The Malaysian Federal Court has given new guidance on when the separate personality of a company, or the “corporate veil”, can be disregarded or pierced to fix liability on its shareholders or controllers.
Previously, Malaysian courts would only pierce the corporate veil where a company was used to commit actual or equitable fraud. The Malaysian Federal Court has now adopted as part of Malaysian law, with qualifications, the modern English law treatment of corporate personalities as set out in the leading judgment of Prest v Prest and others  UKSC 34 (see our coverage here and here). This update refines the circumstances in which the corporate veil may now be disregarded under Malaysian law.
The dispute concerns the non-payment of sums relating to substructural works for a multi-storey commercial development in Malaysia. Perfect Selection Sdn Bhd (“Perfect Selection”) was engaged as a substructural works subcontractor and sought to delegate part of its works. A director of Perfect Selection subsequently invited Keller (M) Sdn Bhd (“Keller”) to quote for three categories of substructural works based on bills of quantities under Perfect Selection’s substructural works subcontract (“Subcontract“). However, the documents provided to Keller omitted pages disclaiming that one category of substructural works, the Earth Bore Works (“EBW”), would not be paid for. It was found during trial that Perfect Selection and its controlling shareholder and director, Tony Ong, were aware of this omission.
Keller was awarded all three categories of substructural works and given a letter of award stating that all three categories of substructural works, including the EBW, would be paid for. The letter of award was issued by PS Bina Sdn Bhd (“PS Bina”), which was not the company that invited Keller to quote for the works. PS Bina was a newly incorporated company with no assets or track record. This caused Keller to decline entering into the sub-subcontract with PS Bina but eventually did so upon representations from Tony Ong.
Keller proceeded to complete the EBW, following which PS Bina progressively decertified the full sum for the EBW. Concurrently, the shareholding and directorship in PS Bina were transferred to third parties who had no knowledge of PS Bina’s obligations to Keller.
Keller then sued, among others, PS Bina, Perfect Selection and Tony Ong in the Malaysian High Court for sums due under its subcontract with PS Bina, including the full cost of the EBW.
High Court and Court of Appeal decisions
The High Court found that PS Bina, Perfect Solution and Tony Ong were jointly and severally liable to Keller for the debt in relation to the performance of the EBW. This was because of findings that:
- Tony Ong, Perfect Selection and PS Bina defrauded Keller. Tony Ong was the “mastermind” or “puppeteer” behind Perfect Selection and PS Bina which operated as a single economic unit under his control. Tony Ong, Perfect Solution, and PS Bina (through Tony Ong) knew that the EBW would not be paid for under the Subcontract and hid this fact from Keller. Despite this, Tony Ong gave assurances to Keller that he could secure payment for the EBW.
- PS Bina was utilised as a “sham” company interposed between Perfect Solution and Keller to prevent effective recovery of monies by Keller. This was deliberately arranged by Tony Ong to enable Perfect Solution to evade the debt due to Keller while enjoying the profits under the Subcontract and the EBW.
- The fraud by Tony Ong, PS Bina and Perfect Solution justified piercing the corporate veils between them and making them jointly and severally liable to Keller.
Tony Ong and Perfect Selection appealed. The Court of Appeal dismissed the appeal and affirmed the High Court’s findings in their entirety, agreeing that the circumstances allowed the corporate veils to be pierced.
Federal Court decision
Tony Ong and Perfect Selection filed an appeal to the Federal Court. The appeal was dismissed with the Federal Court also agreeing that the circumstances warranted disregarding the corporate veils between Tony Ong, Perfect Selection and PS Bina.
The Federal Court’s reasoning is notable as it updates the Malaysian approach to corporate veil piercing, and streamlines it with the modern English law principles as set out in Lord Sumption’s judgment in Prest:
- A finding of common law and/or equitable fraud allows the corporate personality to be disregarded so that the actual wrongdoers, including the company itself, its shareholders and/or controllers, can be held liable. This has been and continues to be part of Malaysian law and exists outside of the doctrine of corporate veil piercing.
- Alternatively, the corporate personality can be disregarded using the doctrine of corporate veil piercing. Under this doctrine, a wrongdoing should now be analysed to ascertain whether it falls within the “concealment” and “evasion” principles as elaborated by Lord Sumption in Prest, although many cases will fall within both categories.
- The concealment principle looks behind the corporate personality to assess the true facts hidden behind the corporate veil, such as where companies are interposed so as to conceal the identity of the real actors. Following this analysis, a court can then analyse principles of substantive law, such as trust or agency, to fix liability against a party. Notably, this does not pierce the corporate veil as the corporate personality is maintained.
- By contrast, the evasion principle pierces the corporate veil. It allows a court to fix liability on persons seemingly unconnected to a contested transaction in which a company is used to defeat a legal right or frustrate its enforcement. The Federal Court noted that it is only rarely that an appropriate set of facts will warrant such piercing, particularly where a legal relationship between the company and its controller exists in which case one should not resort to piercing the corporate veil.
- However, the Federal Court cautioned that Lord Sumption’s analysis should not to be applied rigidly as this risks unduly limiting the situations in which the corporate veil may be pierced.
- Additionally, the Federal Court agreed with Baroness Hale in Prest that where veil piercing is used to “convert the liability of the controller of the company to the company itself, the utilisation of the agency concept and the ‘directing mind’ would be more appropriate than the doctrine of piercing of the veil.”
The Federal Court’s decision in Ong Leong Chiou is a welcome update to Malaysian company law. Although Prest had previously been cited by Malaysian courts, it was unclear to what extent its principles, and the differing views of the UK Supreme Court majority in the case, were applicable in Malaysia and how they co-existed with the then prevailing Malaysian law principles on corporate veil piercing. Prior to Ong Leong Chiou, Malaysian courts would only pierce the corporate veil where actual or equitable fraud are present. While this substantially mirrors the evasion principle in Prest, there was previously little guidance under Malaysian law on the concealment principle and the use of fraud to unravel corporate personalities independently of the doctrine of corporate veil piercing. The Federal Court has now clarified the way forward and has streamlined this aspect of Malaysian law with modern refinements under English law.
Also reassuring is the Federal Court’s emphasis that Malaysian courts should be slow to pierce the corporate veil as this protects the limited liability of a company’s shareholders and controllers which is necessary to facilitate the conduct of business.
For further information, please contact Peter Godwin, Lim Tse Wei, Kin-Hoe Loi or your usual Herbert Smith Freehills contact.
Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.