Fraudulent management within the company?

[SmartPlayer]

There is a possibility that some unscrupulous promoters may float a bogus company, issue shares and collect money. Later on, they can get away with the money by putting the company in liquidation.
What is the possibility of floating a bogus company? How the promoters of bogus company can get away with money, without no one chasing them?
What it means by company in liquidation?

[georgetan86]

Every investor hopes to get a high return from a high risk investment. Investing in a new company that is potentially give high return will attract many investors to buy its shares, especially those risk seekers.

Liquidation or winding up is the process by which its assets are collected, its debts paid and the surplus, if any, distributed among its members. Based on Malaysia situation, there is no way a person or a group of people start a company and wind it up legally, this is because:

1. Voluntary winding up can only possible by shareholders (with special resolution) or creditors (if the company is insolvent). Without the consent from both parties, voluntary winding up is impossible.

2. If it is a compulsory winding up, a person must make petition to the court with proper purpose; Lim Yoke Kian v Castle Development Sdn Bhd [2000] 4 MLJ 443. If the filing of petition process, it involves mandatory gazettal and advertising under r 24 of the Companies Winding-Up Rules 1972. The court has power in its equitable jurisdiction to issue an injunction to restrain the filing of a petition which is vexatious or an abuse of process; Malaysian Resources Corp Bhd v Juranas Sdn Bhd [2002] 3 MLJ 169. Section 217(1)(a) of the Companies Act 1965 permits the company to apply to have itself compulsorily wound up. Again, it is up to the judge to determine the approval for compulsory winding up.

3. If the court has make approve the liquidation, the company must appoint a liquidator, and this liquidator must fulfill range of criteria before he could appointed. Therefore, even they have proper reason to wind up, they cannot make profit or income from liquidator.

4. If the liquidator is the proper person, they are unlikely to get the money because according to Section 292 (1), money from liquidation must be use to settle all secured creditors (with floating charges), then follow by all cost and expenses for winding up, employees, taxes, and lastly shareholders. In order to get the liquidation in such a way, the company must be insolvent. In most of the case, the amount is just enough to pay the secured creditors. Only a few companies are able to pay the wind up expenses. So the management has no way to get the money in such condition.

Well, above is the legal way. If the company winds up in an illegal way, thousands of people will go after that person (which most probably runs away to another country) and the most powerful person to chase them is the government (Securities Commission). Unless they never come back to Malaysia, or else they sure get caught by local authorities.

Although there are laws govern the liquidation of company, shareholders are the one who suffer the most if really come to this stage. To avoid being get into such trouble, as investors, it is advisable to refer to the prospectuses, article of association, and memorandum of association for the particular company before make any decision. prospectuses are available at the market or from the company itself directly. Meanwhile article and memorandum is available at Securities Commission. A company that formed without lodged the article and memorandum is fake company. If the particular company is grow from a partnership or form private to become a public listed company, do some survey on their past performance and make evaluation. If there are problems in getting those material or understand them, advices from professional consultant is needed. In fact, you are most welcome to consult them if you are armature in investment.

After all events happened, the possibility of bogus company is become smaller because the Securities Commission and the Corporate Governance now are very strict on the companies. People nowadays also more educated and rational enough to make the right decision.

Again, this answer is based on Malaysia view. It may not applicable at another country. Hope that this will help you.