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Behind the corporate veil – where there’s a veil, there’s a way
The concept of corporate personality is the bedrock of company law.
Upon incorporation, the company acquires its own legal personality distinct from that of its members. This is metaphorically illustrated by what is known as a ‘corporate veil’.
The corporate veil separates a company from its members and distinguishes the respective property, rights, and liabilities. This means that the company can be sued in its own name and own assets separately from its members. The rationale behind this concept is so that the controller of a company limits his/her liability in respect of the future conduct of the company’s affairs.
The concept of separate legal personality originated from the seminal decision of the House of Lords in Salomon v A Salomon & Co Ltd (“Salomon”). In Malaysia, this principle has been codified in section 20 of the Companies Act 2016 (“CA 2016”).
Where there’s a veil, there’s a way
The law on separate legal personality is predicated on the assumption that the company’s business is to be conducted with honesty and integrity.
As such, where a company is used for fraudulent, unlawful, or dishonest purposes, the court is justified in disregarding the concept of corporate personality of the company. The courts would not allow the abuse of the separate legal personality concept to shield the controllers of a company from their wrongdoings.
Over the years, judges have found ways to sidestep and disregard the Salomon principle by ‘lifting’ or ‘piercing’ the corporate veil in order to look behind the facade. This is done to unravel the true mastermind hiding behind the corporate structure to evade liability.
The courts have done so in several situations, such as where a company is utilised as an alter ego of its controllers, where a company evades its legal obligations, and where companies are run as a single economic unit.
Recently, the Federal Court had the opportunity to examine in detail the concept of separate legal personality in Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & 2 Ors (“Ong Leong Chiou”). The Federal Court examined the English Supreme Court case of Prest v Petrodel Resources Ltd & Ors and held that the concealment principle and the evasion principle as expounded in that case is applicable in Malaysia.
The case of Ong Leong Chiou
The dispute in this case centered around the construction of the Melawati Mall Project. Bina Puri Holdings Berhad (“Bina Puri”), who was the main contractor for the project, contracted the works out to Perfect Selection Sdn Bhd (“Perfect Selection”). Perfect Selection had in turn sub-contracted the works to PS Bina Sdn Bhd (“PS Bina”). PS Bina had then sub-contracted the works out to Keller (M) Sdn Bhd (“Keller”), the entity that eventually carried out the actual works. An important character at play in this case was Tony Ong— the common nexus between Perfect Solution and PS Bina as he was the director of both companies.
The dispute arose when Keller discovered that the interim payment certificates that PS Bina had deducted the sum for the empty bore works. At the same time, Keller found out that PS Bina had changed its directorships and shareholding and the new directors and shareholders were unaware of PS Bina’s obligations to Keller. Keller then sued PS Bina, Perfect Selection and Tony Ong for the return of the sum in relation to the empty bore works.
High Court, Court of Appeal, and Federal Court’s decision
The High Court found that PS Bina, Perfect Solution, and Tony Ong had defrauded Keller. As a result, the Court lifted the corporate veil of PS Bina and Perfect Solution to find PS Bina, Perfect Solution, and Tony Ong jointly and severally liable to Keller for the sum owed. The Court of Appeal affirmed the High Court’s findings in its entirety. The Federal Court held that there was no basis to depart from the findings of fact by the trial judge.
The starting point
In light of the Federal Court’s decision in Ong Leong Chiou, the position of the law on this area can be simplified as such— the court will have to first analyse and ascertain the nature of the relevant wrongdoing. Next, the court would have to decide whether the said wrongdoing falls within the concealment principle or evasion principle.
Concealment principle
Where the wrongdoing concerns abusing the corporate veil as a façade to hide or shield the wrongdoer – this falls within the concealment principle.
Under this principle, the court will not pierce the corporate veil. The court will merely lift the corporate veil so that the true facts that were being concealed, can be revealed.
Evasion principle
On the other hand, where an existing legal obligation exists independently of the company’s involvement, and the controller of a company seeks to avoid or defeat that obligation through the concept of separate legal personality – this falls within the evasion principle.
In this instance, the court will pierce the corporate veil to impose liability against the wrongdoer, the company, or both.
Fraud
The Federal Court in Ong Leong Chiou remarked that the court’s ability to unravel transactions by reason of fraud is independent from the corporate veil doctrine. In Ong Leong Chiou itself, fraud was not pleaded in the formally accepted form, namely, pleading fraud formally followed by the particulars. Nonetheless, this does not mean that fraud has not been pleaded. The Federal Court found that the substance inexorably pointed to a plea of fraud upon perusing the statement of claim in that case.
Conclusion
The case of Ong Leong Chiou is significant as it has provided a much-needed streamlining of the legal position on the doctrine of corporate personality. This brings the Malaysian jurisprudence to be consistent with the English position.
With greater clarity in the law, commercial certainty will be further enhanced as this will be an instructive guidance to future cases in ensuring that the concept of separate legal personality will not be easily abused.
References
Salomon v A Salomon & Co Ltd [1897] AC 22
Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34
Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & Ors [2021] 3 MLJ 622