Tutorial 3: The Lifting of the Veil of Incorporation

1. Explain the significance of the veil of incorporation?

When a company is formed, the owner and the company become
separate legal persons, hence the term, veil of incorporation. The veil of
incorporation gives the protection sought for in having limited liability.
If the court lifts up the corporate veil it will be able to discover the
identity of the participants of the company and impose liability upon
them. Thus, the separation between the company and its participants
(members and officers) does not exist anymore.
There must be some exceptional circumstance for the court to lift the
veil of incorporation.

2. List and explain the situations in which the veil will be lifted?
(1) Fraud
These occur where individuals have used the separate legal entity to do
something they are personally forbidden from doing.
Gilford Motor Co Ltd v Horne (1933)
H was the MD of Gilford Motors (G), and left G. His contract stated that he
wasnt allowed to sell to Gs customers for a period after leaving. H set up a
company using the wifes name, he then approached his former customers; H
argued that firstly it was his company that was approaching the customers,
not him; and secondly, if there was wrongdoing, his company was liable and
not him.
The courts held that the company was sham, lifted the veil of
incorporation to show that he and the company was one and the same
and granted an injunction against his company as well as him.
Jones v Lipman [1962].
In this case Lipman agreed to sell land to Jones but before completion of the
contract, and later having changed his mind about selling the land, Lipman
sold the land to a company of which he and another were the sole directors
and shareholders. He did this to put the land out of reach from the
purchasers.
The judges ordered specific performance against Lipman and the company.
The company was described as a device and a sham, a mask which Lipman
held before his face in an attempt to avoid recognition by the eye of equity.

 Suffice to say that a litigant who seeks the court's intervention to pierce the
corporate veil must establish special circumstances showing that the
company in question is a mere facade concealing the true facts.
Perman Sdn Bhd- vs -European Commodities Sdn Bhd per Gopal Sri
Ram JCA
In Lam Kam Loy & Anor v Boltex Sdn Bhd & Ors [2005]
I had occasion to discuss the more recent cases on the subject and had this
to say about the present state of the law:
In my judgment, in the light of the more recent authorities such as Adams v.
Cape Industries Plc,[1990] Ch 433 it is not open to the courts to disregard the
corporate veil purely on the ground that it is in the interests of justice to do so.
It is also my respectful view that the special circumstances to which Lord
Keith referred [inWoolfson v. Strathclyde Regional Council [1978] SLT 159]
include cases where there is either actual fraud at common law or some
inequitable or unconscionable conduct amounting to fraud in equity.
per Gopal Sri Ram JCA.

(2) Agency
If a subsidiary company is acting as an agent for its holding company, it may
be bound by the same liabilities and rights of its holding company.
However, no court has yet found subsidiary companies liable for their
holding companys debts.

Smith, Stone & Knight Ltd v Birmingham Corporation (1939)

SSK owned Birmingham Works (BW) some land, and a subsidiary company
(BW) operated on this land. BC issued a compulsory purchase order on this
land. BC would reasonably compensate any owner for the business they ran
on the land. Since the subsidiary company did not own the land, BC claimed
they were not entitled to the compensation.
The courts held that the subsidiary company was an agent and BC must
pay compensation.

(3) Group of companies

The Companies Act does not refer to a group of companies but terms like
holding company or wholly owned subsidiary are used in the Act. (see s5,
5A, 5B and 6)

 Creasey v Breachwood Motors [1993]

An employee brought an action for unfair dismissal against his employer who
transferred the company assets to another company formed for the purpose.
The employee won but there were no assets to pay his claim. The judge
allowed him to transfer the claim to the new company; i.e. He lifted the
veil.
Ord v Belhaven Pubs Limited [1998]
The plaintiffs were suing the defendant for misrepresentation. The defendant
company was part of a group that underwent a number of reorganisations.
This worried the plaintiffs who feared the defendant company would have no
funds to pay if they won. The plaintiffs went to court to substitute the company
with another company in the group. The Court of Appeal refused to allow
the substitution saying they would only lift the veil in cases of
impropriety and there was none in this case.
Adams v Cape Industries plc and Another (1991)
A, worked for a US subsidiary of CI, which marketed asbestos in the US. The
US subsidiary had no assets. A, suffered injuries through exposure to
asbestos dust and wanted to sue.
If he had sued the US subsidiary, he would have received no compensation
since there was no money to pay out.
He therefore sued CI in the UK and claimed that the company was a single
economic unit.
The courts held in refusing to lift the veil of incorporation that, even
though they recognised that the corporate structure was designed to
minimise liability and taxation, it was not illegal and should not be
considered a single economic unit. On the test of the mere facade, it
was emphasised that the motive was relevant whenever such a sham or
cloak is alleged, as in Jones v Lipman. A company must be set up to
avoid existing obligations, not future and hypothetical obligations which
have not yet arisen.

The Liberal Approach -

Asparta Sdn Bhd v Bank Bumiputra Malaysia Bhd [1987]

The court would generally lift the corporate veil in order to do justice
particularly when an element of fraud is involved and here there was abuse
from the very structure of the companies after lifting the corporate veil.

 Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant
Workers In this case, the hotel appealed against the award of the Industrial
Court in awarding compensation to restaurant workers employed by the
subsidiary of the hotel. The court found that in the particular circumstances of
the dispute, the hotel was in law the employer of the retrenched workers even
though they were employed by the restaurant. The two companies were under
the same MD, who had ultimate authority over the employees the hotel and
the restaurant is one enterprise.
While in Asparta and Hotel Jayapuri the court did lift the veil in a group of
companies there are other cases where they declined to do so. For example
in:
People's Insurance Co (M) Sdn Bhd v People's Insurance Co LtdIndependent legal entity. Veil not lifted. The 4 directors from the holding
company were not the agent of the holding company but directors and agent
of the subsidiary company.
Court of Appeal in ATA Management Consultants Sdn Bhd v. Makumaran
Sdn Bhd liberal interpretation is no longer supported by current authorities
see Abdul Aziz vin Atan & 87 Ors v. Ladang Rengo Malay Estate Sdn Bhd
as per Shankar J., that the incorporation of the company creates a separate
legal person distinct from the shareholders.
In Double Acres Sdn Bhd v Tiara Setia Sdn Bhd [2000] the court was of
the view that Malaysian courts have been lifting the corporate veil in relation
to a group of companies rather too easily.
However in the recent case of Visvanathan a/l Perumal & 2 Ors v. Mona
Industries (M) Sdn Bhd [2004], applied the legal principle found in Hotel
Jayapuri and furthermore the Court of Appeal in ATA Management
Consultants Sdn. Bhd., v. Makumaran Sdn Bhd [2004] did not overruled Hotel
Jayapuri.

(4) Single Economic Entity

DHN Food Distributors Ltd v London Borough of Tower Hamlets (1976)Liberal Apporach
DHN owned all the shares in its subsidiaries, Bronze and Transport. A
subsidiary company Bronze owned all the land on which LBTB issued a
compulsory purchase order on. The Court of Appeal held, in lifting the veil
of incorporation that DHN was able to claim compensation because it
and its subsidiary was a single economic unit. DHN own all the shares
of the subsidiaries and control every movement of the subsidiaries.

 Woolfson v Strathclyde Regional Council (1978)

This was similar to DHN v Tower Hamlets. However, the House of Lords
ruled that Woolfson and its subsidiary was not a single economic unit due to
operational practices. Note that since this case was based in Scotland,
different law applied.

(5) National Emergency

Daimler Co Ltd v Continental Tyre and Rubber (GB) Ltd (1916)
C sued D for debts owing. C was a UK company; however all the
shareholders were German except for one British Secretary. D argued that
they should not pay the debt to German individuals to prevent money going
towards Germanys war effort. The court held lifting the veil that C was
German company therefore have no locus standi tin English courts.

(6) Tax Evasion

Companies may transfer assets between subsidiary companies to reduce tax
liability, but the courts may then treat them as a single unit.

(7) Tortious claims

Williams v Natural Life Health Foods Ltd [1998]
In its judgment the House of Lords considered that a director or employee of a
company could only be personally liable for negligent misstatement if there
was reasonable reliance by the claimant on an assumption of personal
responsibility by the director so as to create a special relationship between
them. There was no evidence in the present case.

3. Research the following incidents:

Adams v. Cape Industries Plc and Another (1991) 1 All ER. 929 CA

Adams v Cape Industries plc and Another (1991)

A, worked for a US subsidiary of CI, which marketed asbestos in the US. The
US subsidiary had no assets. A, suffered injuries through exposure to
asbestos dust and wanted to sue. If he had sued the US subsidiary, he would
have received no compensation since there was no money to pay out. He
therefore sued CI in the UK and claimed that the company was a single
economic unit. The courts held that, even though they recognised that the
corporate structure was designed to minimise liability and taxation, it was not
illegal and should not be considered a single economic unit.

The BMF scandal / Lorraine Esme Osman

Research the following incidents:

1. The BMF scandal/Lorraine Esme Osman
In Malaysia, the case that was labelled as the one that shocked the nation is
Asparta Sdn Bhd v Bank Bumiputra Malaysia Bhd [1] (Koh, 2006). Fraud was
perpetrated against the company. In this case, Bumiputra Malaysia Finance Ltd
(BMF) sued Lorrain Esme Osman (Lorrain) for the full amount figure of
M$27,625,853.06 which they have described that Lorrain has made secret profit
on for which the company has had no disclosure from the accused.
Lorrain was a director of Bank Bumiputra Malaysia Bhd (BBMB) and also the
Chairman of BMF. They received news that Lorrain had disappeared from
Malaysia and so apply to the Court for an order to restrain (Mareva Injunction)
Lorrain from moving his assets out of the country, and also for an order for
disclosure of the value of Lorrains assets (Anton Piller Order) and the nature of
these assets. They discovered that Lorrains assets were in 32 banks and 104
other companies.
The courts decision to take this action was because the court in agreement with
BBMB wanted to prevent Lorrain from taking out his asset out jurisdiction which
my deter recovery process later on. Furthermore, the court has also found that
Lorrain has secretly transferred the profit to Aspatra and this supported the
decision of the court to issue the Mareva injunction.
However, lawyer for En. Lorrain argued that he is not the culprit who has the
money that was siphoned, the company (Aspatra), is the real culprit as the
money is with the company and not with him. The lawyers cited separate legal
personality where the members and the management are separate from the
company. Lawyers for Lorrain relied on the authority of Salomon v Salomon [2]
and s 16(5) of the Companies Act 1965 [3] to argue separate legal personality.
The court on other hand thought otherwise and instead found sufficient evidence
to lift the corporate veil establish actual ownership of assets in companies with
the Lorrain Group. In this case, the Supreme Court held that courts in Malaysia

had the power to grant Mareva injunction and as such the lifting of the corporate
veil was appropriate and found Aspatra Sdn Bhd to be liable.

The Bhopal disaster

The Bhopal disaster, also referred to as the Bhopal gas tragedy, was a gas
leak incident in India, considered one of the world's worst industrial
disasters.[1] It occurred on the night of 23 December 1984 at the Union
Carbide India Limited (UCIL) pesticide plant in Bhopal, Madhya Pradesh. A
leak of methyl isocyanate gas and other chemicals from the plant resulted
in the exposure of hundreds of thousands of people. The toxic substance
made its way in and around the shantytowns located near the plant.[2]
Estimates vary on the death toll. The official immediate death toll was
2,259 and the government of Madhya Pradesh has confirmed a total of
3,787 deaths related to the gas release.[3] Others estimate 8,000 died
within two weeks and another 8,000 or more have since died from gasrelated diseases.[4][5] A government affidavit in 2006 stated the leak
caused 558,125 injuries including 38,478 temporary partial and
approximately 3,900 severely and permanently disabling injuries.[6]
UCIL was the Indian subsidiary of Union Carbide Corporation (UCC), with
Indian Government controlled banks and the Indian public holding a 49.1
percent stake. In 1994, the Supreme Court of India allowed UCC to sell its
50.9 percent share. Union Carbide sold UCIL, the Bhopal plant operator, to
Eveready Industries India Limited in 1994. The Bhopal plant was later sold
to McLeod Russel (India) Ltd. Dow Chemical Company purchased UCC in
2001.
Civil and criminal cases are pending in the United States District Court,
Manhattan and the District Court of Bhopal, India, involving UCC, UCIL
employees, and Warren Anderson, UCC CEO at the time of the disaster.[7]
[8] In June 2010, seven ex-employees, including the former UCIL
chairman, were convicted in Bhopal of causing death by negligence and
sentenced to two years imprisonment and a fine of about $2,000 each, the
maximum punishment allowed by law. An eighth former employee was
also convicted, but died before the judgment was passed.[1]
Legal proceedings leading to the settlementOn 14 December 1984, the
Chairman and CEO of Union Carbide, Warren Anderson, addressed the
US Congress, stressing the company's "commitment to safety" and
promising to ensure that a similar incident "cannot happen again".
However, the Indian Government passed the Bhopal Gas Leak Act in
March 1985, allowing the Government of India to act as the legal
representative for victims of the disaster,[45] leading to the beginning of

legal wrangling. In 1985, Henry Waxman, a California Democrat, called for

a US government inquiry into the Bhopal disaster, which resulted in US
legislation regarding the accidental release of toxic chemicals in the United
States.[47] March 1986 saw Union Carbide propose a settlement figure,
endorsed by plaintiffs' US attorneys, of $350 million that would, according
to the company, "generate a fund for Bhopal victims of between $500600
million over 20 years". In May, litigation was transferred from the US to
Indian courts by US District Court Judge. Following an appeal of this
decision, the US Court of Appeals affirmed the transfer, judging, in January
1987, that UCIL was a "separate entity, owned, managed and operated
exclusively by Indian citizens in India".[45]
The judge in the US granted UCC's forum request, thus moving the case
to India. This meant that, under US federal law, the company had to
submit to Indian jurisdiction. Litigation continued in India during 1988. The
Government of India claimed US$ 350 million from UCC.[5] The Indian
Supreme Court told both sides to come to an agreement and "start with a
clean slate" in November 1988.[45] Eventually, in an out-of-court
settlement reached in 1989, Union Carbide agreed to pay US$ 470 million
for damages caused in the Bhopal disaster, 15% of the original $3 billion
claimed in the lawsuit.[5] By the end of October 2003, according to the
Bhopal Gas Tragedy Relief and Rehabilitation Department, compensation
had been awarded to 554,895 people for injuries received and 15,310
survivors of those killed. The average amount to families of the dead was
$2,200.[48]
Throughout 1990, the Indian Supreme Court heard appeals against the
settlement from "activist petitions". In October 1991, the Supreme Court
upheld the original $470 million, dismissing any other outstanding petitions
that challenged the original decision. The Court ordered the Indian
government "to purchase, out of settlement fund, a group medical
insurance policy to cover 100,000 persons who may later develop
symptoms" and cover any shortfall in the settlement fund. It also requested
UCC and its subsidiary "voluntarily" fund a hospital in Bhopal, at an
estimated $17 million, to specifically treat victims of the Bhopal disaster.
The company agreed to this.[45]
Charges against Warren Anderson and others UCC Chairman, CEO
Warren Anderson was arrested and released on bail by the Madhya
Pradesh Police in Bhopal on 7 December 1984. The arrest, which took
place at the airport, ensured Anderson would meet no harm by the Bhopal
community. Anderson was taken to UCC's house after which he was
released six hours later on $2,100 bail and flown out on a government
plane. These actions were allegedly taken under the direction of then chief
secretary of the state, who was possibly instructed from chief minister's
office, who himself flew out of Bhopal immediately.[49][50][51] Later in
1987, the Indian government summoned Anderson, eight other executives
and two company affiliates with homicide charges to appear in Indian

court.[52] In response, Union Carbide balked, saying the company is not

under Indian jurisdiction.[52]
In 1991, the local Bhopal authorities charged Anderson, who had retired in
1986, with manslaughter, a crime that carries a maximum penalty of 10
years in prison. He was declared a fugitive from justice by the Chief
Judicial Magistrate of Bhopal on 1 February 1992 for failing to appear at
the court hearings in a culpable homicide case in which he was named the
chief defendant. Orders were passed to the Government of India to press
for an extradition from the United States. The U.S. Supreme Court refused
to hear an appeal of the decision of the lower federal courts in October
1993, meaning that victims of the Bhopal disaster could not seek damages
in a US court.[45]
In 2004, the Indian Supreme Court ordered the Indian government to
release any remaining settlement funds to victims. And in September
2006, the Welfare Commission for Bhopal Gas Victims announced that all
original compensation claims and revised petitions had been "cleared".[45]
The Second Circuit Court of Appeals in New York City upheld the dismissal
of remaining claims in the case of Bano v. Union Carbide Corporation in
2006. This move blocked plaintiffs' motions for class certification and
claims for property damages and remediation. In the view of UCC, "the
ruling reaffirms UCC's long-held positions and finally puts to restboth
procedurally and substantivelythe issues raised in the class action
complaint first filed against Union Carbide in 1999 by Haseena Bi and
several organizations representing the residents of Bhopal".[45]
In June 2010, seven former employees of the Union Carbide subsidiary, all
Indian nationals and many in their 70s, were convicted of causing death by
negligence and each sentenced to two years imprisonment and fined Rs.1
lakh (US$2,124). All were released on bail shortly after the verdict. The
names of those convicted are: Keshub Mahindra, former non-executive
chairman of Union Carbide India Limited; V.P. Gokhale, managing director;
Kishore Kamdar, vice-president; J. Mukund, works manager; S.P.
Chowdhury, production manager; K.V. Shetty, plant superintendent; and
S.I. Qureshi, production assistant. Federal class action litigation, Sahu v.
Union Carbide et al. is presently pending on appeal before the Second
Circuit Court of Appeals in New York. The litigation seeks damages for
personal injury, medical monitoring and injunctive relief in the form of
cleanup of the drinking water supplies for residential areas near the
Bhopal plant. A related complaint seeking similar relief for property
damage claimants is stayed pending the outcome of the Sahu appeal
before the federal district court in the Southern District of New York.

In reviewing the facts of the above incidents identify how the concept of separate
legal identity operates and whether the veil ought to be lifted when justice dictates?

4. Good Health Sdn. Bhd. is a well-established pharmaceutical company which is the

parent company of a large group of subsidiary companies involved in different
aspects of the pharmaceutical industry.
Testing Sdn. Bhd. is one these subsidiaries and was set specifically for the purpose
of carrying out commercially risky ventures in the search for profitable new drugs.
Owing to this aspect of the business, Testing Sdn. Bhd.s total assets are
intentionally capped at approximately RM 50,000.00.
Recently, Testing undertook experiments to try and develop a new drug to cure a
new strain of deadly influenza. Barry Tablet, the Managing Director of Testing Sdn.
Bhd., appeared live on the television to make a personal appeal for volunteers for
the experiment. After an intensive media campaign involving Barry Tablet, 100
volunteers were chosen.
Unfortunately, the experiment went disastrously wrong resulting in several volunteers
losing their eyesight permanently. The experiment was not properly researched and
there is clear evidence of negligence. Testing now faces claims of millions of ringgit.
Discuss Testing Sdn. Bhd.s liability and advise Barry if he can be held personally
liable and further, if claims can be brought against Good Health Sdn. Bhd.

Answer:
Good Health Sdn. Bhd. is a well-established pharmaceutical company which is the
parent company of a large group of subsidiary companies involved in different
aspects of the pharmaceutical industry.

The concept of a company being a legal entity and therefore it is a separate

legal person from the owner (Salomon v. Salomon, Macaura v. Northern
Assurance, or Lee v Lee Air Faming) can sometimes give undesirable results.
In particular, shareholders could use a company to obtain funds dishonestly,
and then not be liable for repayment.

There are therefore numerous exceptions to the rules defined by

Salomon v Salomon & Co Ltd. These can be implemented by the courts
on a case-by-case basis, or by statute.
Hence if the court lifts up the corporate veil it will be able to discover the
identity of the participants of the company and impose liability upon
them. Thus, the separation between the company and its participants
(members and officers) does not exist anymore.
There must be some exceptional circumstance for the court to lift the
veil of incorporation.

Since the courts rule on a case-by-case basis, it can be difficult to

classify the exceptions.
This would imply that it may be possible for substitution of defendants
to take place.
Apply any two to three authorities from: Salomon v Salomon & Co. [1897]
Macaura v Northern Assurance Co. [1925]
Lee v Lees Air Farming [1961]
s.16(5) CA 1965
Goh Hooi Yin v Lim Teong Ghee
Abdul Aziz bin Atan & 87 Ors v Ladang Rengo Malay Estate Sdn.
Bhd. [1985]
o Perman Sdn. Bhd. v European Commodities Sdn. Bhd. (2005)
o
o
o
o
o
o

Testing Sdn. Bhd. is one these subsidiaries and was set specifically for the purpose
of carrying out commercially risky ventures in the search for profitable new drugs.
Owing to this aspect of the business, Testing Sdn. Bhd.s total assets are
intentionally capped at approximately RM 50,000.00.
While the subsidiary is undercapitalised, that appears to be irrelevant as the
doctrine of corporate personality implies that the Testing is a separate entity
from Good Health. Ownership however is significant. If the company is totally
owned by the parent company and control all its movement then it will be
regarded as a single economic entity as in DHN Food Distributors. However if
a company is not totally owned or controlled in such manner then the laws
governing Group of Companies may apply.

First issue: Single Economic Entity

The single economic entity argument can Good Health and Testing be
treated as one and the same?

Cases: DHN Food Distributors Ltd v London Borough of Tower

Hamlets (1976), Woolfson v Strathclyde Regional Council (1978),
Adams v Cape Industries plc and Another (1991)

If it is like DHN - Single Economic Entity. From the facts we are told that
Testing was structured to do risky ventures developing new drugs for
deadly influenza. If operationally different then it will be more like
Woolfsons case (unlike DHN there is no unity of ownership in this case).

Although Woolfsons case doubted DHN, it did not overrule as the Court of
Appeal in Woolfsons distinguished the facts in both cases. (That is

DHN and Woolfson do not have the same facts.)

Assuming that since the pay up capital is only RM 50,000 and Testing is to
developed drugs that are highly profitable for Good Health, the control
could be like DHN, in which case Testing would be found liable. In this
case Testing may be found to be operationally different and as such
Testing may be regarded as a separate legal entity and the veil may not be
lifted (rules in Group of Companies).

Second Issue: Group of companies - liberal approach: Malaysia

Could Good Health and Testing be part of a Group Enterprise? Courts are
reluctant to lift the veil of incorporation in Group Enterprise because each
company in a group enterprise may not have identical creditors with
identical claims. Nevertheless there were instances that courts have taken

The Liberal Approach -

Asparta Sdn Bhd v Bank Bumiputra Malaysia Bhd [1987]

The court would generally lift the corporate veil in order to do justice
particularly when an element of fraud is involved and here there was abuse
from the very structure of the companies after lifting the corporate veil.
Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant
Workers In this case, the hotel appealed against the award of the Industrial
Court in awarding compensation to restaurant workers employed by the
subsidiary of the hotel. The court found that in the particular circumstances of
the dispute, the hotel was in law the employer of the retrenched workers even
though they were employed by the restaurant. The two companies were under
the same MD, who had ultimate authority over the employees the hotel and
the restaurant is one enterprise.
While in Asparta and Hotel Jayapuri the court did lift the veil in a group of
companies there are other cases where they declined to do so. These are
instances where the courts in Malaysia have adopted the strict approach.
For example in:
People's Insurance Co (M) Sdn Bhd v People's Insurance Co LtdIndependent legal entity. Veil not lifted. The 4 directors from the holding
company were not the agent of the holding company but directors and agent
of the subsidiary company.

 Court of Appeal in ATA Management Consultants Sdn Bhd v. Makumaran

Sdn Bhd liberal interpretation is no longer supported by current authorities
see Abdul Aziz vin Atan & 87 Ors v. Ladang Rengo Malay Estate Sdn Bhd
as per Shankar J., that the incorporation of the company creates a separate
legal person distinct from the shareholders.
In Double Acres Sdn Bhd v Tiara Setia Sdn Bhd [2000] the court was of
the view that Malaysian courts have been lifting the corporate veil in relation
to a group of companies rather too easily.
However in the recent case of Visvanathan a/l Perumal & 2 Ors v. Mona
Industries (M) Sdn Bhd [2004], applied the legal principle found in Hotel
Jayapuri and furthermore the Court of Appeal in ATA Management
Consultants Sdn. Bhd., v. Makumaran Sdn Bhd [2004] did not overruled Hotel
Jayapuri.
The argument then lies on whether fraud has been committed. If fraud is
evident, as per Aspatra and Hotel Jayapuri cases then the veil will be lifted
and Good Health may be found liable. Under capitalizing the subsidiary is not
indicative of fraud.
Law Kam Loy v Boltex Sdn Bhd [2005] 3 CLJ 355, CA adopted the strict
approach and courts will lift the veil of incorporation only when there are
evidence of fraud.
In this regard, it should be noted that Hotel Jaya Puri Bhd was applied by the
Court of Appeal as recent as 2010 (see Vellasamy Pennusamy & Ors v
Gurbachan Singh Bagawan Singh & Ors [2010] 5 MLJ 437, CA),
Whereas Law Kam Loy was applied by the Court of Appeal as recent as
2011 (see Epic Quest Sdn Bhd & Anor v Sheila Eleanor De Costa [2011] 8
CLJ 518, CA).
No attempt was made to reconcile the conflicting decisions in either case, and
the Federal Court has yet to make an authoritative ruling on this issue.

In the more recent case of Prest v Petrodel Resoruces Ltd [2013] the
Supreme Court made it clear that the strict, conservative and legalistic
approach rather than the economics analysis of company law are favoured. In
this case Mrs. Prest recently divorced from her husband then, sought to claim
ancillary relief over seven properties owned by her husbands companies (the
Petrodel Group of Companies). At the heart of the argument was whether the
veil of these companies can be pierced and be shown that the husband
actually owned the company and Mrs. Prest would have matrimonial rights
under section 24 of the Matrimonial Causes Act 1973, to claim relief for these

properties. At the Supreme Court, the Lordships held that the veil of
incorporation could be lifted and that these companies were holding the
properties in trust for Mr. Prest and as such the transfer of properties could be
made to the plaintiff. Lord Sumption delivered the principal judgement and
stated that the correct law in lifting the veil of incorporation is found within
company law and not matrimonial laws and stated that the veil of
incorporation would be lifted where companys legal personality is abused for
the purposes of some wrong doing and propounded that fraud may be seen in

two distinct principles of concealment and evasion.

There would be concealment when companies conceal the identity of the
real actors and evasion if there is a legal right against the person in
control and the company is interposed [to] defeat the right or frustrate its
enforcement. Lord Sumption further added that courts should only lift the veil
of incorporation when a person is under an existing legal obligation or
liability or subject to an existing legal restriction which he deliberately evades
or whose enforcement he deliberately frustrates by interposing a company
under his control. The court may then pierce the corporate veil for the
purpose, and only for the purpose, of depriving the company or its controller
of the advantage that they would otherwise have obtained by the companys
separate legal personality.

Third Issue: Agency

Agency: If a subsidiary company is acting as an agent for its holding

company, it may be bound by the same liabilities and rights of its holding
company. Smith, Stone & Knight Ltd v Birmingham Corporation (1939)

Fourth Issue: Justice as a criterion?

This is a disputed area. Malaysian law appears to follow the principles laid
down in Adams although English courts have recently re-evaluated this. One
argument could be on the basis of the nature of the business and public
safety. On the other hand, there appears to be nothing morally culpable about
undercapitalizing the subsidiary. In the present context, Malaysian courts are
unlikely to extend the scope of veil lifting to cover this.

Recently, Testing undertook experiments to try and develop a new drug to cure a
new strain of deadly influenza. Barry Tablet, the Managing Director of Testing Sdn.
Bhd., appeared live on the television to make a personal appeal for volunteers for
the experiment. After an intensive media campaign involving Barry Tablet, 100
volunteers were chosen.
Unfortunately, the experiment went disastrously wrong resulting in several volunteers
losing their eyesight permanently. The experiment was not properly researched and
there is clear evidence of negligence. Testing now faces claims of millions of ringgit.

Applying the legal principles adopted in the strict approach under Group
enterprises, it may be argued that Good Health may not be found liable
for the acts of the subsidiary as fraud could not be proven in this case.
The likely party liable for the negligent act would be Testing Sdn Bhd
and the volunteers must be advised that the under capitalisation of the
subsidiary may mean that very little in terms of compensation could be
recovered.

Barry had appeared on TV on behalf of Testing, unfortunately, the experiment went

disastrously wrong resulting in several volunteers losing their eyesight permanently.
The experiment was not properly researched and there is clear evidence of
negligence. Testing now faces claims of millions of ringgit

Section 132(1A) Companies Act 1965 provides that a director of a

company shall exercise reasonable care, skill and diligence with:
(a)

the knowledge, skill and experience which may reasonably be

expected of a director having the same responsibilities; and

(b)

any additional knowledge, skill and experience which the director

in fact has.

Where a director has additional knowledge, skill and experience, that

director will be assessed against a reasonable person who has that
additional knowledge, skill and experience.

The actual knowledge and experience of a director is to be considered in

addition to the minimum standard.

There is no minimum objective standard required of a director. Since the

subjective standard of care varies according to the skill a director has, a
director with no specific skill or expertise need not be accountable.

It may be difficult for Barry to say that he is of the opinion that the work
done at Testing is not regarded as high risks work as the company was
under-capitalised and they were testing new experimental drugs. On the

balance of probabilities, Barry may be found liable as the director due to

provision of section 132 (1A) Companies Act 1965. Furthermore as a
director, Barry may have tortious liability as provided for under the
authority of William v. Natural Health Food due to breach of duty of care
and as such may be found to have been negligent.

Under section 214 (2) Companies Act 1965, if a company is wound-up,

directors will have unlimited liability personally.