Lifting of Corporate Veil

Lifting of corporate veil
Introduction
 The recognition that a company is a separate legal entity distinct from its shareholders and directors
is often expressed as the veil of incorporation.
 This is because once a company is duly incorporated, there is a veil and the courts usually do not
look behind the veil to enquire why the company was formed or who really controls it.
 Yap Sing Hock v Public Prosecutor
-The court held that the lifting of veil clearly constitutes a violation of the principle of veil of
incorporation but this has come to be treated correctly as an exception to the primary principle.
 Generally, the lifting of corporate veil can be by statute and by case law.
Statute
 Under the Companies Act 2016, there are several statutory provisions that have the effect of lifting
corporate veil.
 S.75(5)
 S.540(1)
 S.540(2)
 S.250(1)
Case Law
 Next, case laws have shown several circumstances where the court would lift the corporate veil.
Fraud or avoidance of legal obligations

 Gilford Motor Co v Horne & Anor
-Horne, who was managing director of the plaintiff company, was subject to a restrictive covenant
not to solicit customers of the plaintiff company within five years from the determination of his
employment.
-Later, Horne resigned and set up his own business in competition with the company and through
which he solicited the plaintiff company’s customers.
-The court held that Horne had breached the covenant and granted an injunction against Horne and
his company.
-The court stated that Horne’s company was a ‘mere cloak or sham’ used by Horne to commit the
breach of the covenant.
 Jones v Lipman
-The first defendant agreed to sell land to the plaintiff.
-To avoid completion of the sale to the plaintiff, the first defendant sold and transferred the land to
Alamed Ltd, a company which was under the complete control of the first defendant.
-The court ordered specific performance of the contract against the first defendant and the
company.
-The court held that the company was a device and a sham used by the first defendant for defeating
the plaintiff’s right.
 Aspatra v Bank Bumiputra Malaysia Berhad
-The respondents brought an action against Lorrain for account of secret profit.
-A Mareva injunction was issued to restrain Lorrain from transferring his assets out of jurisdiction.
-The injunction was extended to Aspatra Sdn Bhd which was controlled by Lorrain.
-Anton Piller was also ordered against Aspatra Sdn Bhd.
-The court held that Aspatra Sdn Bhd’s assets were treated as Lorrain’s assets as there was an
element of fraud in the receipt of the secret profits.
-The court stated that it could generally lift the corporate veil in order to do justice particularly
where an element of fraud is involved.
Agency
 This refers to the circumstance where the activities of the subsidiary company are so closely
controlled and directed by the parent company that the subsidiary company can be regarded as
merely an agent conducting the parent company business, despite separate existence.
 Smith Stone & Knight Ltd v Birmingham Corporation
-A company incorporated a subsidiary company.
-The parent company held all the shares in the subsidiary company except five which its director
held.
-The profits of the subsidiary company were treated as profits of the parent company.
-The subsidiary company operated business in premises belonging to the parent company and this
premises were later compulsorily acquired by the the defendant corporation.
-An issue arose as to who can claim the compensation for disturbance.
-The court held that the subsidiary company was not operating on its own behalf but of the parent
company and hence the parent company was the party to claim compensation.
 Re FG (Films) Ltd
-A company made a film and wanted to register it as British film.
- The company did not have business premises and employees and 90% shares of the company was
held by the president of an American company.
-The financing of the film was provided by the American company.
-The court held that the Board of Trade was right in declining to register the film as British film as the
company was merely an agent for the American company and hence could not be regarded as the
makers of the firm.
Group entities
 The principle that a company upon incorporation becomes a legal entity separate and distinct from
its members and directors is also extended to related corporations.
 People’s Insurance Co (M) Sdn Bhd v People’s Insurance Co Ltd
-The court held that the holding and subsidiary companies are two separate legal entities.
 However, there are exceptions.
 Hotel Jaya Putri Bhd v National Union of Hotel, Bar & Restaurant Workers
-The hotel was the holding company and the restaurant within its premises was its fully owned
subsidiary company.
-A number of workers employed by the restaurant were retrenched as the business was closed
owing to losses.
-The Union representing the workers claimed that the workers were employees of hotel.
-Since the hotel was still in business and hence the workers had been dismissed and not retrenched
by the company.
-The Industrial Court held that the hotel and the restaurant were inter-dependent and were
functionally one integral whole.
-A number of senior officers such as the Secretary, Personnel Manager and Assistant Manager were
common both to the hotel and the restaurant.
-The court held that the hotel and the restaurant were in reality one enterprise and hence the
workers of the restaurant were employees of the hotel.
-However, the workers were not entitled compensation on other grounds.
 DHN Food Distributors Ltd v Tower Hamlets London Borough Council

-There were three companies, namely DHN, which was the holding company, and Bronze and
Transport, which were wholly-owned subsidiary of DHN.
-The directors in these three companies were the same.
-Later, there was a compulsory acquisition of land owned by Bronze.
-Bronze was paid compensation for the value of the land.
-DHN claimed for compensation for disturbance of business.
-The court held that the three companies were one commercial entity and therefore DHN were
entitled to compensation for disturbance.
 Adams v Cape Industries Plc
-Cape is an English company which mined and marketed asbestos.
-It has two subsidiary companies.
-The first is Capasco, an English company, a worldwide marketing subsidiary.
-The second is NAAC which is a wholly owned marketing subsidiary in US.
-The employees of Texas company sued Cape, Capasco and NAAC for personal injuries and
attempted to enforce award in UK.
-The issue is whether Cape, the English company, was present within US jurisdiction through its
subsidiaries or had submitted to the US jurisdiction.
-In this case, the court stated three situations where the corporate veil may be lifted.
-First, the court is interpreting a statute or a document.
-Second, the company is a mere façade.
-Third, subsidiary is an agent of the company.
-In this case, the court refused to lift corporate veil as Cape did not fall under any of the three
situations.
-Cape’s motive is to minimize presence in US for tax and other liabilities and this is not legally wrong.
-Besides, the subsidiaries of Cape were independent businesses free from the day-to-day control of
Cape.
-In this case, the court held that a strong economic link between a group of companies could not in
itself justify the merging of a group of companies into one economic entity.
Tort
 Court may lift the corporate veil of subsidiary companies and make their parent company liable for
their subsidiaries’ tort.
 Briggs v James Hardie & Co Pty Ltd
-Briggs suffered from asbestosis while he was employed in an asbestos mine.
-The corporation which owned the mine was a subsidiary of James Hardie corporation.
-Briggs brought action against both the holding and subsidiary companies.
-The court held that in the case of a tort action, the veil could be lifted where a person suffers an
injury because of a tortious act, he has no choice as to which corporation will cause him harm.
Enemies aliens
 Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain)
-The respondent company was incorporated in England, but all its shareholders, except one, and all
its directors were German residents in Germany.
-When war broke out between England and Germany, it commenced an action for payment of a
trade debt.
-The issue is whether the company has locus to sue in English court.
-The court lifted the corporate veil and discovered that the subject shareholders of the company
were enemy German nationals and hence the claim was not allowed.
In the interest of justice

 Aspatra v Bank Bumiputra Malaysia Berhad
-The court stated that it could generally lift the corporate veil in order to do justice particularly
where an element of fraud is involved.
 However, in Adams v Cape Industries Plc, the court stated that court are not free to disregard the
principles in Salomon v Salomon & Co Ltd merely because it considers that justice so requires.
 Law Kam Loy v Boltex Sdn Bhd
-The court referred to Adams v Cape Industries and stated that it is not open to the courts to
disregard the corporate veil purely on ground that it is in the interests of justice to do so.
-The court was of the view that the special circumstances to which it is appropriate to pierce
corporate veil include cases where there is either actual fraud at common law or some inequitable
or unconscionable conduct amounting to fraud in equity.
 Perman Sdn Bhd v European Commodities Sdn Bhd
-The court held that it is not open to court to disregard the corporate personality of a limited
company save in exceptional circumstances.
-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.
 Tenaga Nasional Bhd v Irham Niaga Sdn Bhd & Anor
-The court held that the veil of incorporation cannot simple be raised just because you feel that it is
in the interest of justice.
-However, if there is fraud, then the veil of incorporation may be lifted.

Lifting of Corporate Veil

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Lifting of corporate veil

Fraud or avoidance of legal obligations

 DHN Food Distributors Ltd v Tower Hamlets London Borough Council

In the interest of justice

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