Companies are recognised as separate legal entities. As such, a company is a distinct entity separate from its shareholders and directors. This has been established in Salomon v Salomon Co Ltd wherein the House of Lords unanimously held that a company is an independent person in the eyes of the law. It was from this case that the legal fiction of the corporate veil was born.
Lifting the corporate veil would mean disregarding the corporate personality and holding the real person who is in control of the company accountable. In Malaysia, the courts generally do not look behind the veil to enquire why the company was formed or who really controls it. However, there are instances where individuals carry out wrong-doings and hide behind the corporate veil. As such, under certain circumstances, the courts may lift or pierce the corporate veil in order to hold the wrong-doers responsible.
Circumstances in which the corporate veil may be lifted
1) By Statute
Under the Companies Act 2016 (“CA”), there are several statutory provisions that have the effect of lifting the corporate veil. Examples of provisions are as follows:
- S.75(5) CA: Approval of the shareholders at a general meeting must be obtained whenever a company wants to issue new shares. Any director who knowingly contravenes this requirement or permits or authorises its contravention shall be liable to compensate the company and the person to whom the shares were issued for any loss, damages or costs sustained or incurred by them.
- S.539(3) CA: An officer who knowingly contracts a debt with no reasonable or probable ground of expectation that the company would be able to pay the debt is guilty of an offence.
- S.540 CA: An officer who knowingly carries out business with the intent to defraud the creditors is guilty of an offence. Officers may be personally liable to creditors for debts incurred by the company.
1) By Case Law
1. Due to fraud/Avoidance of legal obligations
In Gilford Motor Co v Horne & Anor, an injunction was granted against Horne (the Managing Director of Gilford Co Ltd) and the company as the company was a “mere cloak or sham.”
In Aspatra v Bank Bumiputra Malaysia Berhad, Aspara’s assets were treated as Lorrain’s assets as there was an element of fraud involved.
2. On the basis of implied agency
In Re FG (Films) Ltd, an American film company held 90% of shares in a British company. The British company was without resources, having a share capital of £ 100, no place of business (save for a registered address) and no employees. When the British company sought to register a film under the Cinematographic Films Act 1938 as the company that had made the film, the registration was rejected. It was thus held that since the English company did not have the resources to make the film, its participation in the film making must have been as an agent of the American company.
3. Involving group entities
In Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers, the hotel had a wholly-owned subsidiary to carry out its restaurant business in the hotel. The Industrial court ordered the hotel to pay termination benefits to the restaurant’s employees but the hotel appealed, arguing that it was not the party to the contract of employment. It was held that the hotel and the restaurant were one group enterprise. The employees were thus in fact working for one entity. As such, the hotel company was liable to the restaurant’s employees.
In DHN Food Distributors Ltd v Tower Hamlets London Borough Council, it was held that since the Directors were the same in all 3 companies, the 3 companies were thus considered one commercial entity.
4. Involving a tort
In Briggs v James Hardie & Co Pty Ltd, it was held that the Courts may be prepared to lift the veil of subsidiary companies and make a parent company liable for their subsidiaries’ tort.
5. Involving enemy aliens
In Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain), the House of Lords reiterated the basic principle that the identity of a company’s shareholders was immaterial to the company’s separate legal personality. However, they allowed the possibility there will be occasions when the shareholders’ identity does affect the corporate personality. This may occur in times of war, as in the present case.
6. In the interest of justice
The court will lift the corporate veil when the justice of the case so requires, which is as seen in cases like Hotel Jaya Puri Sdn Bhd v National Union Bar & Restaurant Workers (1980) and Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd (1988).