chapter 3

Question 1

Salleh Abbas FJ in Tan Lai v Mohammed Bin Mahmud (1982) 1 MLJ 338, “ (Significance of the certificate of incorporation)

Answer 1

… This provision makes it impossible for anyone to challenge the lawfulness and validity of the existence of the company. A certificate of incorporation prevents any doubt from being cast upon the legal existence and persona of the company…”

Question 2

Significance of the certificate of incorporation

Answer 2

The certificate of incorporation serves as conclusive evidence that a company has been duly registered from the date mentioned on the certificate and has duly complied with the requirements of the Companies Act.

Question 3

Incorporation and its effects

Answer 3

upon incorporation, a company is considered as an artificial legal person, i.e. a person created by statute.
S.21 CA 2016: ‘body corporate’
1.A company’s obligations and liabilities are its own, and not those of its participants;
2.A company can sue and be sued in its own name;
3. A company has perpetual succession;
4. A company’s property is not the property of its participants;
5. A company can contract with its controlling participants
6.The company shall also have Separate Legal Personality (see s20 CA 2016)

Question 4

The separate legal entity doctrine – The Corporate Veil

Answer 4

-The company is a legal person separate from its participants.

-This means that:
.its obligations and property are its own and not those of its participants
.its existence continues unchanged even if the identity of the participants changes
-The company is a legal person separate from its members and those who manage its operations
-There is a corporate veil that separates the company from its members
-The law treats a company as being a separate

Question 5

The separate legal entity doctrine – The Corporate Veil

Answer 5

Case studies:
The veil of incorporation: There is a corporate veil that separates the company from its members
1.Salomon v Salomon & Co. [1897] AC 22
2.Macaura v Northern Assurance Co. [1925] AC 619
3.Lee v Lee’s Air Farming [1961] AC 12

Question 6

The separate legal entity doctrine in Malaysia

Answer 6

Malaysian courts have accepted the Salomon principle as being an integral part of Company Law.
-In Goh Hooi Yin v Lim Teong Ghee [1977] the court was of the view that it was incumbent (duty or responsibility) on the courts to apply the doctrine.
-In Abdul Aziz bin Atan & 87 Ors v Ladang Rengo Malay Estate Sdn. Bhd. [1985] Shankar J.:
“…an incorporated company is a legal person separate and distinct from the shareholders of the company…
-Perman Sdn. Bhd. v European Commodities Sdn. Bhd. (2005) per Gopal Sri Ram JCA:
“Once a company is incorporated, a veil is cast over the true controllers of the company, through which the law will not usually penetrate.”

”Justice Abdul Malik Ishak (JCA) in Mackt Logistics (M) Sdn. Bhd. v. Malaysian Airline System Berhad [2014] 5 CLJ 851
a principle which lies at the heart of company law. It is that a company is a separate person from its shareholders.

Question 7

Lifting the Veil of Incorporation

Answer 7

• By The Courts

- By Statute

Question 8

Lifting the Veil of Incorporation

Answer 8

Hence if the court lifts up the corporate veil it will be able to discover the identity of the participants of the company and impose liability upon them. Thus, the separation between the company and its participants (members and officers) does not exist anymore.

Question 9

Lifting The Veil - The Courts

Answer 9

• There must be some exceptional circumstance for the court to lift the veil of incorporation.
• Since the courts rule on a case-by-case basis, it can be difficult to classify the exceptions.
• The following are some examples where the courts will lift the corporate veil.

Question 10

Judicial veil lifting (1) Fraud

Answer 10

These occur where individuals have used the separate legal entity to do something they are personally forbidden from doing.

Question 11

Judicial veil lifting (1) Fraud (Jones v Lipman [1962]. )

Answer 11

In this case Lipman agreed to sell land to Jones but before completion of the contract Lipman sold the land to a company of which he and another were the sole directors and shareholders. He did this to put the land out of reach from the purchasers.

The judges ordered specific performance against Lipman and the company. The company was described as a device and a sham, a mask which Lipman held before his face in an attempt to avoid recognition by the eye of equity.

Question 12

Judicial veil lifting (1) Fraud (Gilford Motor Co Ltd v Horne (1933))

Answer 12

H was a car salesman, and left G. His contract stated that he wasn’t allowed to sell to G’s customers for a period after leaving. H set up a company which then approached his former customers; H argued that firstly it was his company that was approaching the customers, not him; and secondly, if there was wrongdoing, his company was liable and not him.

The courts held that the company was sham, and granted an injunction against his company as well as him.

Question 13

Judicial veil lifting - Fraud

Answer 13

“Suffice to say that a litigant who seeks the court’s intervention to pierce the corporate veil must establish special circumstances showing that the company in question is a mere facade concealing the true facts.”

Perman Sdn Bhd- vs -European Commodities Sdn Bhd per Gopal Sri Ram JCA

Question 14

Judicial veil lifting - Fraud (In Lam Kam Loy & Anor v Boltex Sdn Bhd & Ors [2005] )

Answer 14

“ …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….”

There must be “…actual fraud…or some inequitable or unconscionable conduct amounting to fraud…” per Gopal Sri Ram JCA.

Question 15

Judicial veil lifting - Fraud (In the Federal Court decision of Gurbachan Singh Bagawan Singh & Ors V. Vellasamy Pennusamy & Other Appeals [2015] 1 CLJ 719 it was held:
)

Answer 15

“…we are of the view that it is now a settled law in Malaysia that the court would lift the corporate veil of a corporation if such corporation was set up for fraudulent purposes, or where it was established to avoid an existing obligation or even to prevent the abuse of a corporate legal personality.”

Question 16

Judicial veil lifting - Agency

Answer 16

• If a subsidiary company is acting as an agent for its holding company, it may be bound by the same liabilities and rights of its holding company.
• However, no court has yet found subsidiary companies liable for their holding company’s debts

Question 17

Judicial veil lifting - Agency (Smith, Stone & Knight Ltd v Birmingham Corporation (1939)
)

Answer 17

SSK owned some land, and a subsidiary company operated on this land. BC issued a compulsory purchase order on this land. BC would reasonably compensate any owner for the business they ran on the land. Since the subsidiary company did not own the land, BC claimed they were not entitled to the compensation.
The courts held that the subsidiary company was an agent and BC must pay compensation.

Question 18

Judicial veil lifting - Group of companies

Answer 18

The Companies Act does not refer to a ‘group of companies’ but terms like ‘holding company’ or ‘wholly owned subsidiary’ are used in the Act. (see s5, 5A, 5B and 6)

Question 19

Judicial veil lifting - Group of companies (Creasey v Breachwood Motors [1993])

Answer 19

An employee brought an action for unfair dismissal against his employer who transferred the company assets to another company formed for the purpose. The employee won but there were no assets to pay his claim. The judge allowed him to transfer the claim to the new company; i.e. He lifted the veil.

Question 20

Judicial veil lifting - Group of companies (Ord v Belhaven Pubs Limited [1998])

Answer 20

The plaintiffs were suing the defendant for misrepresentation. The defendant company was part of a group that underwent a number of reorganizations. This worried the plaintiffs who feared the defendant company would have no funds to pay if they won. The plaintiffs went to court to substitute the company with another company in the group. The Court of Appeal refused to allow the substitution saying they would only lift the veil in cases of impropriety and there was none in this case.

Question 21

Judicial veil lifting - Group of companies (Asparta Sdn Bhd v Bank Bumiputra Malaysia Bhd [1987])

Answer 21

The court would generally lift the corporate veil in order to do justice particularly when an element of fraud is involved and here there was abuse from the very structure of the companies after lifting the corporate veil.

Question 22

Judicial veil lifting - Group of companies (In Double Acres Sdn Bhd v Tiara Setia Sdn Bhd [2000])

Answer 22

the court was of the view that Malaysian courts have been lifting the corporate veil in relation to a group of companies rather too easily.

Question 23

Judicial veil lifting - Single Economic Entity (DHN Food Distributors Ltd v London Borough of Tower Hamlets (1976) )

Answer 23

A subsidiary company of DHN owned land which LBTB issued a compulsory purchase order on. The courts held that DHN was able to claim compensation because it and its subsidiary were a single economic unit.

Question 24

Judicial veil lifting - Single Economic Entity (Woolfson v Strathclyde Regional Council (1978))

Answer 24

This was similar to DHN v Tower Hamlets. However, the House of Lords ruled that Woolfson and its subsidiary were not a single economic unit due to operational practices.

Question 25

Judicial veil lifting - Single Economic Entity (Adams v Cape Industries plc and Another (1991))

Answer 25

A worked for a US subsidiary of CI, which marketed asbestos in the US. The US subsidiary had no assets. A suffered injuries through exposure to asbestos dust and wanted to sue. If he had sued the US subsidiary, he would have received no compensation since there was no money to pay out. He therefore sued CI in the UK and claimed that the company was a single economic unit. The courts held that, even though they recognised that the corporate structure was designed to minimise liability and taxation, it was not illegal and should not be considered a single economic unit.

Question 26

Judicial veil lifting - National Emergency (Daimler Co Ltd v Continental Tyre and Rubber (GB) Ltd (1916))

Answer 26

C sued D for debts owing. C was a UK company; however all the shareholders but one were German. D argued that they should not pay the debt to German individuals to prevent money going towards Germany’s war effort.
The court held that C was German.

Question 27

Judicial veil lifting - Tax Evasion

Answer 27

Companies may transfer assets between subsidiary companies to reduce tax liability, but the courts may then treat them as a single unit.

Question 28

Judicial veil lifting - Tortious claims (Williams v Natural Life Health Foods Ltd [1998] )

Answer 28

In its judgment the House of Lords considered that a director or employee of a company could only be personally liable for negligent misstatement if there was reasonable reliance by the claimant on an assumption of personal responsibility by the director so as to create a special relationship between them. There was no evidence in the present case.

Question 29

Statutory Veil Lifting(s. 30 CA 2016)

Answer 29

– misdescription (unless the company is willing to ratify). So for example: A company cheque must bear the name of a company exactly, otherwise the director who signs is liable if the cheque is not cleared. This applies even if the omission is due to a printing error.

Question 30

Statutory Veil Lifting(s57 CA 2016)

Answer 30

Register of directors etc. – if particulars are wrong then any officer can be liable.

Question 31

Statutory Veil Lifting

Answer 31

An officer of the company can be liable for providing financial assistance to purchase its own shares, s 123 (3).
Groups of companies must produce accounts acknowledging their internal relationship, and profits and losses of different subsidiaries can be offset for taxation purposes – s 169.
Taxation purposes - s 140 Income Tax Act 1967.
Payment of dividend from profit – s131CA 2016
Issuance of prospectus s154 CA 2016
Incapable of paying the company’s debt s. 539 CA 2016
Fraudulent trading – s. 540 CA 2016

Question 32

TO LIFT THE VEIL OR NOT?

Answer 32

There must be some exceptional circumstance for the court to lift the veil of incorporation.
These are exceptions to the universal application of maintaining the separate legal personality that is attributed to a company upon incorporation.

Question 33

Exceptional circumstances

Answer 33

“Suffice to say that a litigant who seeks the court’s intervention to pierce the corporate veil must establish special circumstances ….”

Perman Sdn Bhd- vs -European Commodities Sdn Bhd per Gopal Sri Ram JCA

Question 34

EXCEPTIONAL CIRCUMSTANCES – FRAUD?

Answer 34

Asparta Sdn Bhd v Bank Bumiputra Malaysia Bhd [1987]
The court would generally lift the corporate veil in order to do justice particularly when an element of fraud is involved and here there was abuse from the very structure of the companies after lifting the corporate veil.

Question 35

Judicial veil lifting - Fraud

Answer 35

In the Federal Court decision of Gurbachan Singh Bagawan Singh & Ors V. Vellasamy Pennusamy & Other Appeals [2015] 1 CLJ 719 it was held:
“…we are of the view that it is now a settled law in Malaysia that the court would lift the corporate veil of a corporation if such corporation was set up for fraudulent purposes, or where it was established to avoid an existing obligation or even to prevent the abuse of a corporate legal personality.”

Question 36

Judicial veil lifting formalistic approach (In Lam Kam Loy & Anor v Boltex Sdn Bhd & Ors [2005] )

Answer 36

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….” per Gopal Sri Ram JCA.

Question 37

Judicial veil lifting formalistic approach

Answer 37

• So, the courts appear to be reluctant to lift the veil purely on the grounds of justice.
• Unless there is “…actual fraud…or some inequitable or unconscionable conduct amounting to fraud…” per -Gopal Sri Ram JCA in Lam’s case.
• Why is this narrow or formalistic view being adopted?
• This is consistent with the principles espoused in Salamon.

Question 38

The liberal approach

Answer 38

The development of a liberal approach in Littlewoods Mail Order v. IRC (1969) and the views of Lord Denning in that case – “the courts can often do draw aside the veil. They can, and often do, pull of the mask to see what really lies behind.”
DHN Food Distributors Ltd V London Borough Of Tower Hamlets (1976) – notions of justice were applied through the concept of a single economic entity by Lord Denning.

Question 39

The liberal approach…rejected

Answer 39

The development of a liberal approach in DHN Food Distributors Ltd V London Borough Of Tower Hamlets (1976) were rejected in Woolfson .
Lord Keith said:
I have some doubts whether in this respect the Court of Appeal (in DHN), properly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that is a mere façade concealing the true facts.

Question 40

The liberal approach…rejected (In Adams v Cape Industries plc and Another (1991) the court held:)

Answer 40

“…the court is not free to disregard the principle of Salomon v. A. Salomon & Co. Ltd. [1897] A.C. 22 merely because it considers that justice so requires.” 
“Neither in this class of case nor in any other class of case is it open to this court to disregard the principle of Salomon v. A. Salomon & Co. Ltd. [1897] A.C. 22 merely because it considers it just so to do.” per Slade LJ

Question 41

The liberal approach…rejected

Answer 41

• So it appears that justice alone cannot be a criteria to lift the veil. Adams clearly dealt a further blow to the single economic unit argument as expressed in DHN. There must be some exceptional circumstance to lift the veil.
• In Trustor AB V Smallbone (No.2) [2001] 1 WLR 1177 the court also declined to follow lift the veil on the grounds of justice

Question 42

The liberal approach…back again? (In Ratiu v Conway [2006] 1 All ER 571 )

Answer 42

.. the courts have appear to have adopted a less formalistic view that the courts can draw back the veil to do justice when common sense and reality demand it.
Auld LJ said:
There is, it seems to me, a powerful argument of principle, in this intensely personal context of considerations of trust, confidence and loyalty, for lifting the corporate veil where the facts require it to include those in or behind the company who are in reality the persons whose trust in and reliance upon the fiduciary may be confounded.

Question 43

The liberal approach…back again? (In Prest v Petrodel Resources Ltd [2013] UKSC 34, )

Answer 43

the Supreme Court held that the corporate veil may only be pierced where there is some impropriety. In reaching judgment, the Supreme Court held that it would not be appropriate to pierce the corporate veil based on the facts of the present case but, instead, the Supreme Court ruled that the only basis on which the companies could be ordered to transfer ownership of the disputed properties to the wife was if the properties were beneficially owned by the husband.