There are two inter-related general principles of company law which even the most uninitiated or indifferent law student or lawyer will remember. The first is that a company is a separate legal entity distinct from its shareholders: Salomon v A Salomon and Co Ltd [1897] AC 22. This is the most fundamental principle of company law. The second is that the court may, in appropriate circumstances, “pierce the corporate veil” so as to impose liability for a particular act on the person who owns and controls a company. This is a true exception to what would otherwise be the unimpeachable principle in Salomon v Salomon.
While the expression “piercing the corporate veil” is undoubtedly well-known, it may perhaps be surprising to know that the United Kingdom House of Lords (now the Supreme Court) had never given an authoritative ruling on the scope of this principle. The observation of Lord Keith of Kinkel in Woolfson v Strathclyde Regional Council 1978 SC(HL) 90 that “it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts” were, influential as it was, merely obiter. Otherwise, the only authoritative decision was that of the English Court of Appeal in Adams v Cape Industries plc [1990] Ch 433, which held that the court may not pierce the corporate veil merely because it considers that justice so requires.
The UK Supreme Court has finally given authoritative guidance on this important area of company law (it may not be an exaggeration to say this may very well be the single most important decision of English company law in the 21st century.) An enlarged panel of 7 Supreme Court judges delivered their decision in the case of Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34 (12 June 2013), in which the Supreme Court recognised the existence of a limited principle of piercing the corporate veil and clarified the scope of its application. Each of the judgments delivered in this case is illuminating and merits careful study.
The leading judgment was delivered by Lord Sumption. His Lordship observed that the difficulty in formulating a correct principle of “piercing the corporate veil” was in identifying what is a relevant wrongdoing, and mere references to a “facade” or “sham” were unsatisfactory. According to Lord Sumption, there were two distinct principles which had to be distinguished.
The first was the “concealment” principle, which does not involve piercing the corporate veil at all. According to Lord Sumption, the “concealment” principle:-
“… is that the interposition 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 “facade”, but only looking behind it to discover the facts which the corporate structure is concealing.”
The second, and more importantly, was the “evasion” principle, which according to Lord Sumption:–
“… 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.”
Lord Sumption held that the “evasion” principle is the true principle governing the doctrine of piercing the corporate veil. Accordingly, his Lordship concluded that there is a limited principle of English law which applies 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 company’s separate legal personality. However, the courts should resort to piercing the corporate veil only when all other, more conventional, remedies have proved to be of no assistance.
The landmark decision of the UK Supreme Court in Petrodel has now authoritatively settled the question of when it is appropriate to pierce the corporate veil under English law. It may also be of great importance in clarifying the applicable principles for piercing the corporate veil under Malaysian law. This is because insofar as common law principles are concerned, and save where there is legislation modeled upon the company laws of different jurisdictions to the contrary, Malaysian company law has largely and faithfully followed the decisions of English courts, especially in respect of the principle of piercing the corporate veil.
The position under Malaysian law in respect of the principle of “piercing the corporate veil” has, it would appear, yet to be authoritatively settled. There is uncertainty as to the proper test to be applied due to two apparently conflicting tests laid down in decisions of high authority.
The first test is to be found in the decision of Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers & Anor [1980] 1 MLJ 109, HC where Salleh Abas FJ (as he then was) held that the corporate veil may be lifted “when the justice of the case so demands“. This test was approved by Gopal Sri Ram JCA in Tengku Abdullah Ibni Sultan Abu Bakar v Mohd Latiff Bin Shah Mohd [1996] 2 MLJ 265, CA.
The second test is found in the Court of Appeal decision in Law Kam Loy v Boltex Sdn Bhd [2005] 3 CLJ 355, CA, where Gopal Sri Ram JCA changed his mind and held that 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, preferring Lord Keith’s “mere facade” test in Woolfson and following Adams v Cape Industries.
On the one hand, the “justice of the case” test in Hotel Jaya Puri Bhd is too uncertain and wholly unsatisfactory as a principle to be applied by judges, as it leaves too much to the subjective opinion of a particular judge. It has arguably been effectively overruled by Law Kam Loy. On the other hand, the “mere facade” test approved by the Court of Appeal in Law Kam Loy is equally uncertain and leaves judges none the wiser. If the “mere facade” test is to be preferred, Malaysian courts might as well approve and adopt the principle laid down by Lord Sumption in Petrodel above.
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. (It should be noted that in Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd [1988] 1 MLJ 97, although the Supreme Court upheld the High Court’s decision to lift the corporate veil on the facts, the Supreme Court did not express a concluded view on the appropriate test, and their position was overall neutral.)
It is hoped that the Federal Court will have the opportunity in the near future to clarify this important principle of company law.