Federal Court conflates concepts of “lifting” and “piercing” of corporate veil.
In a previous article titled “Piercing the Corporate Veil” (12 June 2013), we highlighted the landmark decision of Prest v Petrodel Resources Ltd & Ors  UKSC 34 in which the UK Supreme Court authoritatively clarified when the corporate veil can be pierced. The state of uncertainty under Malaysian law was also highlighted, with hope expressed that the Federal Court would have the opportunity in the near future to clarify this important principle of company law.
The Federal Court recently had the opportunity to consider the issue of lifting or piercing the corporate veil, and appears to have accepted and applied the principles laid down in Prest. However, rather confusingly, the Federal Court also appears to have conflated the concept of “lifting” the corporate veil with that of “piercing” the corporate veil.
In Gurbachan Singh & Ors v Vellasamy Pennusamy & Ors & Or Appeals (Civil Appeal No. 02(f)-58-09/2013(A), 27 November 2014), the 1st appellant was an advocate and solicitor who, although originally engaged to act on behalf of a group of purchasers (including the respondents) of shares or plots in a large parcel of rubber estate land, subsequently wrongfully acquired the rubber estate land in his own name, which he then transferred to the 4th appellant company was incorporated by him. One of the issues posed for the Federal Court’s consideration was “Whether a Court is entitled to lift the corporate veil of a company in order to do justice despite it not being the pleaded or argued case of the claimants that the company concerned was used as an engine of fraud.” The majority of the Court of Appeal below had taken the view that the 4th appellant company was the alter ego of the 1st appellant.
The Federal Court held that on the facts, it was not necessary to deal with the issue of lifting the corporate veil. However, the court nevertheless went on to make the following observations:-
96. But in the event that we should, we are of the view that it is now a settled law in Malaysia that the Court would lift the corporate veil of a corporation if such corporation was set up for fraudulent purposes, or where it was established to avoid an existing obligation or even to prevent the abuse of a corporate legal personality. (Prest v Prest and Others  UKSC 34.)
97. As to what constitutes fraudulent purposes it has been described as to include actual fraud or fraud in equity. (Law Kam Loy & Anor v Boltex Sdn Bhd  3 CLJ 355) And fraud in equity occurred in ‘…cases where there are signs of separate personalities of companies being used to enable persons to evade their contractual obligations or duties, the court would disregard the notional separateness of the companies…’ (Sunrise Sdn Bhd v First Profile (M) Sdn Bhd  3 MLJ 533.)
98.Quite recently this Court also discussed on the issue of lifting a corporate veil. (Takako Sakao (f) v Ng Pek Yuan (f) & Anor  6 MLJ 751.) It said this:
…  A more recent statement of the doctrine of corporate personality is to be found in the case of Woolfson v Strathclyde Regional Council 1978 SLT 159 which is authority for the proposition 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 façade concealing the true facts.
99.The phrase ‘a mere façade concealing the true facts’ was recently elaborated by the Supreme Court of the United Kingdom in the case of Prest v Prest and Others  UKSC 34. The leading judgment of the Court said this:
‘The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is the imposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the “façade” but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be critical. This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil.’
100. Reverting therefore to the facts and circumstances in the present case, and bearing in mind the foregoing principles, we are inclined to agree with the majority that there were justifications in the lifting of the corporate veil of the 4th Appellant.
101. It was not in dispute that the 1st Appellant made the bids for the estate land in his own name. But the Respondents had adduced evidence that the purchasers only agreed to the arrangement after the 1st Appellant managed to convince them during the meeting before the second auction.Further, it is also a fact that part of the money for the deposit for the second auction was paid by some of the purchasers. After having successfully bid for the estate land the 1st Appellant proceeded to incorporate the 4th Appellant with the sole intention of transferring the estate land to it. But at the same time he was one of the directors, a shareholder and the promoter of the 4th Appellant.
102. As such, on the facts as found, we agree with the finding of the majority that the 4th Appellant was the alter ego of the 1st Appellant. The 1st Appellant established the 4th Appellant as a mere façade to transfer the ownership of the estate land in order to evade his fiduciary obligations as the solicitor towards his clients, the purchasers including the Respondents.
However, the Federal Court concluded that on the facts, as the shares in the 4th appellant had been transferred to third parties who were purchasers in good faith and for valuable consideration, the court declined to declare as invalid, null and void the transfer of the estate land from the 1st appellant to the 4th appellant.
The following comments may be made of the reasoning of the Federal Court in Gurbachan Singh:-
- First, it was somewhat curious for the Federal Court to state that the principles governing the lifting or piercing of the corporate veil were “settled law in Malaysia”. As highlighted in the previous article, prior to Gurbachan Singh the Malaysian courts had applied two different tests, namely the “when the justice of the case so demands” test and the “mere facade” test. The Malaysian courts have hitherto neither clearly nor consistently applied principles similar to those laid down by the UK Supreme Court in Prest. It is unclear why the Federal Court was unwilling to simply acknowledge that it was accepting the Prest test as part of Malaysian law henceforth.
- Secondly, and more worryingly, the Federal Court appears to have completely conflated the concepts of “lifting” and “piercing” the corporate veil, even though the UK Supreme Court in Prest emphasized these are separate and distinct legal concepts involving different legal principles. This can be seen, for example, from the Federal Court’s confusing statement that Malaysian courts would “lift” the corporate veil “if such corporation was set up for fraudulent purposes, or where it was established to avoid an existing obligation or even to prevent the abuse of a corporate legal personality.” It is confusing, because these principles were held in Prest to constitute the “evasion” principle which is applied to “pierce” the corporate veil. The “lifting” of the corporate veil is based on a completely different principle i.e. the “concealment” principle.
- Thirdly, an examination of the facts of Gurbachan Singh demonstrate that the Federal Court was in fact “piercing” and not “lifting” the corporate veil. As the court observed, the 1st appellant established the 4th appellant to transfer the ownership of the estate land in order to evade his fiduciary obligations as solicitor towards the respondents. The factual matrix of Gurbachan Singh fell completely within the “evasion” principle, which is the basis for piercing the corporate veil. On the facts, there was nothing which would have triggered the application of the “concealment” principle at all. Curiously and confusingly, although the Federal Court itself quoted the UK Supreme Court’s caution in Prest that the concealment principle does not involve piercing the veil at all, yet the Federal Court purportedly applied the concealment principle to “lift” the corporate veil which was irrelevant to the actual legal result, i.e. “piercing” the corporate veil.
- Finally, it was unfortunate and confusing for the Federal Court to speak of “lifting” the corporate veil throughout its judgment, and to place so much emphasis on phrases such as “mere facade“. Contrary to the views of the Federal Court, the UK Supreme Court in Prest did not elaborate on the meaning of the word “mere facade” as if it remained an applicable test, but in fact criticized references to a “facade” or “sham” as begging too many questions to provide a satisfactory answer, and liable to confuse. The Federal Court appears to have taken the view that either the issue before it did not involve the “piercing” of the corporate veil at all, or (more worryingly) that there was no legal difference between the “lifting” and “piercing” of the corporate veil. Either view was mistaken.
It is unfortunate that the Federal Court in Gurbachan Singh appears to have conflated the separate and distinct concepts of “lifting” and “piercing” the corporate veil, while endorsing the continued use of unhelpful terms such as “mere facade”. It is even more unfortunate considering that the observations of the Federal Court were completely obiter in nature, as the court had already taken the view that on the facts it was not necessary to deal with the issue of the corporate veil at all.
If the principles in Prest have been accepted as forming part of Malaysian law, it is arguably more helpful for the Malaysian courts to focus on whether the facts of a particular case trigger the application of either the “concealment” principle or “evasion” principle, which will accordingly guide them to the correct legal result on the facts. As the judgment of the Federal Court in Gurbachan Singh demonstrates, failure to appreciate a legal distinction with a difference is a guaranteed recipe for uncertainty and confusion.