Company LawCompany Law

LIFTING OF THE CORPORATE LIFTING OF THE CORPORATE VEILVEIL

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LIFTING OF THE CORPORATE VEILLIFTING OF THE CORPORATE VEIL

• The principle of separate corporate personality as confirmed The principle of separate corporate personality as confirmed inin Saloman v. A Saloman & Co. LtdSaloman v. A Saloman & Co. Ltd.. [1897] [1897] forms the forms the corner-stone of co. law. corner-stone of co. law.

• Incorporation of a co. casts a veil over the true controllers of Incorporation of a co. casts a veil over the true controllers of the co, a veil through which the law will not usually the co, a veil through which the law will not usually penetrate.penetrate.

• There are however instances when the law will disregard or There are however instances when the law will disregard or look behind the corporate personality and have regard to the look behind the corporate personality and have regard to the reality of the situation. Lifting or piercing the corporate veil reality of the situation. Lifting or piercing the corporate veil mean in effect ignoring the fact that the business is carried mean in effect ignoring the fact that the business is carried on by a co. and looking behind the co. to see who is actually on by a co. and looking behind the co. to see who is actually operating it i.e. looking at the reality of the situation. operating it i.e. looking at the reality of the situation.

• This would involve treating the rights or liabilities or This would involve treating the rights or liabilities or activities of the co. as the rights or liabilities or activities of activities of the co. as the rights or liabilities or activities of its shareholders, for example treating the business of a co. its shareholders, for example treating the business of a co. as that of its principal shareholder. as that of its principal shareholder.

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• Lifting the corporate veil is sometimes expressly Lifting the corporate veil is sometimes expressly authorised by authorised by statutestatute and sometimes it is adopted by and sometimes it is adopted by the the courtscourts..

• It is generally recognised that there is no overall It is generally recognised that there is no overall principle as to when the courts will lift or pierce the principle as to when the courts will lift or pierce the corporate veil. All the cases cannot be reduced to a corporate veil. All the cases cannot be reduced to a single principle. It is therefore difficult to predict with single principle. It is therefore difficult to predict with any given set of facts whether or not the courts will any given set of facts whether or not the courts will lift the corporate veil. lift the corporate veil.

• Each case has to be approached based on its own Each case has to be approached based on its own peculiar facts rather than purely on legal rules. We peculiar facts rather than purely on legal rules. We need to look at the cases as examples of situations as need to look at the cases as examples of situations as to when the courts have lifted the corporate veil.to when the courts have lifted the corporate veil.

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Exceptions to the Separate Entity Doctrine Exceptions to the Separate Entity Doctrine i.e. when will the corporate veil be lifted?i.e. when will the corporate veil be lifted?

A.A. Statutory ExceptionsStatutory Exceptions

1.1. When the membership of a co. falls below two – When the membership of a co. falls below two – s. 36 Companies Act 1965s. 36 Companies Act 1965

• If at any time only one member of a co. remains, that If at any time only one member of a co. remains, that member has six months in which to find another member has six months in which to find another member. If after the six-month grace period the co. is member. If after the six-month grace period the co. is still carrying on business with only one member, that still carrying on business with only one member, that member is personally liable for all of the debts of the member is personally liable for all of the debts of the co. contracted after the grace period. The co. and the co. contracted after the grace period. The co. and the member shall be guilty of an offence.member shall be guilty of an offence.

• Except in the case of a wholly owned co.Except in the case of a wholly owned co.

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2. Where a person signs, issues or authorizes the signing 2. Where a person signs, issues or authorizes the signing or issue of certain instruments on which the or issue of certain instruments on which the company's name does not appear properly - company's name does not appear properly - s.121(2)s.121(2)(c).(c).

• The name of the co. must appear in letters on all bills The name of the co. must appear in letters on all bills of exchange, promissory notes, cheques, negotiable of exchange, promissory notes, cheques, negotiable instruments, indorsements and orders. instruments, indorsements and orders.

• If the name of the co. is not properly mentioned on If the name of the co. is not properly mentioned on any of these documents, the person who signed or any of these documents, the person who signed or issued the document (or who authorized the signing issued the document (or who authorized the signing or issue) is liable to the holder of the document for or issue) is liable to the holder of the document for the amount due, unless the co. pays upon the the amount due, unless the co. pays upon the instrument.instrument.

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Hendon v. AdelmanHendon v. Adelman (1973) – the directors of L & R (1973) – the directors of L & R Agencies Ltd were personally liable under the Agencies Ltd were personally liable under the equivalent of s.121(2) because they purported to sign equivalent of s.121(2) because they purported to sign a cheque on behalf of the co. by writing ‘LR a cheque on behalf of the co. by writing ‘LR Agencies Ltd’. This was not the correct name of the Agencies Ltd’. This was not the correct name of the co.co.

Jenice Ltd v. DanJenice Ltd v. Dan (1994) – (1994) – the company’s name the company’s name ‘Primekeen Limited’ was misspelt ‘Primkeen ‘Primekeen Limited’ was misspelt ‘Primkeen Limited’. It was held that the directors were not Limited’. It was held that the directors were not personally liable when the cheque was dishonoured. personally liable when the cheque was dishonoured. The mere omission of a single letter in the middle of The mere omission of a single letter in the middle of a name was not the same as the omission of a word.a name was not the same as the omission of a word.

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3.3. Where debts are contracted on behalf of a co. and at Where debts are contracted on behalf of a co. and at the time that the debts were contracted the officer the time that the debts were contracted the officer responsible had no reasonable or probable responsible had no reasonable or probable expectation that the co. would be able to pay the expectation that the co. would be able to pay the debts, that officer may be guilty of an offence and on debts, that officer may be guilty of an offence and on conviction, he may be made liable for the payment of conviction, he may be made liable for the payment of the whole or any part of the debt so contracted – the whole or any part of the debt so contracted – s. s. 303(3)303(3)

• Fraudulent trading -Where any business of the co. Fraudulent trading -Where any business of the co. has been carried out with intent to defraud creditors has been carried out with intent to defraud creditors of the co., the court may make the person who was of the co., the court may make the person who was knowingly a party to the transaction personally knowingly a party to the transaction personally responsible for the debts or other liabilities of the co.- responsible for the debts or other liabilities of the co.- s. 304(1)s. 304(1) – –

Siow Yoon Keong v. H. Rosen Engineering Siow Yoon Keong v. H. Rosen Engineering [2003] 4 [2003] 4 MLJ 569; [2003] 5 AMR 735MLJ 569; [2003] 5 AMR 735

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Siow Yoon Keong v. H Rosen Engineering BVSiow Yoon Keong v. H Rosen Engineering BVRosen Engineering had completed works under a contract Rosen Engineering had completed works under a contract between Rosen and Petronas Gas Sdn Bhd dated between Rosen and Petronas Gas Sdn Bhd dated 24/3/1990. Petronas made payments to Ventura Industries 24/3/1990. Petronas made payments to Ventura Industries Sdn Bhd totalling RM 1067,100. Under an agreement Sdn Bhd totalling RM 1067,100. Under an agreement between Ventura and Rosen, Ventura would retain 20% between Ventura and Rosen, Ventura would retain 20% thereof and remit the balance of 80% to Rosen. V paid a thereof and remit the balance of 80% to Rosen. V paid a sum of RM 423,000 to Rosen but failed to pay the balance sum of RM 423,000 to Rosen but failed to pay the balance of RM 423,000. The appellant, Siow, as managing director of RM 423,000. The appellant, Siow, as managing director and alter ego of V, had used V’s funds to invest in shares and alter ego of V, had used V’s funds to invest in shares on the stock exchange under his own name, instead of on the stock exchange under his own name, instead of discharging the debt to Rosen.discharging the debt to Rosen.

Having acquired the shares, partly using V’s funds and Having acquired the shares, partly using V’s funds and partly his own funds, Siow realising that he was about to partly his own funds, Siow realising that he was about to incur losses on his investments, arranged for a co. incur losses on his investments, arranged for a co. resolution to be passed by the boardresolution to be passed by the board

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of directors to ratify the investment and the use of the co’s of directors to ratify the investment and the use of the co’s funds, including that which was due to Rosen. This had the funds, including that which was due to Rosen. This had the effect of transferring the losses on his investments to the co. effect of transferring the losses on his investments to the co. The co’s funds were used to pay Siow’s losses and the co. The co’s funds were used to pay Siow’s losses and the co. was left with no funds to pay Rosen, to whom RM 423,000 was left with no funds to pay Rosen, to whom RM 423,000 was due.was due.

The court applying The court applying s. 304(1)s. 304(1) of the CA 1965 held that it was of the CA 1965 held that it was very clear that the intention of Siow was to defraud Rosen, very clear that the intention of Siow was to defraud Rosen, the creditor and it was also equally clear that it was done for the creditor and it was also equally clear that it was done for a fraudulent purpose. Siow was held to be personally liable a fraudulent purpose. Siow was held to be personally liable for the debt and the court ordered Siow to pay to Rosen the for the debt and the court ordered Siow to pay to Rosen the balance sum of RM 423,000 together with interest for which balance sum of RM 423,000 together with interest for which judgement had been obtained by Rosen against Ventura.judgement had been obtained by Rosen against Ventura.

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Kawin Industrial Sdn Bhd (in liquidation) v. Tay Tiong Kawin Industrial Sdn Bhd (in liquidation) v. Tay Tiong SoongSoong [2009] 1 MLJ 723. [2009] 1 MLJ 723.

On 12/8/2000, the plaintiff co. (Kawin Industrial) On 12/8/2000, the plaintiff co. (Kawin Industrial) purchased eight units of knitting machinery, accessories purchased eight units of knitting machinery, accessories and spare parts (‘the machinery’) from Kawin Knitting and spare parts (‘the machinery’) from Kawin Knitting Pte. Ltd (‘Kawin’). During the time of the purchase of the Pte. Ltd (‘Kawin’). During the time of the purchase of the machinery, P had already ceased operations and become machinery, P had already ceased operations and become an insolvent co. an insolvent co.

On 19/4/2001, P sold the machinery to Skytex Industries On 19/4/2001, P sold the machinery to Skytex Industries (M) Sdn Bhd at the price of RM 115,500. This sum was (M) Sdn Bhd at the price of RM 115,500. This sum was paid to the defendant, D, who was the managing director paid to the defendant, D, who was the managing director of the co. P failed to pay the purchase price of the of the co. P failed to pay the purchase price of the machinery and judgement was entered for S$210,334.23machinery and judgement was entered for S$210,334.23

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against P on 9/4/2002. On 7/8/2003 an order for winding against P on 9/4/2002. On 7/8/2003 an order for winding up was made against P and a provisional liquidator (L) was up was made against P and a provisional liquidator (L) was appointed. L found that P was insolvent based on the appointed. L found that P was insolvent based on the audited accounts of P for the financial year ending audited accounts of P for the financial year ending 31/3/2001. 31/3/2001. P filed an application in court for a declaration that that the P filed an application in court for a declaration that that the payment of RM 115,500 made by Skytex to P which ought payment of RM 115,500 made by Skytex to P which ought to have been paid into P’s account, constituted an act of to have been paid into P’s account, constituted an act of fraudulent preference in favour of P and was therefore fraudulent preference in favour of P and was therefore illegal pursuant to illegal pursuant to s. 304(1) s. 304(1) of the CA 1965. of the CA 1965.

The principal issue to be considered by the court was The principal issue to be considered by the court was whether in the circumstances, the business of P had been whether in the circumstances, the business of P had been carried out with intent to defraud creditors of the co. within carried out with intent to defraud creditors of the co. within the meaning of the meaning of s. 304(1). s. 304(1).

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The court The court heldheld that, on the facts, there was an intention to that, on the facts, there was an intention to defraud Kawin, the creditor, or it was done for a defraud Kawin, the creditor, or it was done for a fraudulent purpose. It was clear that P purchased the fraudulent purpose. It was clear that P purchased the machinery when it had already ceased operations and D machinery when it had already ceased operations and D knew that P being insolvent had no funds to pay the knew that P being insolvent had no funds to pay the outstanding purchase price to Kawin. Thus, by later outstanding purchase price to Kawin. Thus, by later selling the machinery and paying the purchase price of selling the machinery and paying the purchase price of RM 115,500 to himself it was obvious that D had the RM 115,500 to himself it was obvious that D had the intention to fraudulently defraud Kawin, a creditor. intention to fraudulently defraud Kawin, a creditor.

Furthermore, D, as managing director had acted in a Furthermore, D, as managing director had acted in a manner which had prejudiced the creditors of P when the manner which had prejudiced the creditors of P when the co. was already insolvent. On the facts, a case had been co. was already insolvent. On the facts, a case had been made out under s. 304(1) of the CA . made out under s. 304(1) of the CA .

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4.4. Where dividends are paid when there are no available Where dividends are paid when there are no available profits out of which to pay themprofits out of which to pay them - - s. 365(2)(b).s. 365(2)(b).

• No dividends may be paid to the shareholders of a co. No dividends may be paid to the shareholders of a co. unless there are profits available. If a director or unless there are profits available. If a director or manager of a co. willfully pays or permits the manager of a co. willfully pays or permits the payment of a dividend when there are no available payment of a dividend when there are no available profits, he is liable to the creditors of the co. for the profits, he is liable to the creditors of the co. for the amount of the debts due to them to the extent by amount of the debts due to them to the extent by which the dividends exceeded the available profits which the dividends exceeded the available profits and shall be guilty of an offence.- and shall be guilty of an offence.- s. 365(1) & (2)s. 365(1) & (2)

5.5. If a co. breaches the prohibition against providing any If a co. breaches the prohibition against providing any financial assistance for the purchase of its own financial assistance for the purchase of its own shares, shares, s. 67(3)s. 67(3) makes its officers guilty of an makes its officers guilty of an offence.offence.

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B. B. JUDICIAL EXCEPTIONSJUDICIAL EXCEPTIONS1. 1. FRAUDULENT CONDUCTFRAUDULENT CONDUCT • Where there is fraudulent behaviour or fraudulent intention on the part Where there is fraudulent behaviour or fraudulent intention on the part

of the corporators in forming the co. courts will be ready to pierce or of the corporators in forming the co. courts will be ready to pierce or lift the corporate veil. lift the corporate veil.

• Fraud here is used in a very wide sense to cover inequitable and Fraud here is used in a very wide sense to cover inequitable and improper conduct, including cases where the corporator seeks improper conduct, including cases where the corporator seeks to to evade a contractual liabilityevade a contractual liability by the use of the corporate form. by the use of the corporate form.

InIn Guilford Motor Co. Ltd. v. HorneGuilford Motor Co. Ltd. v. Horne [1933] Ch. 935 CA. E B Horne, [1933] Ch. 935 CA. E B Horne, the first defendant, was formerly employed by the plaintiff co. as the the first defendant, was formerly employed by the plaintiff co. as the managing director. His contract of employment included a covenant managing director. His contract of employment included a covenant not to solicit the customers of the plaintiff after he left their not to solicit the customers of the plaintiff after he left their employment. When H left their employment he set up a co. called JM employment. When H left their employment he set up a co. called JM Horne & Co. Ltd., the second defendant, to carry on his business. The Horne & Co. Ltd., the second defendant, to carry on his business. The shareholders and directors of the co. were himself, his wife and an shareholders and directors of the co. were himself, his wife and an employee. JM Horne & Co. Ltd. then began to solicit the customers of employee. JM Horne & Co. Ltd. then began to solicit the customers of the plaintiff by sending out circulars to persons who were at the the plaintiff by sending out circulars to persons who were at the crucial time customers of the plaintiff co. The plaintiff brought an crucial time customers of the plaintiff co. The plaintiff brought an action to try to restrain H from carrying on in this way.action to try to restrain H from carrying on in this way.

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The Court of Appeal held that H had breached his covenant with The Court of Appeal held that H had breached his covenant with the plaintiff and granted an injunction against both H and his co. the plaintiff and granted an injunction against both H and his co. H was in breach of the valid covenant in restraint of trade H was in breach of the valid covenant in restraint of trade contained in his contract of employment. The court held that the contained in his contract of employment. The court held that the co. was a mere cloak or sham for the purpose of enabling H to co. was a mere cloak or sham for the purpose of enabling H to commit a breach of his covenant. Lord Hanworth MR made the commit a breach of his covenant. Lord Hanworth MR made the following observations:-following observations:-

““I am quite satisfied that this co. was formed as a devise, a I am quite satisfied that this co. was formed as a devise, a stratagem, in order to mask the effective carrying on of a business stratagem, in order to mask the effective carrying on of a business of Mr. E B Horne. The purpose of it was to try to enable him, of Mr. E B Horne. The purpose of it was to try to enable him, under what is a cloak or sham, to engage in business which, on under what is a cloak or sham, to engage in business which, on consideration of the agreement which had been sent to him just consideration of the agreement which had been sent to him just about seven days before the co. was incorporated, was a business about seven days before the co. was incorporated, was a business in respect of which he had a fear that the plaintiffs might intervene in respect of which he had a fear that the plaintiffs might intervene and object.”and object.”

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This decision was followed in This decision was followed in Jones v. LipmanJones v. Lipman [1962] 1 All [1962] 1 All ER 442ER 442..L, the defendant, contracted with J, the plaintiff, to sell J a L, the defendant, contracted with J, the plaintiff, to sell J a piece of land with registered title for £5,250. Before piece of land with registered title for £5,250. Before conveyance of the land to J, L changed his mind. Instead he conveyance of the land to J, L changed his mind. Instead he sold and transferred the land to a co. called Alamed Ltd. which sold and transferred the land to a co. called Alamed Ltd. which he had formed (he and a clerk for his solicitors were he had formed (he and a clerk for his solicitors were shareholders and directors) for £3,000, of which £1,564 were shareholders and directors) for £3,000, of which £1,564 were borrowed by the defendant co. from a bank and the rest borrowed by the defendant co. from a bank and the rest remained owing to the first defendant. Alamed Ltd. was remained owing to the first defendant. Alamed Ltd. was expressly formed for the purpose of putting the land beyond expressly formed for the purpose of putting the land beyond the reach of an order for specific performance. J then brought the reach of an order for specific performance. J then brought this action to compel L to transfer the land to him. Ignoring this action to compel L to transfer the land to him. Ignoring the corporate veil, Russel J. ordered specific performance the corporate veil, Russel J. ordered specific performance against both the defendant and his co. So L could not evade his against both the defendant and his co. So L could not evade his contractual liability by using the corporate form. Russel J. in contractual liability by using the corporate form. Russel J. in his judgement said:his judgement said:““The defendant co. is the creature of the defendant, a devise The defendant co. is the creature of the defendant, a devise and a sham, a mask which he holds before his face in an and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity... an attempt to avoid recognition by the eye of equity... an equitable remedy is rightly to be granted directly against the equitable remedy is rightly to be granted directly against the creature in such circumstances”.creature in such circumstances”.

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InIn Aspatra Sdn. Bhd. and 21 Ors. v. Bank Bumiputra Malaysia Aspatra Sdn. Bhd. and 21 Ors. v. Bank Bumiputra Malaysia Bhd. & AnorBhd. & Anor. . [1988] 1 MLJ 97,[1988] 1 MLJ 97, the Supreme Court held that the the Supreme Court held that the court could generally lift the corporate veil in order to do justice court could generally lift the corporate veil in order to do justice particularly where an particularly where an element of fraudelement of fraud is involved. Here, there is involved. Here, there was an element of fraud in the receipt of secret profits by Lorraine was an element of fraud in the receipt of secret profits by Lorraine Osman as alleged in the case and that was sufficient for the court Osman as alleged in the case and that was sufficient for the court to lift the corporate veil for the purpose of determining whether to lift the corporate veil for the purpose of determining whether the assets of the co. are really owned by them.the assets of the co. are really owned by them.

The first plaintiff, Bank Bumiputra Malaysia Bhd (the Bank) and The first plaintiff, Bank Bumiputra Malaysia Bhd (the Bank) and the second plaintiff, Bumiputra Malaysia Finance (BMF), a the second plaintiff, Bumiputra Malaysia Finance (BMF), a wholly owned subsidiary of the Bank, sued Lorrain Osman, a wholly owned subsidiary of the Bank, sued Lorrain Osman, a director of the Bank and the Chairman of BMF for an account of director of the Bank and the Chairman of BMF for an account of secret profits that he allegedly made while he was director of the secret profits that he allegedly made while he was director of the Bank and Chairman of BMF. The plaintiffs alleged that L Bank and Chairman of BMF. The plaintiffs alleged that L received the sum of M$ 27,652,853-06 through his solicitors in received the sum of M$ 27,652,853-06 through his solicitors in Kuala Lumpur wrongfully and without the knowledge and Kuala Lumpur wrongfully and without the knowledge and approval of the plaintiffs and in breach of his fiduciary duty as a approval of the plaintiffs and in breach of his fiduciary duty as a director of the Bank and Chairman of BMF. director of the Bank and Chairman of BMF.

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On the same day that the plaintiffs had filed the writ against L, On the same day that the plaintiffs had filed the writ against L, they made an they made an exex parteparte application for a application for a MarevaMareva injunction to injunction to restrain L from removing from the jurisdiction of the Court, restrain L from removing from the jurisdiction of the Court, selling, transferring or otherwise dealing with his assets held in selling, transferring or otherwise dealing with his assets held in the companies controlled by him, including monies that L held in the companies controlled by him, including monies that L held in his accounts with various banks, limited to the above sum. The his accounts with various banks, limited to the above sum. The appellant companies, appellant companies, inter alia,inter alia, challenged the challenged the Mareva Mareva injunction injunction on the ground that the court should not have treated the assets of on the ground that the court should not have treated the assets of the companies as L’s assets – the companies and L are separate the companies as L’s assets – the companies and L are separate entities – the Salomon principle.entities – the Salomon principle.

The learned trial judge found that L was the alter ego of the The learned trial judge found that L was the alter ego of the companies. Only 32 out of 21,796,395 shares in the appellant companies. Only 32 out of 21,796,395 shares in the appellant companies did not belong to L. He exercised effective or sole companies did not belong to L. He exercised effective or sole control of the companies by holding more than 99% of the total control of the companies by holding more than 99% of the total paid up capital of the 22 appellant companies. Further, he was also paid up capital of the 22 appellant companies. Further, he was also a director in 15 of them. These were the main factual bases on a director in 15 of them. These were the main factual bases on which the learned judge lifted the corporate veil. which the learned judge lifted the corporate veil.

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The case of The case of Lim Kar Bee v. Duofortis Properties (M) Sdn. BhdLim Kar Bee v. Duofortis Properties (M) Sdn. Bhd. . [1992] 1 AMR 4 concerned a scheme that was devised by the co. [1992] 1 AMR 4 concerned a scheme that was devised by the co. the primary purpose of which was to avoid paying the estate duty. the primary purpose of which was to avoid paying the estate duty. The Supreme Court held that the scheme was illegal. His The Supreme Court held that the scheme was illegal. His Lordship, Peh Swee Chin SCJ, in delivering the judgement of the Lordship, Peh Swee Chin SCJ, in delivering the judgement of the court made the following observation on lifting the corporate veil court made the following observation on lifting the corporate veil for the purpose of discovering any illegal or improper purpose:-for the purpose of discovering any illegal or improper purpose:-

““When the issue of illegality was raised, we have lifted the When the issue of illegality was raised, we have lifted the corporate veil of each co. wherever we found it necessary, for it is corporate veil of each co. wherever we found it necessary, for it is well settled that the courts have a discretion to lift it for the well settled that the courts have a discretion to lift it for the purpose of discovering any illegal or improper purpose …”purpose of discovering any illegal or improper purpose …”

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● The court will not allow a section to be invoked for an improper The court will not allow a section to be invoked for an improper purpose or for a purpose not contemplated or intended by the purpose or for a purpose not contemplated or intended by the section. section.

In In RRe Bugle Press Ltd.e Bugle Press Ltd. [1961] Ch 270 the Court of Appeal held [1961] Ch 270 the Court of Appeal held that section 209, CA 1948, U.K. (s. 180 CA 1965, Malaysia) may that section 209, CA 1948, U.K. (s. 180 CA 1965, Malaysia) may not be used by the majority shareholders to expropriate the shares not be used by the majority shareholders to expropriate the shares of a minority shareholder. of a minority shareholder.

S. 428 CA 1985, U.K. permits a co. which has acquired 90% or S. 428 CA 1985, U.K. permits a co. which has acquired 90% or more of another company’s shares as a result of a takeover bid to more of another company’s shares as a result of a takeover bid to compulsorily buy out the remainder of the shares. Bugle Press’ compulsorily buy out the remainder of the shares. Bugle Press’ share capital consisted of 10,000 £1.00 shares. Jackson and Shaw share capital consisted of 10,000 £1.00 shares. Jackson and Shaw each owned 4500 of these shares (‘the majority shareholders’) and each owned 4500 of these shares (‘the majority shareholders’) and Trelby owned the remaining 1000 shares. Jackson and Shaw tried Trelby owned the remaining 1000 shares. Jackson and Shaw tried to buy out Trelby but he refused to sell his shares. They then to buy out Trelby but he refused to sell his shares. They then formed a £100 co., Jackson & Shaw (Holdings) Ltd. in which they formed a £100 co., Jackson & Shaw (Holdings) Ltd. in which they were the only shareholders. Jackson & Shaw (Holdings) Ltd. then were the only shareholders. Jackson & Shaw (Holdings) Ltd. then made an offer addressed to the shareholders in Bugle Press Ltd., made an offer addressed to the shareholders in Bugle Press Ltd., to purchase their shareholdings at £10 per share. Jackson and to purchase their shareholdings at £10 per share. Jackson and Shaw Shaw

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obviously accepted and their shares were transferred to the co. obviously accepted and their shares were transferred to the co. but Trelby again refused on the ground that the price was too but Trelby again refused on the ground that the price was too low. Since Jackson & Shaw (Holdings) Ltd. now owned 90% low. Since Jackson & Shaw (Holdings) Ltd. now owned 90% of Bugles’ shares, it sought to exercise the statutory right of Bugles’ shares, it sought to exercise the statutory right under s. 428 by giving Trelby notice of its intention to under s. 428 by giving Trelby notice of its intention to purchase his shares compulsorily. purchase his shares compulsorily.

The Court of Appeal held that Jackson & Shaw (Holdings) The Court of Appeal held that Jackson & Shaw (Holdings) Ltd. could not do this. The scheme was not binding on Trelby. Ltd. could not do this. The scheme was not binding on Trelby. For all practical purposes, Jackson & Shaw (Holdings) Ltd. For all practical purposes, Jackson & Shaw (Holdings) Ltd. was entirely equivalent to the nine-tenths of the shareholders was entirely equivalent to the nine-tenths of the shareholders of Bugle Press who have accepted the offer of Jackson & of Bugle Press who have accepted the offer of Jackson & Shaw (Holdings) Ltd. The Court will not allow the section to Shaw (Holdings) Ltd. The Court will not allow the section to be invoked for a purpose not contemplated by the section (an be invoked for a purpose not contemplated by the section (an improper purpose), which is, for the purpose of enabling improper purpose), which is, for the purpose of enabling majority shareholders to expropriate or evict the minority majority shareholders to expropriate or evict the minority shareholders.shareholders.

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2. 2. AGENCYAGENCY

Vaughn Williams J., the trial judge, in Vaughn Williams J., the trial judge, in Saloman’sSaloman’s case had held case had held that there was a principal and agency relationship existing between that there was a principal and agency relationship existing between Saloman and the co. But the House of Lords rejected this and the Saloman and the co. But the House of Lords rejected this and the courts have since been very slow in finding a principal and agency courts have since been very slow in finding a principal and agency relationship. relationship.

In exceptional cases, an agency between a co. and its shareholders In exceptional cases, an agency between a co. and its shareholders or controllers may be found to exist as a matter of fact. or controllers may be found to exist as a matter of fact.

In the case of In the case of Re FG (Films) Ltd.Re FG (Films) Ltd. [1953] 1 WLR 483 a finding of [1953] 1 WLR 483 a finding of agency allowedagency allowed the court to lift the corporate veil. Here, an the court to lift the corporate veil. Here, an American corporation called Film Group Incorporated set up a co. American corporation called Film Group Incorporated set up a co. in the U.K. called FG Films Ltd. The co. had a nominal share in the U.K. called FG Films Ltd. The co. had a nominal share capital of £100 consisting of 100 £1-00 shares. 90 of these shares capital of £100 consisting of 100 £1-00 shares. 90 of these shares were held by the President of the American corporation who was a were held by the President of the American corporation who was a director of the co., and the remaining 10 shares was held by a director of the co., and the remaining 10 shares was held by a British director. The third director had no shareholding. The co. British director. The third director had no shareholding. The co. only carried on business at its registered office and did not employ only carried on business at its registered office and did not employ any staff. It then made a film called “Monsoon”. The story rights any staff. It then made a film called “Monsoon”. The story rights of this film were held by the American corporation. The film was of this film were held by the American corporation. The film was made in India and it costs over £80,000. made in India and it costs over £80,000.

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The co. sought to have the film registered as a British film The co. sought to have the film registered as a British film under the Cinematograph Films Act 1938-48, which provided under the Cinematograph Films Act 1938-48, which provided certain restrictions on films unless they were made by a British certain restrictions on films unless they were made by a British person or co. The Board of Trade refused the application on person or co. The Board of Trade refused the application on the ground that the film had in reality been made by the the ground that the film had in reality been made by the American corporation. The applicant co., FG Films, sought a American corporation. The applicant co., FG Films, sought a declaration from the court that it was the ‘maker’ of the film declaration from the court that it was the ‘maker’ of the film within the meaning of the Act. within the meaning of the Act.

The Court held that this film had not been made by a British The Court held that this film had not been made by a British co. It was not a British film. All the finance for the film had co. It was not a British film. All the finance for the film had come from the American corporation and it held that the come from the American corporation and it held that the participation of the British co. in the making of the film had participation of the British co. in the making of the film had been so small as to be practically negligible and in so far as it been so small as to be practically negligible and in so far as it acted at all in the matter, it acted merely as the nominee or acted at all in the matter, it acted merely as the nominee or agent of the American corporation, Film Group Incorporated.agent of the American corporation, Film Group Incorporated.

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In In Smith, Stone and Knight Ltd. v Birmingham CorporationSmith, Stone and Knight Ltd. v Birmingham Corporation [1939] 4 All ER 116 Atkinson J, allowed a holding co. to claim [1939] 4 All ER 116 Atkinson J, allowed a holding co. to claim compensation for compulsory acquisition as if it were an owner-compensation for compulsory acquisition as if it were an owner-occupier, on the ground that its subsidiary which occupied the occupier, on the ground that its subsidiary which occupied the land in question was merely its agent for the purpose of carrying land in question was merely its agent for the purpose of carrying on its business.on its business.

A parent co., Smith Stone & Knight held 497 out of 502 shares in A parent co., Smith Stone & Knight held 497 out of 502 shares in a subsidiary co. called Birmingham Waste Co. Ltd. The remaining a subsidiary co. called Birmingham Waste Co. Ltd. The remaining 5 shares were held by the directors of the parent co., who were the 5 shares were held by the directors of the parent co., who were the directors of the subsidiary, in trust for it (a so called ‘wholly directors of the subsidiary, in trust for it (a so called ‘wholly owned subsidiary’). The parent co. was in total and constant owned subsidiary’). The parent co. was in total and constant control of the subsidiary. The defendant corporation, Birmingham control of the subsidiary. The defendant corporation, Birmingham Corporation, compulsorily acquired the land that was owned by Corporation, compulsorily acquired the land that was owned by the subsidiary on which the business was carried. The parent co. the subsidiary on which the business was carried. The parent co. then claimed compensation in respect of the removal and then claimed compensation in respect of the removal and disturbance to the business. The defendants claimed that the disturbance to the business. The defendants claimed that the parent co. was not the proper claimant for this disturbance. They parent co. was not the proper claimant for this disturbance. They said that the proper claimant was the subsidiary.said that the proper claimant was the subsidiary.

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Atkinson JAtkinson J. recognized the fact that the mere fact that a man . recognized the fact that the mere fact that a man owns all the shares in a co. does not make the business carried owns all the shares in a co. does not make the business carried on by the co. his business. Nor does it make the co. his agent on by the co. his business. Nor does it make the co. his agent for the carrying on of that business. However, in this case, the for the carrying on of that business. However, in this case, the learned judge had no difficulty in deciding that the business of learned judge had no difficulty in deciding that the business of the subsidiary co. was the business of the parent co. and the the subsidiary co. was the business of the parent co. and the subsidiary was merely its agent, employee or tool. He said subsidiary was merely its agent, employee or tool. He said this:this:

““There was nothing to prevent the parent co. at any moment There was nothing to prevent the parent co. at any moment from saying we would carry on this business in our own name. from saying we would carry on this business in our own name. They had but to paint out the subsidiary’s name on the They had but to paint out the subsidiary’s name on the premises, change their business papers and forms and the premises, change their business papers and forms and the thing would have been done. I am satisfied that the business thing would have been done. I am satisfied that the business belonged to the parent co. They were in any view the real belonged to the parent co. They were in any view the real occupiers of the premises.”occupiers of the premises.”

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3.3. GROUP ENTITY GROUP ENTITY

Courts have ignored the separate legal entities of various Courts have ignored the separate legal entities of various companies within a group and instead looked at the economic companies within a group and instead looked at the economic entity of the whole group.entity of the whole group.

DHN Food Distributors v London Borough of Tower HamletsDHN Food Distributors v London Borough of Tower Hamlets [1976] 3 All ER 462 CA[1976] 3 All ER 462 CAThe facts in this case were similar to those in Smith, Stone & The facts in this case were similar to those in Smith, Stone & Knight and it is another case which involves compulsory Knight and it is another case which involves compulsory purchase. In compulsory purchase cases under the Compulsory purchase. In compulsory purchase cases under the Compulsory Purchase Act the claimants themselves are asking for the veil to Purchase Act the claimants themselves are asking for the veil to be lifted.be lifted.

Here DHN was the parent co. It ran a wholesale cash-and-carry Here DHN was the parent co. It ran a wholesale cash-and-carry grocery business from premises owned by one of its wholly grocery business from premises owned by one of its wholly owned subsidiaries called Bronze Investments Ltd. The premises owned subsidiaries called Bronze Investments Ltd. The premises were compulsorily acquired by the Borough Council of Tower were compulsorily acquired by the Borough Council of Tower Hamlets in 1970. Under the Act, compensation was payable Hamlets in 1970. Under the Act, compensation was payable under 2 heads:- 1) compensation for the value of the land, and 2) under 2 heads:- 1) compensation for the value of the land, and 2) compensation for the disturbance to any business on the land.compensation for the disturbance to any business on the land.

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But someone claiming compensation under either of these 2 But someone claiming compensation under either of these 2 heads must have an interest in the land greater than that of a heads must have an interest in the land greater than that of a bare licensee i.e. a yearly tenant. There was no problem with bare licensee i.e. a yearly tenant. There was no problem with the first head. Bronze owned the freehold of the land and the first head. Bronze owned the freehold of the land and Bronze was entitled to compensation for the value of the land. Bronze was entitled to compensation for the value of the land. However, the business was run by DHN. Bronze itself took no However, the business was run by DHN. Bronze itself took no part in the running of the business. DHN only had an interest part in the running of the business. DHN only had an interest in the land of that of a licensee i.e. an interest less than that of in the land of that of a licensee i.e. an interest less than that of a yearly tenant and so the Borough Council claimed that DHN a yearly tenant and so the Borough Council claimed that DHN was not entitled to compensation under the second head.was not entitled to compensation under the second head.

However, it was held by the Court of Appeal reversing a However, it was held by the Court of Appeal reversing a ruling of the Lands Tribunal that you could regard the group ruling of the Lands Tribunal that you could regard the group of companies here as a single economic entity. The directors of companies here as a single economic entity. The directors of DHN were the same as those of Bronze and the of DHN were the same as those of Bronze and the shareholders of Bronze were the same as in DHN. The shareholders of Bronze were the same as in DHN. The decision to pierce the corporate veil was expressly based upon decision to pierce the corporate veil was expressly based upon a a group entitygroup entity view treating the group of companies as one view treating the group of companies as one economic entity or unit rather than by using agency principles economic entity or unit rather than by using agency principles

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Shortly after this case, the House of Lords declined to pierce the Shortly after this case, the House of Lords declined to pierce the veil in the case of veil in the case of Woolfson v. Strathclyde Regional Council Woolfson v. Strathclyde Regional Council AuthorityAuthority [1978] 38 P & LR 521, a case which had originated in [1978] 38 P & LR 521, a case which had originated in Scotland. This case again concerned compulsory purchase. Scotland. This case again concerned compulsory purchase.

Here, the shop premises were occupied by C Ltd. for its Here, the shop premises were occupied by C Ltd. for its business. There were 1000 issued shares in C Ltd. and 999 were business. There were 1000 issued shares in C Ltd. and 999 were owned by Woolfson and the remaining one by his wife. The owned by Woolfson and the remaining one by his wife. The wife, he said, did not hold this share as his nominee. She was an wife, he said, did not hold this share as his nominee. She was an independent shareholder. While Woolfson was the only director, independent shareholder. While Woolfson was the only director, he obviously controlled the business. He also owned the he obviously controlled the business. He also owned the premises. While the shop premises were compulsorily acquired, premises. While the shop premises were compulsorily acquired, the question arose as to whether compensation should be paid to the question arose as to whether compensation should be paid to Woolfson for disturbance of the business. Unfortunately, C Ltd. Woolfson for disturbance of the business. Unfortunately, C Ltd. had not been joined as a party to the claim and the Court would had not been joined as a party to the claim and the Court would not allow them to be joined subsequently. So Woolfson was not allow them to be joined subsequently. So Woolfson was asking for piercing on the ground that he and C Ltd. should be asking for piercing on the ground that he and C Ltd. should be treated as the same entity. He claimed that if the reality of the treated as the same entity. He claimed that if the reality of the situation was looked at it would be seen that he was the occupier situation was looked at it would be seen that he was the occupier carrying of the business as well as the owner of the premises. carrying of the business as well as the owner of the premises. The House of Lords rejected his claim.The House of Lords rejected his claim.

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Lord Keith said that, Lord Keith said that, ““it is appropriate to pierce the corporate veil it is appropriate to pierce the corporate veil only where special circumstances existed indicating that it is a only where special circumstances existed indicating that it is a mere facade concealing the true facts”mere facade concealing the true facts”. . They held that this was not the case here. It had not been shown They held that this was not the case here. It had not been shown that there was a mere facade. It was C Ltd. which carried on the that there was a mere facade. It was C Ltd. which carried on the business on the premises and not Woolfson and and that Woolfson business on the premises and not Woolfson and and that Woolfson was not beneficially entitled to the whole of the shareholding in was not beneficially entitled to the whole of the shareholding in the co. because his wife was an independent shareholder and not a the co. because his wife was an independent shareholder and not a nominee for her husband.nominee for her husband.

This is one way in which the House of Lords distinguished DHN. This is one way in which the House of Lords distinguished DHN. In DHN, Bronze was a wholly owned subsidiary. Another In DHN, Bronze was a wholly owned subsidiary. Another distinction is that in DHN the subsidiary owned the land and the distinction is that in DHN the subsidiary owned the land and the parent co. owned and controlled the business. So the case of parent co. owned and controlled the business. So the case of Woolfson shows that courts are still prepared to apply the Woolfson shows that courts are still prepared to apply the Saloman principle in cases where the controller shareholder is a Saloman principle in cases where the controller shareholder is a single natural person and those cases where the controller single natural person and those cases where the controller shareholder is a co. In the former case, the courts are almost shareholder is a co. In the former case, the courts are almost certainly constrained by Saloman itself and in the latter case the certainly constrained by Saloman itself and in the latter case the courts feel less constrained because of the factual difference from courts feel less constrained because of the factual difference from Saloman.Saloman.

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In the Malaysian case ofIn the Malaysian case of Tiu Shi Kian & Anor. v. Red Rose Tiu Shi Kian & Anor. v. Red Rose Restaurant Sdn. BhdRestaurant Sdn. Bhd.. [1984] the court treated the subsidiary [1984] the court treated the subsidiary and the parent co. as functionally and the parent co. as functionally one entityone entity. . Here, the plaintiffs/applicants operated a nightclub and Here, the plaintiffs/applicants operated a nightclub and restaurant called the Golden Million Cabaret and Night Club restaurant called the Golden Million Cabaret and Night Club in the premises of Red Rose Restaurant S/B., a subsidiary of in the premises of Red Rose Restaurant S/B., a subsidiary of Hotel Berjaya S/B. The restaurant was situated in Hotel Hotel Berjaya S/B. The restaurant was situated in Hotel Shangrila which was also owned by Hotel Berjaya S/B. A Shangrila which was also owned by Hotel Berjaya S/B. A dispute arose between the plaintiffs and Red Rose regarding dispute arose between the plaintiffs and Red Rose regarding the renewal of the plaintiffs’ licence to operate the club. The the renewal of the plaintiffs’ licence to operate the club. The plaintiffs obtained an interim injunction on 14 March 1983 to plaintiffs obtained an interim injunction on 14 March 1983 to restrain the defendants from disturbing the plaintiffs’ quiet use restrain the defendants from disturbing the plaintiffs’ quiet use and enjoyment of the premises until the action was tried. On and enjoyment of the premises until the action was tried. On the nights of 14 and 15 March, the plaintiffs were able to carry the nights of 14 and 15 March, the plaintiffs were able to carry on their business at the premises but on the following night, 16 on their business at the premises but on the following night, 16 March, the plaintiffs found the restaurant premises were March, the plaintiffs found the restaurant premises were locked in breach of the injunction. The plaintiffs then locked in breach of the injunction. The plaintiffs then instituted committal proceedings for civil contempt of court instituted committal proceedings for civil contempt of court

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against the directors of Red Rose in breaching the order of 14 against the directors of Red Rose in breaching the order of 14 March 1983. The respondents contended that the closure of the March 1983. The respondents contended that the closure of the premises was effected by a separate entity, Hotel Berjaya S/B, premises was effected by a separate entity, Hotel Berjaya S/B, the owner of Hotel Shangrila. The defendant co. and the the owner of Hotel Shangrila. The defendant co. and the respondents should not, therefore, be responsible for such acts. respondents should not, therefore, be responsible for such acts.

The court held that there was functional integrity between the The court held that there was functional integrity between the hotel and restaurant. Hotel Berjaya and Red Rose were hotel and restaurant. Hotel Berjaya and Red Rose were one one single entitysingle entity. The respondents were found guilty of contempt . The respondents were found guilty of contempt and fined accordingly.and fined accordingly.

• The decision of the High Court was affirmed by the Federal The decision of the High Court was affirmed by the Federal Court and Privy Council. See:Court and Privy Council. See: Datuk Hong Kim Sui v Tiu Shi Datuk Hong Kim Sui v Tiu Shi Kian Kian [1985] 1 MLJ 145 (Federal Court) and [1987] 1 MLJ 345 [1985] 1 MLJ 145 (Federal Court) and [1987] 1 MLJ 345 (Privy Council).(Privy Council).

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The same approach was taken by the court in The same approach was taken by the court in Hotel Jaya Puri Hotel Jaya Puri Bhd. v National Union of Hotel, Bar and Restaurant WorkersBhd. v National Union of Hotel, Bar and Restaurant Workers. . [1980] 1 MLJ 109. [1980] 1 MLJ 109.

The High Court held that the Hotel (Hotel Jaya Puri Bhd) and the The High Court held that the Hotel (Hotel Jaya Puri Bhd) and the Restaurant (Jaya Puri Chinese Garden Restaurant SB), a wholly Restaurant (Jaya Puri Chinese Garden Restaurant SB), a wholly owned subsidiary of the Hotel, where both had the same owned subsidiary of the Hotel, where both had the same managing director, were functionally one and treated them as managing director, were functionally one and treated them as one one single entitysingle entity ignoring the separate legal personalities of the ignoring the separate legal personalities of the companies. companies.

See alsoSee also: : Win Line (UK) Ltd. V. Masterpart (Singapore) Pte. LtdWin Line (UK) Ltd. V. Masterpart (Singapore) Pte. Ltd.. [2000] [2000]

2 SLR 98 – where the court refused to treat two companies which 2 SLR 98 – where the court refused to treat two companies which have no common shareholders or directors as being a single have no common shareholders or directors as being a single economic unit and thus a single legal unit.economic unit and thus a single legal unit.

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4.4. PUBLIC POLICY PUBLIC POLICY The case of The case of Daimler Co. Ltd. v Continental Tyre and Rubber Daimler Co. Ltd. v Continental Tyre and Rubber

Co. (Great Britain) LtdCo. (Great Britain) Ltd.. [1916] 2 AC 307[1916] 2 AC 307 shows that courts will shows that courts will pierce the veil when there are overwhelming public policy pierce the veil when there are overwhelming public policy grounds for doing so. grounds for doing so. Here, the Continental Tyre Co. was incorporated in England but Here, the Continental Tyre Co. was incorporated in England but all except one of its shareholders were resident in Germany and all except one of its shareholders were resident in Germany and all its directors resided in Germany. The Secretary who held the all its directors resided in Germany. The Secretary who held the remaining share resided in England and was a British subject. remaining share resided in England and was a British subject. The issue in this case was whether this co. had standing to sue The issue in this case was whether this co. had standing to sue and recover a debt in an English court during the First World and recover a debt in an English court during the First World War when England was at war with Germany. The defendants War when England was at war with Germany. The defendants (Daimler) alleged that the co. was an alien enemy and that the (Daimler) alleged that the co. was an alien enemy and that the payment of the debt would constitute trading with the enemy payment of the debt would constitute trading with the enemy alien. In fact the action was eventually dismissed on a procedural alien. In fact the action was eventually dismissed on a procedural point but the majority of the House of Lords were of the opinion point but the majority of the House of Lords were of the opinion that a co. could have an enemy character despite the fact that the that a co. could have an enemy character despite the fact that the co. had been incorporated in England and they were ready to say co. had been incorporated in England and they were ready to say here that the co. was an alien co. This was likely to occur when a here that the co. was an alien co. This was likely to occur when a company’s agents or persons in control of the co. were residents company’s agents or persons in control of the co. were residents in an enemy country or were acting under the control of such in an enemy country or were acting under the control of such persons.persons.