Lifting of the corporate veil
Certain legal principles seem almost idyllic; the lifting of the veil conjures images of a dashing groom unveiling his blushing bride on their wedding day.
However, instead of a happily ever after, the lifting of the corporate veil is a decidedly morose affair for the directors of a company being “unveiled”.
To fully understand the implications of a lifted veil, it is first necessary to consider the fact that a corporation is a stand-alone, separate legal entity (references to the term corporation STRICTLY exclude sole proprietorships and partnerships, where personal liability is inextricably linked with its principals).
Legal entity
In law, a company is an artificial person. Section 21 of the Companies Act 2016 makes it clear that upon incorporation, a company may sue and be sued.
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Consider a simple scenario. Tanner Sdn Bhd (“Tanner”) is a private limited corporation involved in the wholesale supply of bear-skin shoes to Ursine Sdn Bhd (“Ursine”).
Ursine places an order for 1 million pairs of shoes and pays Tanner the sum of RM1,000,000.00.
However, due to the decimation of bear populations, supplies taper off and grind to an interminable halt. Tanner is unable to fulfill Ursine's order and sends a polite letter indicating the same.
Ursine's board of directors do not take kindly to this communication. They reply tersely, demanding that the sum of RM1,000,000.00 be refunded in full.
Tanner is unable to repay the RM1,000,000.00 and goes into liquidation. In this simple scenario, Ursine will only be able to recover monies paid to Tanner as an unsecured creditor.
There will be no way in which Ursine will be able to go after Tanner's directors for their failure to repay the sum in full.
This is due to the corporate veil, wherein Tanner is considered a separate legal entity that may sue and be sued.
The lifting of the corporate veil
Using the example outlined above, imagine that Tanner's directors have run the company shoddily. They have mixed monies incoming for goods sold and delivered under Tanner's name with their own.
In addition, they have utilised Tanner as their own personal piggy bank; dipping into the petty cash account is almost an accepted (some would venture encouraged) practice amongst Tanner's directors.
In addition, evidence has surfaced that Tanner's directors took on the order for RM1,000,000.00 from Ursine with the full knowledge that they would not be able to deliver. A damning PowerPoint presentation has surfaced, where it is manifest that Tanner's directors knew of the impending dearth of bear skins.
With evidence such as this, it may be possible for Ursine to mount a suit against Tanner and its (Tanner's) directors in their personal capacity.
Scenarios where the Courts have pierced the corporate veil
With this factual matrix in mind, I propose to consider 2 situations where the Malaysian Courts have held that the corporate veil in suitable to be pierced.
At the outset, it must be noted that the scenarios in which the corporate veil may be pierced are non-exhaustive; each case will turn on its individual facts. However, the Courts should be slow to create new scenarios for piercing the veil (Lim Chee Twang v Chan Shuk Kuen Helina [2010] 2 SLR 209)
It is of the imperative that the lifting of the corporate veil is specifically pleaded; failing to do so will almost always cause the action to fail (Ravichantiran Ganesan v Percetakan Wawasan Maju [2008] 8 MLJ 450).
The test- Special circumstances
When one intends to lift the corporate veil, the Federal Court in Takako Sakao v Ng Pek Yuen [2009] 6 MLJ 751 has conclusively decided that special circumstances must be proved. The burden is on the Plaintiff to show that the Defendant company is being utilised as a facade to conceal the true facts (confirmed very recently by the Court of Appeal in Giga Engineering & Construction v Yip Chee Seng & Sons [2015] 2 MLJ 652).
A prudent man would ask: what constitutes special circumstances?
In Law Kam Loy v Boltex [2005] 3 CLJ 355, the Court of Appeal clarified this with His Lordship Gopal Sri Ram JCA (as His Lordship was then known) stating as follows:
In my judgment, in the light of the more recent authorities such as Adams v Cape Industries Plc [1990] Ch 433, it is not open to the courts to disregard the corporate veil purely on the ground that it is in the interests of justice to do so. It is also my respectful view that the special circumstances to which Lord Keith referred include cases where there is either actual fraud at common law or some inequitable or unconscionable conduct amounting to fraud in equity.
[Emphasis added]
Refer:- Mackt Logistics v Malaysian Airline System [2014] 2 MLJ 518
Special circumstances- 2 scenarios
Utilising a dissolved company
In RDS Bina v Ong Chin Hoe [2014] 11 MLJ 606, the Defendants had utilised a dissolved company to carry out transactions with the Plaintiff.
The Defendants had attended Court and continued with the proceedings without informing any party as to the dissolved status of the company.
The High Court held that despite the Plaintiff not utilising the specific term “lift the corporate veil” in its Statement of Claim, the Plaintiff's intentions had been made clear and there were adequate pleas to satisfy the Rules of Court 2012.
This is a decision that clearly indicates the Malaysian Courts' willingness to do justice as opposed to blindly applying rigid rules. A clear fraud had been attempted against the Plaintiff through the vehicle of a dissolved company. Accordingly, no corporate veil could be said to exist and the Defendants would be the only persons responsible for all liabilities incurred.
Group enterprises and the sharing of employees
Group enterprises are a somewhat tricky affair. The Courts recognise that a parent and subsidiary company are separate and distinct entities (Bank Bumiputra Malaysia v Lorrain Esme Osman [1987] 1 MLJ 502.
However, where there is a close nexus between the parent and subsidiary, the Courts may be willing to pierce the corporate veil.
This is particularly true for group enterprises where the sharing of staff is commonplace.
In Hotel Jaya Puri v National Union of Hotel, Bar & Restaurant Workers [1980] 1 MLJ 109, a restaurant (subsidiary) was contained within a Hotel (parent). The restaurant and the Hotel had the same Managing Director.
The restaurant was closed due to losses and a dispute in relation to salaries was referred to the Industrial Court. The Hotel was added as a party to the proceedings. An award was issued directing the Hotel to make payments to the employees that had been retrenched.
The Industrial Court made a finding that the Hotel and the restaurant were one enterprise.
The Hotel appealed to the High Court claiming that it was a separate legal entity. The High Court affirmed the Industrial Court's award and held that the Hotel and the restaurant were in fact, one enterprise. A decision that bound one would invariably bind the other.
This is a risk that comes with group enterprises; commingling and innumerable inter-party transactions may lead the Court to believe that the 2 companies are really one and that the “separation” is merely utilised as a tool to evade liabilities.
See also:- The arguments raised by Dato' Cyrus Das in Government of the Lao People's Democratic Republic v Thai-Lao Ignite [2013] 3 MLJ 409 at 447 for an exposition into the American stance and a generally useful guide; ANZCO Foods Waitara v AFFCO New Zealand (2005) 2 NZCCLR 759; Mohd Latiff Bin Shah v Tengku Abdullah Ibni Sultan Abu Bakar [2009] MLJU 1246)
Conclusion
From the above 2 examples, it is clear that the Courts seek to pierce the corporate veil to correct an injustice. Although that is not the correct test to apply (having been superseded by the test of special circumstances), it is clear that the intention of avoiding a miscarriage of justice is always at the forefront of a Judge's mind.
An incredibly useful guide for the circumstances in which the corporate veil may be pierced has been provided by the English Family Court in Ben Hashem v Al Shayif (2008) EWHC 2380 (Fam), [2009] 1 FLR 115.
Although this case was considered in the context of a family law dispute, His Lordship Munby J carefully reviewed family and non-family cases and distilled 6 salient principles:
ownership and control of a company were not enough to justify piercing the corporate veil; the court cannot pierce the corporate veil, even in the absence of third party interests in the company, merely because it is thought to be necessary in the interests of justice; the corporate veil can be pierced only if there is some impropriety; the impropriety in question must be linked to the use of the company structure to avoid or conceal liability'; to justify piercing the corporate veil, there must be 'both control of the company by the wrongdoer(s) and impropriety, that is, (mis)use of the company by them as a device or façade to conceal their wrongdoing'; and the company may be a 'façade' even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions.
His Lordship's decision was cited with approval in the Supreme Court (Prest v Prest [2013] 4 All ER 673).
Munby J's excellent dissection has landed (see Deepak Jaikishan v Intrared [2013] 7 MLJ 437) on Malaysian shores but it has yet to have colonised the hearts and minds of the Malaysian judiciary. It is hoped that in time, this concise and definitive guide will be adopted by Malaysia's common law; all operations into piercing the corporate veil would then be carried out with a scalpel and not a sledgehammer.
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