Federal Court lays down principles on the lifting or piercing of corporate veil

29 June 2021

Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & Ors [2021] 4 CLJ 821

In Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & Ors (“Ong Leong Chiou”), the dispute stemmed from the construction of a multi-storey commercial development in Malaysia known as Melawati Mall. The main contractor for the project, Bina Puri Holdings Berhad (“Bina Puri”) appointed Perfect Selection Sdn Bhd (“Perfect Selection”) as a sub-structural works subcontractor. The directors of Perfect Solution were one Tony Ong Leong Chiou (“Tony”) and one Liew. Perfect Selection in turn subcontracted the sub-structural works to PS Bina Sdn Bhd (‘PS Bina’), which had three directors and shareholders, Tony, Liew and one Chang. Chang on behalf of CTF Build Sdn Bhd invited Keller (M) Sdn Bhd (“Keller”) to quote for the sub-structural works based on bills of quantities under Perfect Selection’s sub-structural works subcontract. Unbeknownst to Keller, the documents provided to Keller had a missing page, indicating that the earth bore works (“EBW”), would not be paid for. It was later found that Perfect Selection and its controlling shareholder and director, Tony, were aware of this omission.

Keller was awarded all three categories of sub-structural works and letters of award were issued by PS Bina, a newly-incorporated company which was not the company that invited Keller to quote for the works, stating that all three categories of sub-structural works, including the EBW, would be paid for. Keller initially did not wish to sign with PS Bina but was induced to enter into the subcontracts with PS Bina by false representations made by Tony. Keller then proceeded to complete the sub-structural works including the EBW. However, PS Bina subsequently progressively decertified the full sum for the EBW. Tony also knew that the payments for the EBW would be reversed as there would be no payment forthcoming from Bina Puri for the EBW. Concurrently, the shareholding and directorship of Tony, Liew and Chang in PS Bina were transferred to third parties who had no knowledge of PS Bina’s obligations to Keller.

When Keller sued, among others, PS Bina, Perfect Selection and Tony in the High Court for sums due under its subcontract with PS Bina, including the full cost of the EBW, the High Court held that: (i) in light of fraud or equitable fraud, it was only right that the corporate veils of Perfect Selection and PS Bina be lifted, and (ii) PS Bina, Perfect Selection and Tony were jointly and severally liable to Keller for the debt in relation to the performance of the EBW. The findings of the High Court were affirmed by the Court of Appeal and hence the appeal to the Federal Court.

In dismissing the appeal, the Federal Court considered the UK Supreme Court case of Prest v Petrodel Resources Limited & Ors [2013] UKSC 34 (“Prest”) and agreed that when deciding on the issue of whether the corporate veil should or should not be pierced, there are two principles that have to be applied. The two principles are: (i) the concealment principle, and (ii) the evasion principle.

The concealment principle in Prest does not in reality result in the piercing of the corporate veil but allows the court to disregard or look behind the corporate personality to ascertain the true facts concealed behind the corporate personality. This will allow the court to determine which legal principle of substantive law will be utilised to determine whether liability subsists and it may even involve utilisation of principles of agency or trusts or some other areas of law. Such application will allow for greater analysis of the basis on which liability is imposed, rather than simply stating that the corporate veil has been lifted or pierced. 

On the other hand, the evasion principle allows the court to pierce the corporate veil to enable liability to be imposed on a person, seemingly unconnected to the transaction in dispute. The court has to first ascertain whether there is a legal right against the person in control of the company which exists independently of the company’s involvement but the company is “interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement”. Only in limited circumstances can the corporate veil be pierced. The Federal Court was of the opinion that on the facts of this case, Tony had interposed PS Bina between Perfect Solution and Keller to ensure that the debt to Keller would not be paid. Tony and Perfect Solution had deliberately procured the performance of the EBW with no intention of paying for it and this amounted to interposing a sham company (PS Bina) to evade debt due to Keller for the EBW. The Federal Court also acknowledged that in many instances, the facts of the case will not allow for a clean and clear application of either one of the principles as both principles might come into play. 

The Federal Court also held that fraud for the purposes of lifting or piercing of corporate veil need not be pleaded in the form “prescribed in textbooks with a formal plea of fraud followed by the particulars”. It suffices if the salient facts pointing to fraud and/or equitable fraud have been set out comprehensively in the pleading.

The adoption of the distinction between the concealment and evasion principle is certainly most welcomed as it allows the court with more than one way to “skin” the proverbial “cat” (the problem of persons abusing the separate legal corporate personality of a company). However, perhaps the factual matrix of this case is not the most appropriate test case to actually see the legal effect of applying the distinction between the concealment and evasion principle. This is because due to the flagrant fraudulent conduct of Tony, he would have been personally liable either under the concealment or evasion principle. It remains to be seen in future cases as to the utility of making a distinction between lifting the corporate veil (concealment principle) and piercing the corporate veil (evasion principle).

The Federal Court in Ong Leong Chiou however missed an opportunity to clearly and conclusively answer another important question regarding the application of the “Single Economic Unit Test”. This was the second question of law posed – whether the Single Economic Unit Test as expounded in Law Kam Loy & Anor v Boltex Sdn Bhd & Ors [2005] 3 CLJ 355; [2005] MLJU 225 (“Law Kam Loy”) is confined to industrial court matters.

The Federal Court declined to answer this second question of law on the basis that the question misstates “the relevant findings of the trial court” and is “predicated on a misunderstanding of the ratio in Law Kong Loy”. Despite not answering the question, the Federal Court in Ong Leong Chiou expressed the opinion that Law Kong Choy “is applicable in all courts, and is not to be confined to the Industrial Court”.

The Single Economic Unit Test has been rejected in recent years by the courts as the basis for lifting/piercing the corporate veil. However, for Industrial Court matters, the Federal Court in Ahmad Zahri Mirza Abdul Hamid v AIMS Cyberjaya Sdn Bhd [2020] 6 CLJ 579 (“Ahmad Zahri”) had limited the applicability of the Single Economic Unit Test / Group Enterprise test to cases under the Industrial Relations Act 1967. No reference was made to the Ahmad Zahri in Ong Leong Chiou and so presumably Ahmad Zahri remains good law.