A Growing Concern in PPE Transactions
Recently, we have observed an increase in complaints from clients related to the buying and selling of personal protective equipment (PPE). A recurring issue involves businesses making fraudulent claims about having ready stock of gloves or other PPE. Only after payment is made do buyers often discover that the seller is unable to meet the promised order requirements, revealing that the assurances of available stock were misleading.
Imagine entering into a business agreement with the expectation of profit, only to find out that deceptive and misleading information led you into the transaction.
Legal Options Against Company Directors
In this article, we explore one legal avenue available to buyers: holding company directors personally liable for fraudulent misrepresentation.
Lifting the ‘Corporate Veil’
Seller companies are often structured as private limited companies (Sdn. Bhd.), which are separate legal entities. Generally, a company alone is liable for its actions and debts. However, it is important to understand that directors can be held personally liable for losses if fraud through misrepresentation is proven.
This process is known as “lifting the corporate veil,” which allows for directors to be held accountable for fraudulent behavior despite the transaction being between two companies. The underlying principle is that the protection of a corporate structure should not be used as a shield to conceal wrongful acts. Directors who engage in fraudulent conduct cannot rely on the corporate veil (i.e., the Sdn. Bhd. status) to avoid personal responsibility.
Understanding “Fraudulent Misrepresentation”
Fraudulent misrepresentation involves a false statement made with dishonest intent. It occurs when one party knowingly makes a false claim, intending for the other party to rely on it. If you act based on that false statement and suffer loss or damages as a result, fraudulent misrepresentation may be proven.
Test for Fraudulent Misrepresentation
If you are considering suing an individual or business for fraudulent misrepresentation, it is essential to understand the elements you must prove in court. This knowledge helps you identify and prepare the necessary evidence for trial.
To demonstrate that you relied on a misrepresentation made by another party – a crucial step in a claim for fraudulent misrepresentation – you generally need to prove the following:
- Representation of Fact: There must be a clear representation of fact, made through words or conduct. Mere silence or non-disclosure is typically not sufficient.
- Knowledge of Falsity: The representation must have been made with knowledge of its falsity, meaning it was either intentionally false or made without any genuine belief in its truth, or recklessly, without regard to its accuracy.
- Intent to Induce Reliance: The representation must have been made with the intention that you would rely on it and act in a way that led to your detriment.
- Reliance on the Representation: You must show that you acted upon the false statement.
- Resulting Loss or Damage: You must prove that you suffered loss or damage as a direct result of acting on the false representation.
Practical Advice for Businesses
Understanding the law of misrepresentation and implementing best practices can help protect your business interests. Here are some key points to consider:
- Draft a Comprehensive Sale and Purchase Agreement (SPA): Having an SPA in place is highly recommended. At a minimum, an SPA serves as a clear checklist, outlining the terms and expectations for the transaction.
- Conduct Due Diligence: Always perform thorough due diligence on potential suppliers or vendors.
- Maintain Accurate Records: Ensure that you keep complete and accurate records of all correspondence and documentation related to transactions.
- Seek Immediate Legal Advice: If you believe you have suffered a loss due to reliance on a misrepresentation, consult your lawyers promptly to understand your options and potential claims.
- Assess Material Impact: Remember that not all misrepresentations give rise to legal action. Only those that have a material impact on the agreement may justify a claim.
- Be Cautious of Offers That Seem Too Good: The age-old adage holds true: “If something seems too good to be true, it probably is.” Maintaining a healthy level of skepticism can protect your business from potential issues.
Navigating the complexities of business transactions requires vigilance and a solid understanding of potential legal pitfalls, such as misrepresentation. By incorporating these best practices into your operations, you can strengthen your business’s ability to prevent, identify, and respond to potential misrepresentation.
Note: This Article does not constitute legal advice. For further information, don’t hesitate to contact us.