarily brought by or against the company.

The fact that one individual owns all the shares, makes all the decisions or communicates directly with the supplier does not, by itself, remove that separation.

If an invoice was issued to ABC Sdn. Bhd. and the purchase order was placed by ABC Sdn. Bhd., the proper debtor will ordinarily be the company.

A director’s wealth does not automatically become available to satisfy the company’s debt.

2. Check who actually entered into the contract

Before deciding whom to sue, examine the documents carefully.

Relevant documents may include:-

• quotations;

• purchase orders;

• contracts;

• invoices;

• delivery orders;

• correspondence;

• payment records;

• company searches; and

• representations made during negotiations.

Sometimes the documentation consistently identifies the company as the contracting party.

In other cases, the position may be less clear. The individual may have entered into the arrangement in his own name, failed to disclose that he was acting for a company or assumed a separate personal obligation.

The answer depends on the words used, the surrounding circumstances and the capacity in which the individual acted.

It is therefore unsafe to add a director as a defendant merely because he signed an email or attended the negotiations.

3. Was a personal guarantee given?

A personal guarantee can create a direct contractual obligation on the guarantor.

For example, a director may sign a document stating that he guarantees payment of all amounts owed by the company to the supplier.

If the guarantee is valid and enforceable, the creditor may have a claim against both:-

• the company as the principal debtor; and

• the director as guarantor.

However, not every signature amounts to a guarantee.

The document should be reviewed to determine:-

• the obligations being guaranteed;

• whether the guarantee is limited or continuing;

• whether a maximum amount applies;

• when the guarantor may be pursued;

• whether notice or demand is required;

• whether the guarantee was properly executed; and

• whether subsequent changes affected the guarantee.

A creditor should not describe an ordinary acknowledgement, credit application or company letter as a personal guarantee unless its wording supports that conclusion.

Likewise, a director should not assume that resigning from the company automatically releases an existing guarantee. A written release may still be required.

4. Did the director make a personal representation?

The position may be different if the claim is not limited to the company’s failure to pay.

Suppose a director personally represented that:-

• payment had already been approved;

• funds were being held for the supplier;

• a particular asset belonged to the company;

• the company had secured a confirmed project; or

• an order had been authorised when it had not.

If the representation was false and the supplier relied on it when extending credit or supplying goods, a separate claim may potentially arise against the individual who made it.

But an unsuccessful business prediction is not automatically fraudulent.

The claimant must identify the actual representation, when and how it was made, why it was false, the director’s state of knowledge where relevant, the reliance placed upon it and the loss caused.

Allegations of fraud or dishonesty must be supported by proper particulars and evidence. They should not be included merely to exert pressure on a director.

5. Personal wrongdoing is different from company liability

The protection of separate corporate personality does not give a director permission to commit a personal wrong.

Depending on the facts, an individual may be personally responsible for his own tortious conduct or other legally actionable wrongdoing even if it occurred while he was acting for a company.

The important distinction is this:

The director is not liable simply because the company is liable. He may be liable because his own conduct gives rise to a separate cause of action.

The pleadings must explain that separate basis clearly.

6. What if the company was used to defraud creditors?

Section 540 of the Companies Act 2016 addresses circumstances in which a company’s business has been carried on with intent to defraud its creditors or for a fraudulent purpose.

Where the statutory requirements are established, the Court may declare a person who was knowingly a party to that conduct personally responsible, without limitation, for debts or liabilities identified by the Court.

This is a serious remedy.

An unpaid debt, insufficient company assets or a failed business does not automatically prove fraudulent trading. Evidence is required to establish the fraudulent purpose and the person’s knowing participation.

Potentially relevant evidence may include:-

• diversion of payments;

• false invoices or records;

• movement of assets to related parties;

• continued orders when there was no genuine intention to pay;

• contradictory financial representations; and

• a pattern of using the company to defeat creditors.

A proper investigation should be conducted before such allegations are made.

7. Can the “corporate veil” simply be lifted?

The expression “lifting the corporate veil” is sometimes used as though the Court may disregard a company whenever fairness requires it.

The legal position is more restricted.

The Court does not ordinarily make a director liable merely because:-

• the company is controlled by one person;

• the company has stopped trading;

• its assets are insufficient;

• the director benefited from the business; or

• it would be easier to recover from the director.

There must be a recognised legal basis for imposing personal liability.

A claimant should therefore identify the precise cause of action rather than relying on a general allegation that the director and company are effectively the same person.

8. Should the director be named in the Letter of Demand?

That depends on the documents and the intended claim.

If the available evidence only establishes a contractual debt owed by the company, demanding personal payment from the director may overstate the legal position.

If there is an enforceable guarantee or an independent claim against the director, the demand should identify that basis accurately.

The letter should distinguish between:-

• the company’s contractual debt;

• the director’s liability under a guarantee;

• any separate representation or wrongdoing; and

• the remedy sought against each party.

This helps prevent confusion and ensures that any later proceedings remain consistent with the case first presented.

9. Do not sue every director as a precaution

Naming individuals without a proper cause of action can increase costs and distract from the genuine debt claim.

The claim against a director may be struck out while the claim against the company continues. The claimant may also be ordered to pay costs relating to the unsuccessful personal claim.

Before filing proceedings, ask:-

• Who was the contracting party?

• Who received the goods or services?

• To whom were the invoices addressed?

• Was any personal guarantee signed?

• Did a director assume a separate obligation?

• Was there an actionable personal representation?

• Is there evidence of personal wrongdoing or fraudulent conduct?

• What assets and recovery options does the company have?

The objective is not simply to name more defendants.

It is to identify the legally responsible parties and pursue a claim that can be proved.

A director is not automatically the company’s substitute debtor. However, corporate status will not necessarily protect a director from a genuine personal obligation, guarantee or wrongdoing.