SMEs, let’s delve into the complexities of “piercing the corporate veil” in the Malaysian company law, particularly in light of the Federal Court’s (FC) decision in Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & Ors [2021] MLJU 393 which adopted the principles laid down by the UK Supreme Court (SC) in Prest v Prest and Others [2013] 4 All ER 673.
The Foundation: Separate Legal Personality and Limited Liability
This is the bedrock principle of our company law, that is: a company is a separate legal personality from its members, shielded by a “corporate veil.” This separation grants limited liability, meaning shareholders are generally not personally liable for the company’s debts. This concept, enshrined in Section 192(1) of the Companies Act 2016 fosters entrepreneurship by mitigating the risk of personal bankruptcy.
However, this principle can be abused. To counter this, the doctrines of “lifting” and “piercing” the corporate veil have emerged:
- “Lifting” involves examining the corporate structure without disregarding its separate legal personality,
- “Piercing” entails disregarding this separation to hold individuals liable for misusing limited liability.
The Uncertainty and the Need for Clarity
There are historical ambiguity surrounding these doctrines due to inconsistent application and a lack of clear guidelines. This uncertainty has led to criticism of common law jurisprudence as “incoherent and unprincipled.” The Ong Leong Chiou (“OLC”) decision aims to provide clarity by aligning Malaysian law with the principles established in Prest.
The Landmark Case: Salomon v. A Salomon & Co Ltd
The seminal case of Salomon v. A Salomon & Co Ltd, has solidified the concept of separate legal personality. The House of Lords (HOL) in Salomon held that once a company is legally incorporated, it is an independent entity with its own rights and liabilities, irrespective of the motives of its founders.
The UK SC in Prest sought to refine the doctrine of piercing the corporate veil. Lord Sumption introduced the “concealment” and “evasion” principles:
- Concealment Principle: This principle does not involve piercing the veil. Instead, it allows the courts to look behind the corporate structure to reveal the true actors where one or multiple companies are interposed to conceal their identities.
- Evasion Principle: This principle, a true instance of piercing the veil, applies when a person uses a company to evade an existing legal obligation or frustrate its enforcement.
According to Lord Sumption, the evasion principle should be a “last resort” to be applied only when there is no other legal remedy available. This restrictive approach reflects the importance of upholding the principle of separate legal personality. Other justices in Prest though had differing views about the doctrine but generally agreed that if the veil were to be pierced, it should be done in highly exceptional circumstances.
The Malaysian Application
The OLC case has provided the Malaysian FC with an opportunity to apply the principles of Prest. The case involved a complex web of subcontracting agreements for a construction project, where a shelf company (PS Bina) was used to contract with Keller.
The FC found that Tony Ong, the director of PS Bina, had made misrepresentations to induce Keller to enter into the contract, knowing that PS Bina had no assets and that the main contract did not provide for payment for certain works.
The FC applied Lord Sumption’s analysis in Prest, (specifically the evasion principle) and found that Tony Ong had deliberately used PS Bina to evade his obligations to Keller, thus justifying piercing the corporate veil to hold him personally liable.
Key Takeaways?
- The OLC decision solidifies the adoption of the Prest principles in Malaysian law, emphasizing a restrictive approach to piercing the corporate veil.
- The evasion principle is the primary basis for piercing the veil, applicable only when a company is used to evade an existing legal obligation and no other remedy is available.
- The courts will scrutinize the facts to determine whether a company has been used for improper purposes, such as fraud or misrepresentation.
- The courts are very reluctant to pierce the corporate veil, and it is a last resort.
- The legal separation of a company and its owners is still a very strong legal concept.
In conclusion, the FC in OLC has provided clarity and consistency to the application of the doctrine of piercing the corporate veil.
