c



  
c
 
 
  
c 

‡ The principle of separate corporate personality as confirmed

in 6
 6
  
 d
 
 d ’
 forms the
corner--stone of co. law.
corner
‡ Incorporation of a co. casts a veil over the true controllers of
the co, a veil through which the law will not usually
penetrate.
‡ There are however instances when the law will disregard or
look behind the corporate personality and have regard to the
reality of the situation. Lifting or piercing the corporate veil
mean in effect ignoring the fact that the business is carried
on by a co. and looking behind the co. to see who is actually
operating it i.e. looking at the reality of the situation.
‡ This would involve treating the rights or liabilities or
activities of the co. as the rights or liabilities or activities of
its shareholders, for example treating the business of a co.
as that of its principal shareholder. m
‡ Lifting the corporate veil is sometimes expressly
authorised by Ú 
 and sometimes it is adopted by
the 
 Ú.
Ú.

‡ It is generally recognised that there is no overall

principle as to when the courts will lift or pierce the
corporate veil. All the cases cannot be reduced to a
single principle. It is therefore difficult to predict with
any given set of facts whether or not the courts will
lift the corporate veil.

‡ Each case has to be approached based on its own

peculiar facts rather than purely on legal rules. We
need to look at the cases as examples of situations as
to when the courts have lifted the corporate veil.

   Ú       
i.e. when will the corporate veil be lifted?

d  
  Ú

. When the membership of a co. falls below two ±

Údc
Ú 
‡ If at any time only one member of a co. remains, that
member has six months in which to find another
member. If after the six-
six-month grace period the co. is
still carrying on business with only one member, that
member is personally liable for all of the debts of the
co. contracted after the grace period. The co. and the
member shall be guilty of an offence.
‡ Except in the case of a wholly owned co.

6
m. Where a person signs, issues or authorizes the signing
or issue of certain instruments on which the
company's name does not appear properly -
Údd

‡ The name of the co. must appear in letters on all bills

of exchange, promissory notes, cheques, negotiable
instruments, indorsements and orders.

‡ If the name of the co. is not properly mentioned on

any of these documents, the person who signed or
issued the document (or who authorized the signing
or issue) is liable to the holder of the document for
the amount due, unless the co. pays upon the
instrument.

0
Ô   
  ( ) ± the directors of L & R
Agencies Ltd were personally liable under the
equivalent of s. m (m) because they purported to sign
a cheque on behalf of the co. by writing µLR
Agencies Ltd¶. This was not the correct name of the
co.

Ô      ( ) ± the company¶s name

µPrimekeen Limited¶ was misspelt µPrimkeen
Limited¶. It was held that the directors were not
personally liable when the cheque was dishonoured.
The mere omission of a single letter in the middle of a
name was not the same as the omission of a word.


. Where debts are contracted on behalf of a co. and at
the time that the debts were contracted the officer
responsible had no reasonable or probable
expectation that the co. would be able to pay the
debts, that officer may be guilty of an offence and on
conviction, he may be made liable for the payment of
the whole or any part of the debt so contracted ± Úd
 
‡ Fraudulent trading -Where any business of the co.
has been carried out with intent to defraud creditors
of the co., the court may make the person who was
knowingly a party to the transaction personally
responsible for the debts or other liabilities of the co.-
co.-
Úd ! "
Ô 6  
’m
’m  
MLJ 56 ’m  5 AMR 5
î
Ô 6  

Rosen Engineering had completed works under a contract
between Rosen and Petronas Gas Sdn Bhd dated
m  . Petronas made payments to Ventura Industries
Sdn Bhd totalling RM 6, . Under an agreement
between Ventura and Rosen, Ventura would retain m

thereof and remit the balance of

to Rosen. V paid a
sum of RM m, to Rosen but failed to pay the balance
of RM m, . The appellant, Siow, as managing director
and alter ego of V, had used V¶s funds to invest in shares
on the stock exchange under his own name, instead of
discharging the debt to Rosen.

Having acquired the shares, partly using V¶s funds and

partly his own funds, Siow realising that he was about to
incur losses on his investments, arranged for a co.
resolution to be passed by the board À
of directors to ratify the investment and the use of the co¶s
funds, including that which was due to Rosen. This had the
effect of transferring the losses on his investments to the co.
The co¶s funds were used to pay Siow¶s losses and the co.
was left with no funds to pay Rosen, to whom RM m,
was due.

The court applying Úd ! of the CA 65 held that it was
very clear that the intention of Siow was to defraud Rosen,
the creditor and it was also equally clear that it was done for
a fraudulent purpose. Siow was held to be personally liable
for the debt and the court ordered Siow to pay to Rosen the
balance sum of RM m, together with interest for which
judgement had been obtained by Rosen against Ventura.

×
Ô   

6  
  ! 
6 ’m  MLJ m.
On m
m , the plaintiff co. (Kawin Industrial)
purchased eight units of knitting machinery, accessories
and spare parts (µthe machinery¶) from Kawin Knitting
Pte. Ltd (µKawin¶). During the time of the purchase of the
machinery, P had already ceased operations and become
an insolvent co.

On m , P sold the machinery to Skytex Industries

(M) Sdn Bhd at the price of RM 5,5 . This sum was
paid to the defendant, D, who was the managing director
of the co. P failed to pay the purchase price of the
machinery and judgement was entered for S$m ,.m
©
against P on m m. On 
m  an order for winding
up was made against P and a provisional liquidator (L) was
appointed. L found that P was insolvent based on the
audited accounts of P for the financial year ending
 m .
P filed an application in court for a declaration that that the
payment of RM 5,5 made by Skytex to P which ought
to have been paid into P¶s account, constituted an act of
fraudulent preference in favour of P and was therefore
illegal pursuant to Úd !of
!of the CA 65.

The principal issue to be considered by the court was

whether in the circumstances, the business of P had been
carried out with intent to defraud creditors of the co. within
the meaning of s.  ( ).

©©
The court held that, on the facts, there was an intention to
defraud Kawin, the creditor, or it was done for a
fraudulent purpose. It was clear that P purchased the
machinery when it had already ceased operations and D
knew that P being insolvent had no funds to pay the
outstanding purchase price to Kawin. Thus, by later
selling the machinery and paying the purchase price of
RM 5,5 to himself it was obvious that D had the
intention to fraudulently defraud Kawin, a creditor.
Furthermore, D, as managing director had acted in a
manner which had prejudiced the creditors of P when the
co. was already insolvent. On the facts, a case had been
made out under s.  ( ) of the CA .

©m
. Where dividends are paid when there are no available
profits out of which to pay them - Úd#d

‡ No dividends may be paid to the shareholders of a co.

unless there are profits available. If a director or
manager of a co. willfully pays or permits the
payment of a dividend when there are no available
profits, he is liable to the creditors of the co. for the
amount of the debts due to them to the extent by
which the dividends exceeded the available profits
and shall be guilty of an offence.-
offence.- Úd$

5. If a co. breaches the prohibition against providing any

financial assistance for the purchase of its own shares,
Úd% makes its officers guilty of an offence.
©
 Îd &' c (c 
.
''c'c
‡ Where there is fraudulent behaviour or fraudulent intention on the part
of the corporators in forming the co. courts will be ready to pierce or
lift the corporate veil.
‡ Fraud here is used in a very wide sense to cover inequitable and
improper conduct, including cases where the corporator seeks 
)  
**#*  by the use of the corporate form.

Ô In ÷
"
#


 
 ’  Ch. 5 CA. E B Horne,
the first defendant, was formerly employed by the plaintiff co. as the
managing director. His contract of employment included a covenant
not to solicit the customers of the plaintiff after he left their
employment. When H left their employment he set up a co. called JM
Horne & Co. Ltd., the second defendant, to carry on his business. The
shareholders and directors of the co. were himself, his wife and an
employee. JM Horne & Co. Ltd. then began to solicit the customers of
the plaintiff by sending out circulars to persons who were at the
crucial time customers of the plaintiff co. The plaintiff brought an
action to try to restrain H from carrying on in this way.
©6
The Court of Appeal held that H had breached his covenant with
the plaintiff and granted an injunction against both H and his co. H
was in breach of the valid covenant in restraint of trade contained
in his contract of employment. The court held that the co. was a
mere cloak or sham for the purpose of enabling H to commit a
breach of his covenant. Lord Hanworth MR made the following
observations:--
observations:

³I am quite satisfied that this co. was formed as a devise, a

stratagem, in order to mask the effective carrying on of a business
of Mr. E B Horne. The purpose of it was to try to enable him,
under what is a cloak or sham, to engage in business which, on
consideration of the agreement which had been sent to him just
about seven days before the co. was incorporated, was a business
in respect of which he had a fear that the plaintiffs might intervene
and object.´

©0
Ô This decision was followed in  $  ’ 6m All
ER m.
m.
L, the defendant, contracted with J, the plaintiff, to sell J a
piece of land with registered title for £5,m5 . Before
conveyance of the land to J, L changed his mind. Instead he
sold and transferred the land to a co. called Alamed Ltd. which
he had formed (he and a clerk for his solicitors were
shareholders and directors) for £, , of which £ ,56 were
borrowed by the defendant co. from a bank and the rest
remained owing to the first defendant. Alamed Ltd. was
expressly formed for the purpose of putting the land beyond
the reach of an order for specific performance. J then brought
this action to compel L to transfer the land to him. Ignoring the
corporate veil, Russel J. ordered specific performance against
both the defendant and his co. So L could not evade his
contractual liability by using the corporate form. Russel J. in
his judgement said:
³The defendant co. is the creature of the defendant, a devise
and a sham, a mask which he holds before his face in an
attempt to avoid recognition by the eye of equity... an equitable
remedy is rightly to be granted directly against the creature in
such circumstances´. ©
Ô In $ 
6    %&'
 ($
#
! 
  
.. ’ 

 MLJ , the Supreme Court held that the
  

court could generally lift the corporate veil in order to do justice
particularly where an element of fraud is involved. Here, there was
an element of fraud in the receipt of secret profits by Lorraine
Osman as alleged in the case and that was sufficient for the court
to lift the corporate veil for the purpose of determining whether
the assets of the co. are really owned by them.

The first plaintiff, Bank Bumiputra Malaysia Bhd (the Bank) and
the second plaintiff, Bumiputra Malaysia Finance (BMF), a
wholly owned subsidiary of the Bank, sued Lorrain Osman, a
director of the Bank and the Chairman of BMF for an account of
secret profits that he allegedly made while he was director of the
Bank and Chairman of BMF. The plaintiffs alleged that L received
the sum of M$ m,65m,
5-
m,65m,
5- 6 through his solicitors in Kuala
Lumpur wrongfully and without the knowledge and approval of
the plaintiffs and in breach of his fiduciary duty as a director of the
Bank and Chairman of BMF. ©î
On the same day that the plaintiffs had filed the writ against L,
they made an ex parte application for a Mareva injunction to
restrain L from removing from the jurisdiction of the Court,
selling, transferring or otherwise dealing with his assets held in the
companies controlled by him, including monies that L held in his
accounts with various banks, limited to the above sum. The
appellant companies, inter alia, challenged the Mareva injunction
on the ground that the court should not have treated the assets of
the companies as L¶s assets ± the companies and L are separate
entities ± the Salomon principle.

The learned trial judge found that L was the alter ego of the
companies. Only m out of m ,6,5 shares in the appellant
companies did not belong to L. He exercised effective or sole
control of the companies by holding more than 
of the total
paid up capital of the mm appellant companies. Further, he was also
a director in 5 of them. These were the main factual bases on
which the learned judge lifted the corporate veil.

©À
Ô The case of 
 "
)
$
 #6  .
#6  .
’ m AMR  concerned a scheme that was devised by the co.
the primary purpose of which was to avoid paying the estate duty.
The Supreme Court held that the scheme was illegal. His
Lordship, Peh Swee Chin SCJ, in delivering the judgement of the
court made the following observation on lifting the corporate veil
for the purpose of discovering any illegal or improper purpose:-
purpose:-

³When the issue of illegality was raised, we have lifted the

corporate veil of each co. wherever we found it necessary, for it is
well settled that the courts have a discretion to lift it for the
purpose of discovering any illegal or improper purpose «´

©×
† The court will not allow a section to be invoked for an improper
purpose or for a purpose not contemplated or intended by the
section.

Ô In  
)
  ’ 6  Ch m the Court of Appeal held

that section m , CA 
, U.K. (s.
CA 65, Malaysia) may
not be used by the majority shareholders to expropriate the shares
of a minority shareholder.

S. m
CA 
5, U.K. permits a co. which has acquired 
or

more of another company¶s shares as a result of a takeover bid to
compulsorily buy out the remainder of the shares. Bugle Press¶
share capital consisted of , £ . shares. Jackson and Shaw
each owned 5 of these shares (µthe majority shareholders¶) and
Trelby owned the remaining shares. Jackson and Shaw tried
to buy out Trelby but he refused to sell his shares. They then
formed a £ co., Jackson & Shaw (Holdings) Ltd. in which they
were the only shareholders. Jackson & Shaw (Holdings) Ltd. then
made an offer addressed to the shareholders in Bugle Press Ltd., to
purchase their shareholdings at £ per share. Jackson and Shaw
m
obviously accepted and their shares were transferred to the co.
but Trelby again refused on the ground that the price was too
low. Since Jackson & Shaw (Holdings) Ltd. now owned 

of Bugles¶ shares, it sought to exercise the statutory right
under s. m
by giving Trelby notice of its intention to
purchase his shares compulsorily.

The Court of Appeal held that Jackson & Shaw (Holdings)

Ltd. could not do this. The scheme was not binding on Trelby.
For all practical purposes, Jackson & Shaw (Holdings) Ltd.
was entirely equivalent to the nine-
nine-tenths of the shareholders
of Bugle Press who have accepted the offer of Jackson &
Shaw (Holdings) Ltd. The Court will not allow the section to
be invoked for a purpose not contemplated by the section (an
improper purpose), which is, for the purpose of enabling
majority shareholders to expropriate or evict the minority
shareholders.

m©
 m.  c+

Vaughn Williams J., the trial judge, in 6aloman¶s case had held
that there was a principal and agency relationship existing between
Saloman and the co. But the House of Lords rejected this and the
courts have since been very slow in finding a principal and agency
relationship.

In exceptional cases, an agency between a co. and its shareholders

or controllers may be found to exist as a matter of fact.
Ô In the case of  *÷*
  ’ 5 WLR 
 a finding of
agency allowed the court to lift the corporate veil. Here, an
American corporation called Film Group Incorporated set up a co.
in the U.K. called FG Films Ltd. The co. had a nominal share
capital of £ consisting of £ - shares.  of these shares
were held by the President of the American corporation who was a
director of the co., and the remaining shares was held by a
British director. The third director had no shareholding. The co.
only carried on business at its registered office and did not employ
any staff. It then made a film called ³Monsoon´. The story rights of
this film were held by the American corporation. The film was
mm
made in India and it costs over £
, .
The co. sought to have the film registered as a British film
under the Cinematograph Films Act 
- 
-
, which provided
certain restrictions on films unless they were made by a British
person or co. The Board of Trade refused the application on
the ground that the film had in reality been made by the
American corporation. The applicant co., FG Films, sought a
declaration from the court that it was the µmaker¶ of the film
within the meaning of the Act.

The Court held that this film had not been made by a British
co. It was not a British film. All the finance for the film had
come from the American corporation and it held that the
participation of the British co. in the making of the film had
been so small as to be practically negligible and in so far as it
acted at all in the matter, it acted merely as the nominee or
agent of the American corporation, Film Group Incorporated.

m
Ô In 6+6    
 

$

’   All ER 6 Atkinson J, allowed a holding co. to claim
compensation for compulsory acquisition as if it were an owner-
owner-
occupier, on the ground that its subsidiary which occupied the land
in question was merely its agent for the purpose of carrying on its
business.

A parent co., Smith Stone & Knight held  out of 5 m shares in
a subsidiary co. called Birmingham Waste Co. Ltd. The remaining
5 shares were held by the directors of the parent co., who were the
directors of the subsidiary, in trust for it (a so called µwholly
owned subsidiary¶). The parent co. was in total and constant
control of the subsidiary. The defendant corporation, Birmingham
Corporation, compulsorily acquired the land that was owned by
the subsidiary on which the business was carried. The parent co.
then claimed compensation in respect of the removal and
disturbance to the business. The defendants claimed that the parent
co. was not the proper claimant for this disturbance. They said that
the proper claimant was the subsidiary. m6
Atkinson J.
J. recognized the fact that the mere fact that a man
owns all the shares in a co. does not make the business carried
on by the co. his business. Nor does it make the co. his agent
for the carrying on of that business. However, in this case, the
learned judge had no difficulty in deciding that the business of
the subsidiary co. was the business of the parent co. and the
subsidiary was merely its agent, employee or tool. He said
this:

³There was nothing to prevent the parent co. at any moment

from saying we would carry on this business in our own name.
They had but to paint out the subsidiary¶s name on the
premises, change their business papers and forms and the
thing would have been done. I am satisfied that the business
belonged to the parent co. They were in any view the real
occupiers of the premises.´
m0
 d ' +

Courts have ignored the separate legal entities of various

companies within a group and instead looked at the economic
entity of the whole group.

Ô * 
,
 
" 
 


’ 6  All ER 6m CA
The facts in this case were similar to those in Smith, Stone &
Knight and it is another case which involves compulsory
purchase. In compulsory purchase cases under the Compulsory
Purchase Act the claimants themselves are asking for the veil to
be lifted.

Here DHN was the parent co. It ran a wholesale cash-

cash-and
and--carry
grocery business from premises owned by one of its wholly
owned subsidiaries called Bronze Investments Ltd. The premises
were compulsorily acquired by the Borough Council of Tower
Hamlets in  . Under the Act, compensation was payable
under m heads:-
heads:- ) compensation for the value of the land, and m)
compensation for the disturbance to any business on the land.m
But someone claiming compensation under either of these m
heads must have an interest in the land greater than that of a
bare licensee i.e. a yearly tenant. There was no problem with
the first head. Bronze owned the freehold of the land and
Bronze was entitled to compensation for the value of the land.
However, the business was run by DHN. Bronze itself took no
part in the running of the business. DHN only had an interest
in the land of that of a licensee i.e. an interest less than that of
a yearly tenant and so the Borough Council claimed that DHN
was not entitled to compensation under the second head.

However, it was held by the Court of Appeal reversing a ruling

of the Lands Tribunal that you could regard the group of
companies here as a single economic entity. The directors of
DHN were the same as those of Bronze and the shareholders
of Bronze were the same as in DHN. The decision to pierce
the corporate veil was expressly based upon a group entity
view treating the group of companies as one economic entity
or unit rather than by using agency principles

mî
 Shortly after this case, the House of Lords declined to pierce the
veil in the case of 
"6

!  




! ’ 
 
P & LR 5m , a case which had originated in
Scotland. This case again concerned compulsory purchase.

Ô Here, the shop premises were occupied by C Ltd. for its

business. There were issued shares in C Ltd. and  were
owned by Woolfson and the remaining one by his wife. The
wife, he said, did not hold this share as his nominee. She was an
independent shareholder. While Woolfson was the only director,
he obviously controlled the business. He also owned the
premises. While the shop premises were compulsorily acquired,
the question arose as to whether compensation should be paid to
Woolfson for disturbance of the business. Unfortunately, C Ltd.
had not been joined as a party to the claim and the Court would
not allow them to be joined subsequently. So Woolfson was
asking for piercing on the ground that he and C Ltd. should be
treated as the same entity. He claimed that if the reality of the
situation was looked at it would be seen that he was the occupier
carrying of the business as well as the owner of the premises.
The House of Lords rejected his claim.
mÀ
Lord Keith said that, ³it is appropriate to pierce the corporate veil
only where special circumstances existed indicating that it is a
facts´.
mere facade concealing the true facts´.
They held that this was not the case here. It had not been shown
that there was a mere facade. It was C Ltd. which carried on the
business on the premises and not Woolfson and and that Woolfson
was not beneficially entitled to the whole of the shareholding in
the co. because his wife was an independent shareholder and not a
nominee for her husband.

This is one way in which the House of Lords distinguished DHN.

In DHN, Bronze was a wholly owned subsidiary. Another
distinction is that in DHN the subsidiary owned the land and the
parent co. owned and controlled the business. So the case of
Woolfson shows that courts are still prepared to apply the
Saloman principle in cases where the controller shareholder is a
single natural person and those cases where the controller
shareholder is a co. In the former case, the courts are almost
certainly constrained by Saloman itself and in the latter case the
courts feel less constrained because of the factual difference from
Saloman.
m×
Ô In the Malaysian case of 6  
  
6  d ’ 
 the court treated the subsidiary
  
6  d
and the parent co. as functionally one entity.
entity.

Here, the plaintiffsapplicants operated a nightclub and

restaurant called the Golden Million Cabaret and Night Club in
the premises of Red Rose Restaurant SB., a subsidiary of
Hotel Berjaya SB. The restaurant was situated in Hotel
Shangrila which was also owned by Hotel Berjaya SB. A
dispute arose between the plaintiffs and Red Rose regarding
the renewal of the plaintiffs¶ licence to operate the club. The
plaintiffs obtained an interim injunction on  March 
 to
restrain the defendants from disturbing the plaintiffs¶ quiet use
and enjoyment of the premises until the action was tried. On
the nights of  and 5 March, the plaintiffs were able to carry
on their business at the premises but on the following night, 6
March, the plaintiffs found the restaurant premises were
locked in breach of the injunction. The plaintiffs then
instituted committal proceedings for civil contempt of court


 against the directors of Red Rose in breaching the order of 
March 
. The respondents contended that the closure of the
premises was effected by a separate entity, Hotel Berjaya SB,
the owner of Hotel Shangrila. The defendant co. and the
respondents should not, therefore, be responsible for such acts.

The court held that there was functional integrity between the
hotel and restaurant. Hotel Berjaya and Red Rose were one
single entity.
entity. The respondents were found guilty of contempt
and fined accordingly.

‡ The decision of the High Court was affirmed by the Federal

Court and Privy Council. See:  (6 6
’ 
5 MLJ 5 (Federal Court) and ’ 
 MLJ 5
 ’
(Privy Council).

©
Ô The same approach was taken by the court in 
 ! )

  
-"
+
    

(


’ 
 MLJ .
The High Court held that the Hotel (Hotel Jaya Puri Bhd) and the
Restaurant (Jaya Puri Chinese Garden Restaurant SB), a wholly
owned subsidiary of the Hotel, where both had the same
managing director, were functionally one and treated them as one
single entity ignoring the separate legal personalities of the
companies.

See also:
also:
Ô  .. ’m
 - # 
$
6 $
)  
m SLR 
± where the court refused to treat two companies which
have no common shareholders or directors as being a single
economic unit and thus a single legal unit.

m
 !d 'Î c c+
Ô The case of  


 
 
 !
  ,,

 d ’  6 m AC   shows that courts will

÷

  d
pierce the veil when there are overwhelming public policy
grounds for doing so.
Here, the Continental Tyre Co. was incorporated in England but
all except one of its shareholders were resident in Germany and
all its directors resided in Germany. The Secretary who held the
remaining share resided in England and was a British subject.
The issue in this case was whether this co. had standing to sue
and recover a debt in an English court during the First World War
when England was at war with Germany. The defendants
(Daimler) alleged that the co. was an alien enemy and that the
payment of the debt would constitute trading with the enemy
alien. In fact the action was eventually dismissed on a procedural
point but the majority of the House of Lords were of the opinion
that a co. could have an enemy character despite the fact that the
co. had been incorporated in England and they were ready to say
here that the co. was an alien co. This was likely to occur when a
company¶s agents or persons in control of the co. were residents
in an enemy country or were acting under the control of such
persons.