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Case: Tradewinds Properties Sdn Bhd v Zulkhiplie bin A Bakar & Ors [2019] 1 MLJ 421 Court: Court of Appeal (Putrajaya) Topic: Lifting the Corporate Veil |
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| Facts | 1. The Appellant sued the First Respondent (an individual) and the Second Respondent (a company) to recover a debt that the Respondents owed to the Appellant.
2. At the material time, the First Respondent was one of the two (2) directors and held 100% shareholding in the Second Respondent. 3. A consent judgment was entered thereafter between the parties on 09.02.2011 whereby the Appellant together with the First Respondent and the Second Respondent agreed to settle the debt amounted to RM1,150,000.00 owed to the Appellant. 4. However, the First Respondent and Second Respondent defaulted in payment of the balance sum under the consent judgment. 5. The Appellant found out that the First Respondent had incorporated the Third Respondent (a company) as a separate entity after the lawsuit was filed and before the consent judgment was entered by the parties. 6. It was also been discovered by the Appellant that the Second Respondent had passed resolutions to make the Third Respondent the recipient of consultancy fees that were actually payable to the Second Respondent by third parties. 7. The Appellant claimed that these resolutions were made with the intention to defraud the Appellant, who was a creditor, out of the remaining amount due according to the consent judgment. 8. The Appellant demanded that either the First Respondent be personally responsible for paying the remaining amount or both the First Respondent and the Third Respondent be held jointly responsible for payment. 9. The High Court dismissed the lawsuit and held that the Appellant had failed to prove that the Respondents had intention to defraud. 10. In the current appeal, the Appellant argued that the evidence indicated that the value of future income assigned to the Third Respondent through the resolutions exceeded RM 2,300,000.00. Additionally, the fact that the Second Respondent became inactive or dormant after this transfer of income was enough to establish an intent to defraud. 11. The Appellant argued that the trial judge should have disregarded the separate legal existence of the Respondents because the evidence demonstrated that they functioned as a single business unit under the complete control of the First Respondent. |
| Issue | 1. Whether all the Respondents operated as a single commercial entity where the facts and evidences justified lifting of corporate veil? |
| Ratios | 1. It was rather tricky for the Court of Appeal to decide on the issue, nonetheless the Court of Appeal stood firm on the fundamental principle of company law where a company has a personality or has its own separate legal identity apart from its shareholders.
2. Correspondingly, the Court of Appeal made a well-connected reference to the rule by the House of Lords in the case of Aron Salomon (Pauper) v A Salomon and Company [1897] AC 22 in which it was held that even if one individual possesses the majority of shares and debentures in a company, with the remaining shares held in trust for that individual, the company should not be seen as mere shadow of that individual. 3. Despite the strict adherence to the principle, there exists specific statutory exceptions to the Salomon rule, whereby a director can be held accountable for the company’s debts due to violations of company or insolvency laws. This practice is referred to as lifting the corporate veil. 4. The provision under Section 304(1) of the Companies Act 1965 had been emphasized by this Court of Appeal to be a statutory exception of the common law position that the corporate veil can be lifted in circumstances where dishonest conduct amounting to fraud at common law or in equity is established on the facts of the case. 5. The Court of Appeal made a coherent reference to the case of Faiza Ben Hashem v Abdulhadi Ali Shayif & Anor [2008] EWHC 2380 (FAM), where Munby J summarized the current state of the law regarding piercing and/or lifting the corporate veil as follows: (a) piercing the corporate veil is appropriate only where special circumstances indicated that it is a mere facade; (b) control of a company by the intended defendant is not of itself enough to justify piercing; (c) piercing should not occur merely because it is thought necessary in the interests of justice: there has to be impropriety; and (d) the impropriety has to be linked to the use of the company structure.” [Emphasis Added] 6. In regards to the above, the Court of Appeal had acknowledged that certain shams or facades may not be easily recognizable. Thus, the Courts are hesitant to establish specific criteria for defining what qualifies as a sham, as they prefer a flexible, case-by-case approach. 7. However, there are some useful tests outlined by the Court of Appeal that can be applied when attempting to identify a sham which are as follows: (a) are the relevant entities in common ownership? (b) are the relevant entities in common control? (c) was the company structure was put in place before or after a particular liability (or serious risk) arose, and if the latter then to what extent was the liability or risk a motivating factor for those who set up the structure? (d) was the company structure put in place in an attempt to allow an activity which would be unlawful if carried out personally? 8. While assessing the facts and the evidences of the present case, the Court of Appeal respectfully disagreed with the assertion of the High Court judge that there was no valid reason to lift the corporate veil, as it was proven that the First Respondent was the controlling mind of the Second and Third Respondents. 9. It has also been presented with much clarity that the First Respondent not only served as a director in the Second Respondent and owned 100% of its shares, but also acted as a director in the Third Respondent with an 85% shareholding. 10. The Court of Appeal found that the First Respondent admitted to having complete control over the Second Respondent. 11. Furthermore, the First Respondent stated that the Third Respondent was specifically created to receive professional fee payments for work carried out by the Second Respondent. Additionally, the expenses of the Second Respondent were also covered by the Third Respondent. 12. Thus, the Court of Appeal held that the corporate veil should be lifted because there is evidence indicating a clear intention on the part of the Respondents to defraud the Appellant by preventing it from receiving the agreed-upon sums stated in the consent judgment. |
| Decision | 1. The Respondents operated as a single commercial entity where the facts and evidences justified lifting of corporate veil.
2. The appeal was allowed and the decision of the High Court was set aside. |
| Key Take Away | 1. It is a settled law that the Court has the authority to lift the corporate veil of a corporation in certain circumstances.
2. This includes situations where the corporation was established with fraudulent intentions, to evade existing obligations, or to abuse the legal personality of the corporation. 3. Fraudulent purposes encompass both actual fraud and fraud in equity. 4. For fraud in equity, where there are indications of separate corporate entities being utilized to avoid contractual obligations or duties, the Court may disregard the concept of separate legal personalities for those companies. |
