SEPARATE LEGAL ENTITY

Salomon v A Salomon Co Ltd (1897)

People Insurance Co (M) Sdn Bhd v People Insurance Co Ltd [1986]
1 MLJ 68

LIMITED LIABILITY OF MEMBERS

CAN SUE AND BE SUED

 Foss v. Harbottle (1843) 2 Hare 461

Two members of the Victoria Park Co who brought an action against

the company’s five directors and other shareholders saying that they
took certain actions to defraud the company including selling land at
an increased price. It was held that the board of directors should be
the ones to call a general meeting to make a claim in this instance and
not the claimant.

The issue of who is a proper claimant, an explanation was made by

Jenkins LJ in the case of Edwards v Halliwell where there were two
limbs to the rule in Foss v Harbottle (1843):

1. If a wrong is done to company, company is to be the proper

plaintiff that only the company may sue and an individual
shareholder or a group of shareholders may not sue
 2. If a company wrongs a member, the member may not sue if
the act complained of could be done by an ordinary
resolution in a general meeting.

Semesta Insurance Underwriting Agency Sdn Bhd v Koperasi

Insurance (M) Bhd & Anor [2006] 3 MLJ 379

On 16 May 1989 Koperasi Insurance (M) Bhd (‘MCIS’) obtained a JID

against Semesta Insurance Underwriting Agency Sdn Bhd (‘Semesta’)
with regard to the alleged debt owed to them for an amount of RM84,
107.76. It was alleged that the debt was assigned to MCIS and therefore
MCIS should provide a ‘letter of release’ for Semesta to renew insurance
agency license. However, the deed of assignment was not stamped.

Upon expiry of Semesta’s underwriting agency licence, MCIS circulated

an internal memo to cease business with Semesta but the business
continued until October 1990. MCIS served a winding up notice to
Semesta and Semesta failed to settle the debt after 21 days upon serving
the winding up notice causing MCIS to proceed with the winding up
proceedings. However, the JID obtained was irregular and it was set
aside, hence, the winding up proceeding was dismissed and MCIS need
to file a fresh suit.
Arising from the dismissed winding up proceeding, Semesta then
commenced the present suit against MCIS for negligence, malicious
prosecution, defamation, loss of profit, general damages, special
damages and punitive damages. Santhanam Christie s/o Lourdes
(Christie) sought for damages as the capacity of a shareholder due to the
damaged reputation and loss of profit by Semesta.

Discussion
it is a genuine claim.
BoP is on Semesta to prove malice.terminated in favour of Semesta.
reasonable and probable cause.Semesta must suffer damages.
The deed of assignment.

Discussion
 There is no evidence of publication tendered on behalf of Semesta.
 Advertisement of winding-up petition in the newspaper is
protected under the statutes:
 Rule 19 (b) Winding Up Rule 1972.
 Section 11(1) of Defamation Act 1957.
 Fourthly, whether Christie has locus standi to sue MCIS?

Discussion
 being a separate entity.
 Christie has no locus standi to sue MCIS
 Finally, whether Semesta and Christine can prove their claims for
damages?
 In this case, Semesta and Christie had failed to prove their claims
of loss of profits due to unrealistic assumption made in their
actuaries report and
 Failed to consider all relevant factors that may affect the
calculation of loss and profit compared to the actuaries report
provided by MCIS
Discussion
 Libel and malicious prosecution claims do not arises because of
lack of merit and unable to satisfy the requirements needed.
 Punitive and exemplary damages
 Failed to plead the claims and
 Failed to produce evidence that shows MCIS falls under any
categories which exemplary damages can be awarded.
VEIL OF INCORPORATION

LIFTING THE CORPORATE VEIL

Judicial lifting of the corporate veil

 Guilford Motor Co. Ltd. v Horne [1933] Ch. 935

Mr Horne was employed by Gilford Motors limited. He left his

employment but his contract of employment contained a restrictive
covenant. The restrictive covenant was prohibiting setting up a
competing business within a certain radius from Gilford motors for
certain time. Under contract law, restrictive covenants are only accepted
if they are reasonable. Mr Horne, knowing that he was subject to
restrictive covenant, registered the company where he and his wife were
the only shareholders.
Issue: Gilford Motors Ltd sought to bring an action against Mr Horne.
The request to the court was to look behind the curtain and see that the
only shareholder was Mr and Mrs Horne and that they were only using
this company as a method to avoid the liability of the restrictive
covenant.
Held: The court did not deny the existence of the company but placed an
injunction to the company. Lord Sumption in Prest v Petrodel argued
that Gilford case was decided on evasion principle.

Jones v Lipman [1962] 1 All ER 442

Facts

Lipman agreed to sell a property to Jones for £5,250, but subsequently

changed his mind. He then formed his own company, which had £100 in
capital, and made himself the director and owner. He then transferred the
land, which he had agreed to sell to Jones, to this sham company for
£3,000. To enable such a transaction, Lipman had borrowed over half the
money needed by way of a bank loan, and the remainder was owed to
other sources. Under the Rules of the Supreme Court Order 14A, the
purchaser applied for specific performance to be carried out against the
vendor and the vendor’s company for the transfer of the property in
question.

Issue

The court was required to decide if an order of specific performance could

be enforced in the circumstances. Specifically, it was important for the court
to assess the company that Lipman had created and the transaction of the
sale of the property to see if it was equitable. The court also had to
establish whether it was appropriate for the Rules of the Supreme
Court to be applied to the circumstances.

Held
Firstly, the court held that the Rules of the Supreme Court could apply to
the circumstances. Further to this, it was found that the defendant’s
company was created by the defendant as ‘a mask to avoid recognition by
the eye of equity’ (at p.836) and on this basis, a requirement of specific
performance could not be avoided. It was clear that the defendant had
control of the sham company which held the property, and therefore
Lipman was the only individual who could perform the agreement.

Tenaga Nasional Bhd v Irham Niaga Sdn Bhd & Anor [2011] 1 MLJ
752

THE ISSUE
In the recent case of Irham Niaga Sdn Bhd & Irham Niaga Logistics Sdn
Bhd v Tenaga Nasional Berhad (unreported), the Kuala Lumpur High
Court had the opportunity to consider the circumstances in which the
court would exercise its discretion to lift the corporate veil of a
subsidiary company so as to impute the liability of the subsidiary onto
its holding company.

THE FACTS
The parties were eventually embroiled in a dispute over TNBT’s
termination of the Agreements, essentially on the ground of alleged
misrepresentation.

The dispute was referred to arbitration pursuant to the arbitration clauses

in the Agreements, where TNBT was the claimant and the Plaintiffs
were the respondents. TNB was not a party to the arbitration
proceedings. The Plaintiffs counter-claimed against TNBT for wrongful
termination of the Agreements in the arbitration and succeeded in their
counter-claim. They were awarded a sum of approximately RM113
million with interest and costs.

TNBT exhausted all avenues to set aside the award and its application
for leave to appeal to the Federal Court was dismissed. The final award
has since been registered as a judgment of the court.

The Plaintiffs filed a claim in the High Court against TNB. The
Plaintiffs claimed that TNB and TNBT, in maintaining TNBT as a
dormant company, had refused to honour the final award and in the
circumstances, the veil of incorporation of TNBT ought to be lifted so as
to render TNB liable for the final award made against TNBT.

THE LEGAL PRINCIPLES

The Court of Appeal refused to lift the corporate veil and criticised the
interest of justice exception on 2 grounds. First, that the concept was
inherently vague and, second, that it did not provide the courts or the
business community with any clear guidance as to when normal
company law rules should be displaced.
Notwithstanding the criticism of the interest of justice exception in Law
Kam Loy, the learned judge, Dato’ Mohamed Ariff J, opined that the
interest of justice concept remains important as a “policy impetus for
creating exceptions to the doctrines of separate legal personality and
limited liability” and ought not to be rejected outright.

The learned judge went on to state that while companies in a group

should in law be free to arrange their affairs in the ordinary way,
including transacting part of the business of the group through
subsidiaries, the veil of incorporation could still be lifted in exceptional
circumstances, such as in cases where special circumstances exist which
indicate that the corporate personality is a mere façade that conceals the
true facts.

FINDINGS OF THE COURT

Having considered the evidence produced at the trial, the Judge was of
the view that this was not a case where TNBT had been used as a front
or a façade from the outset. Neither was it a case where actual fraud
existed on the part of TNB and TNBT from the outset.

However, based on the totality of the evidence adduced during the trial,
the Court was of the view that “this is a case where special
circumstances (exist) in a situation where there is inequitable or
unconscionable conduct amounting to fraud in equity”.

The learned judge was satisfied that TNB was “from the very outset at
the centre of things and was the driving force” of TNBT. TNB was in
full control of TNBT through the provisions of funds, premises,
personnel and through the legal structures that were put in place to
ensure that ultimate control of TNBT resided in TNB at all times.

On the facts adduced, Dato’ Mohamed Ariff J was satisfied that there
was more than a “functional integrality” of TNB and TNBT. The judge
was of the view that TNBT could not have a meaningful functional
existence without the financial resources and personnel support from
TNB.
The Court also held that TNB, in carrying out the corporate exercise of
integrating TNBT back as a division of TNB but leaving TNBT to
continue exist as a dormant company, had totally disregarded the
interests of the Plaintiffs who had been previously paid the rentals
through funds supplied by TNB but routed through TNBT.
Against this backdrop, the Court found it inequitable and
unconscionable for TNB to have collapsed back TNBT’s business into
TNB, leaving TNBT as an empty shell without funds and without any
meaningful personnel. In this regard, the Court took cognisance of the
fact that documentary evidence had been produced which showed that a
board paper had been circulated by TNB to deal with the legal,
contractual and financial commitments to third parties that arose from
the collapsing back exercise, but that TNB had not taken steps to
implement the same.

The High Court allowed the Plaintiffs’ claim and ordered TNB to pay to
the Plaintiffs the final award made against TNBT.

ii. Company acting as an agent or alter ego of the controller

Tiu Shi Kian & AnorvRed Rose Restaurant Sdn. Bhd[1987]1 MLJ

Fact: It was disputed that the company locked up the restaurant is

Hotel Berjaya, not Red Rose.

Holding: The learned judge determined that the two entities function
as one single entity.
Reasoning: the structure of the two companies which provided an
evidence of breaching the separate corporate existence principle; so
the court notwithstanded the technical separateness of the companies
and assigned responsibility upon The Hotel Shangrila for the Red Rose
Restaurant’s acts.

iv. Corporate group functioning as a single economic unit

Sometimes the court will consider the subsidiary and the holding
company were functioning as a single entity to lift the corporate veil.
Hotel Jaya Puri Bhd. v National Union of Hotel, Bar and Restaurant
Workers. [1980] 1 MLJ 109.

Hotel Jaya Puri Sdn Bhd V National Union Bar & Restaurant
Workers [10]

Facts: Jaya Puri Chinese Garden Restaurant Sdn Bhd was closed down
and workers were cut down. This company was wholly owned
subsidiary of Hotel Jaya Puri Bhd whose premises the restaurant was
located. The Union claimed that the actual employer was the hotel and
the hotel was still in business. Therefore the workers had been fired
rather than retrenched on the closure of a business.

Holding: in reality, the companies shared the same functions in an

integral whole, officers and have unity management. Hence, in fact the
workers were employees of the hotel. As such, the restaurant and the
Hotel should be treated as one single entity.

DHN Food Distributors v London Borough of Tower Hamlets [1976]

3 All ER 462 CA
The corporate veil may be pierced where groups of companies can be
treated as partners.

DHN was the holding company in a group of three companies. There

were two subsidiaries, wholly owned by DHN. One subsidiary owned
land used by DHN, the other owned vehicles used by DHN. The land
was subject to compulsory purchase, and DHN sought compensation
for disturbance of its business.

“These subsidiaries are bound hand and foot to the parent company
and must do just what the parent company says… This group is
virtually the same as a partnership in which all the three companies are
partners. They should not be treated separately so as to be defeated
on a technical point.” (at 860)

It was therefore held that DHN was entitled to claim. The separate
corporate personality doctrine was overridden. However, this is likely
to only be followed where the subsidiaries are wholly owned and serve
no purpose other than to own the parent company’s assets. The case
has not been applied to make one company in a group liable for the
debts of another

V.Justice of the case

• The court has lifted the corporate veil where justice of the case
requires the veil to be lifted.
Aspatra Sdn. Bhd. and 21 Ors. v. Bank Bumiputra Malaysia Bhd. &
Anor. [1988] 1 MLJ 97

Supreme Court of Malaysia lifted the veil of incorporation to

ascertain the actual ownership of assets in granting a Mareva
injunction.

Statutory lifting the corporate veil

i. S. 61: If the contract which is executed by using company’s seal
does not bear the name of the company, the officer of the
company or any person who uses or authorises the use of the
seal, shall be personally liable.
ii. S. 123: Company is prohibited from giving financial assistance
to anyone to buy shares in the company itself. On convicted,
officers are liable to a fine not exceeding RM3 million or max 5
years jail term or both.
iii. S. 131(1): A director/manager is liable if dividends are
distributed when there was no available profits.
iv. S. 251: Directors of holding company is required to prepare
consolidated accounts for group of companies. Thus, holding
company and its subsidiary will be considered as one entity.
v. S. 186: The shares in the public company cannot be allotted
unless, the minimum subscription is met and the sum is
received by the company within 4 months after the date of the
issuance of prospectus.
• If these requirements are not met, the amount received must
be refunded to applicants within 5 months.
• Failure to do so, the director will be jointly and severally liable
to repay the amount.
• S. 75: Failure of a director to obtain approval of the
shareholders at a general meeting when a company wants to
issue new shares, the director is liable to compensate the
company and the person to whom the shares were issued.
• S. 539(3): 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: An officer can be personally liable to creditors for debts
incurred by the company when the company is being wound
up but it continues to trade and incur debts with intent to
defraud creditors.