Fraudulent Misrepresentation in Business

Recently, the most common complaints we received from our clients involved the buying and selling of personal protection equipment (“PPE”). We have seen businesses fraudulently claiming that they have ready stock of gloves or PPEs. Once payment is made, the Buyers would often realize that the Seller could never meet order requirements in time, and their promises of ready stocks were false.

Imagine entering into a business deal with a view of making profits just to realize that you have been cheated into entering into a transaction through cheating and misleading information. 

In this article, we will focus on one of the legal options you may have against Company Directors for fraudulent misrepresentation.

Lifting the ‘Corporate Veil’

A Seller company is often a private limited company and a separate legal entity. It is true that a Company or Sdn Bhd, under normal circumstances, is solely liable for all the acts done and the debts it incurred. However, we wish to point out that you can make these Directors personally liable for your loss and damages if you can prove fraud by fraudulent representation on their part.

We call this the lifting of the Company’s “Corporate Veil”. By doing so, we aim to hold the Directors personally accountable for their fraudulent acts, notwithstanding the transaction is made between 2 companies. The rationale is that nobody should be allowed to rely on the protection of a corporate veil (i.e. Sdn Bhd.), as a device or façade to conceal their own wrongdoings.

What is “fraudulent misrepresentation”?

In a nutshell, fraudulent misrepresentation is the most serious, where a false statement is dishonestly made to you, upon which you rely and depend. As a consequence of relying on that statement, you suffer loss and damages.

Test for fraudulent misrepresentation?

Now suppose you wish to sue someone, or a business, for fraudulent misrepresentation. You should understand the elements you must prove in Court, so that you are aware of the evidence you need to prepare in advance to introduce at trial.

If you wish to show the Court that you have relied on a misrepresentation made by others or a business – a vital step in raising claims of fraudulent misrepresentation – generally have to prove the following:-

  1. There must be a representation of fact by words or by conduct, and mere silence is not enough;
  2. The representation that was made to you must be made with the knowledge that it is false, ie, it must be wilfully false or at least made in the absence of any genuine belief that it is true or recklessly (ie, without caring whether his representation is true or false);
  3. The representation must be made with the intention that you would relied and act on it, in the manner which resulted in damage to you;
  4. You must prove that you have acted upon the false statements; and
  5. You must prove that you have sustained loss and damage by so doing.

Some Practical Advice…

There are some practical points and best-practice tips arising from the law of misrepresentation generally, of which all businesses should be aware.

(a) Having a Sale and Purchase Agreement (SPA) drafted out is highly recommended. At the very least, an SPA should act a good checklist, providing a clear path for the transaction.

(b) Always carry out due diligence on potential suppliers or vendors. But as we have experience, it has its sets of challenges.

(c) Always ensure you keep complete and accurate records of the trail of correspondence.

(d) Take legal advice immediately if you think you may have suffered loss having relied on a misrepresentation.

(e) Keep in mind that a misrepresentation that does not have a material effect on the agreement does not give rise to a legal action.

(f) Finally, it may be helpful to remind ourselves of the age-old adage that ‘if something seems too good to be true, it probably is’.

Whether you’ve been sued for fraudulent misrepresentation or believe you have entered into a contract under false pretenses, the stakes are relatively high for your business and interest.

For legal advice on misrepresentation, or on the drafting of Sale and Purchase Agreement (SPA), please contact us at +603 6419 9511, or email our Mr Jonathan at jonathan.k@chernco.com.my.

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