Principles of Corporate Curtain Exclusion

GLUL 3033 Undang-Undang Syarikat

PRINCIPLES OF CORPORATE VEIL EXCLUSION

The fact that the company has its own entity separate from its members may be

viewed as the existence of ‘corporate veil’ that will separate the company’s liability to its

members. Normally, once the company is incorporated, the court will no longer look behind

the ‘curtain’ to find out who is actually in control or manage the company. As explained

above in the case of Solomon, the existence of ‘corporate veil’, this will ensure that the

company will not be liable for company debts.

However, the application of the principle of separate entity would create some

problems that are not desirable because there are parties who are not responsible for the

misuse of this principle of personal benefit or to avoid responsibility. For example, a

company director can use the name of the company to owe and use the money for personal

gain. To avoid having to pay a debt is made, the director can claim he is not liable for the

debt in the name of the company and only company to be liable. Such things will happen if a

separate entity principle applies without any exception. As you know, the law established for

justice.

Therefore, in addition to adopting a general rule, the law also has exemptions in

certain circumstances to seek justice. The principle of separate entity is a general rule that

refers to the separation of liability and the company. In certain circumstances, this general

rule shall not apply. Instead the court will rely on the exemption or reveal the ‘corporate veil’

to identify the individual who committed the offense, which would have been liable. This is

the principle of waiver corporate veil. This principle will be discussed from two perspectives,

namely the exemption in accordance with the statute and exclusions based on court decision

known as judicial waiver.

No Matrik: 125308 1


EXEMPTION STATUTORY

Exception from the application of the principles of this entity is based on the

provisions contained in the Companies Act 1965 and other acts related. It can be divided into

the following sections:

a. Section 36

36. Prohibition of doing business with members less than the minimum statutory.

If at any time for members of a company (other than a company in which all

the shares issued are held by the parent company) is reduced to below two,

and it carries business for more than six months when members of such

reduction, the person who is a member of the company in which it does

business so after six months, and aware of the fact that the company is doing

business with less than two members, is responsible for payment of all

amounts owed to the company the company’s business after a period of six

months and may be charged against him, and that the company and the

member shall be guilty of an offense against this Act if the conduct of such

business after six months.

Penalty: Two thousand dollars, default penalties.

Provisions section at the top means that if the membership of less than two persons,

after a period of six months from the date of membership is reduced those found doing

business alone would be liable for payment of all debts of the company made at the time. The

company and the member is deemed to have committed an offense under the Companies Act

1965 for companies doing business with a member only after a period of six months.

No Matrik: 125308 2


b. Section 121(2) (c)

121(2) If the officer of the company or any person on his behalf –

(c) Signing of the publications or authorize to be signed or issued on behalf of any

bill of exchange, promissory notes, checks or other negotiable instrument or

any endorsement of receipt of order or letter of credit in the name and the

name first (if applicable) is not specified.

According to the provisions of the above, any officer found to sign or issue any

document with the name that is not perfect or even consent to such action, will be liable for

any errors that occur. For example, if a director made a mistake when signing a check and

write your company name does not accurately be personally liable on the amount of the

check is signed.

c. Section 303 (3) read together with section 304 (2)

303 (3) If the winding up of companies or in any proceedings against a company is

shown that an officer of the company is known as a party to the contract on the

debt, the debt contracted, no reasonable excuse, or perhaps in the hope, after

accounting for other dependents, if any, by the company at that time, the

company can pay the debt, the officer shall be guilty of that offense. Penalty:

Prisons a year or five thousand dollars.

304 (2) Where a person has been convicted of an offense under section 303 (3) in

connection with the contract for any debt as referred to in that section of the

Court, on application of the liquidator or any creditor or contributory of the

company, may, if thinks proper to do so, declaring that the person shall be

personally responsible without any limitation of liability for payment of all or

any part of the debt.

No Matrik: 125308 3


For example, if an officer owes to the company but at the same time the officer

believes the company can not pay this debt, the officer will be personally liable to pay the

whole or part of the debt.

d. Section 304 (1)

If the company does business that seeks to defraud creditors or any other form of

cheating whatsoever (fraudulent trading), the court may issue an order that the parties

involved in the fraud liable for company debts. Section 304 (1) provides:

304 (1) If the winding up a company, or on any proceedings against companies are

shown that any company has done business with intent to defraud creditors of

the company or creditors of any other person or for other fraudulent purposes,

the Court of the application solution or any creditor or contributory company

may if it thinks proper, to do so declare that any person who is known as a

party to a business trip on the way to be responsible on their own, with no

limit of liability, for all or any debts or other liabilities of the company as

directed by the Court.

e. Seksyen 365 (2) (b)

365 (2) Every director or manager of a company that knowingly pay or allow the

payment of any dividend from a non-profit knows, except pursuant to section

60 –

(b) There shall also be liable to creditors of the company for the amount of

debt owing by the company to them as to any dividends paid from

profits that exceed the amount recoverable by creditors or liquidators

who sue on behalf of creditors.

Section above clearly shows if the director or manager company to pay or authorize

payment of dividends is not of the company, they may be personally liable for payment of the

dividend.

No Matrik: 125308 4


JUDICIARY EXEMPTION

If you examine the statutory exceptions to the principle of separate entity above, you

may think of the Companies Act 1965 is still not sufficient to ensure that these principles are

not being misused by certain parties. The fact the company as an entity separate from its

members does not mean that the two entities will be separated at all times. For example, if a

company commits fraud against the creditors, the court will reveal the ‘corporate veil’ to find

individuals who play an important role in the management company may be involved in these

scams. In this case, the company and its members are no longer two separate entities, but the

court will treat both as one entity, where the guilty would be liable.

As you understand, the company made only one entity that does not have the physical

characteristics and mental health as human individuals. As such, all business and individual

business carried on by men who will represent the company’s physical and mental. Usually

consists of components from the board until the regular workers. If the company alleged to

have committed fraud and found guilty then sentenced to prison, who will be imprisoned?

Usually the court will look at the party played a major role and control of all matters for the

company liable for errors, such as directors and auditors.

Next, you will see examples of where in certain circumstances the court would not

wear a separate entity principle. Instead, the court will treat you and the company as an

entity. This is the exception in the principles of judicial waiver corporate veil.

No Matrik: 125308 5


a. When companies used to avoid responsibility or fraud

The court would ever be in cahoots with the parties that commit fraud. The principle

of separate entity is often misused as a shield to protect certain parties in their fraudulent

activities. Usually those who commit fraud to hide behind the name of the company to

prevent from being liable. You will better understand the situation after seeing following

examples:

In the case of Gilford Motor Co. v. Horne (1933) Ch 935 (Court Of Appeal, England),

Horne was the director of Gilford Motor Company. While serving in the company, he has

signed a contract that prohibits him from taking customers from the company after he left the

company. However, after resigned from Gilford Motor Company, he founded his own

company, the JM Horne & Co. Ltd. and the company has been taking customers of Gilford

Motor Company. The court issued the order and injunction to restrain the company from

continuing the action.

In the case of Jones v. Lipman (1962) 1 WLR 832 (High Court, England), Lipman has

agreed to sell a house to Jones. However, he has changed his mind. To avoid its responsibility

to submit the property to Jones, he has established his own company known as Alamed Ltd.

and transfer the house to the company. Jones has taken legal action against the company

Alamed to get the house. Lipman explained that the Company is not the party to the contract

of that hire purchase, because the contract only involve Jones with Lipman. The Court held,

in fact Alamed Ltd. established as a shield to avoid responsibility for Lipman to submit the

house to Jones. The court also instructed Lipman and Alamed Ltd. to transfer the title of the

house to Jones.

The Court will also reveal the ‘corporate veil’ to find those responsible for

committing fraud in the company. This principle has been explained in the case of Re Darby

(1911) 1KB 95 (High Court, England), where Darby is a person who has declared bankruptcy

and was convicted of several fraud. He and his colleagues have established the City of

London Investment Corporation Ltd. conducting business transactions quarry licenses and

have committed fraud to his customers. His company had sold a quarry license to the Welsh

Slate Quarries Company Ltd. with very high prices. Profits are divided between Darby and

his colleagues. Welsh Slate Company has incurred losses and dissolved. The liquidator has

No Matrik: 125308 6


claimed from Darby that it deems to claim benefits. Darby claimed, in the law between

himself and company are two different entities. However, after studying the facts of this case

the Court held Darby liable for fraud carried out by the company.

b. When the company made an agent or ‘alter ego’ to members of the company

You used to hear the word agent. For example, insurance agents and direct sales

agents. The Company may act as agent for its members. According to the principles of

agency, agent actions will lead to the principal agent is only liable for actions taken on behalf

of the principal. Thus, if the company used as an agent for its members in a business, the

court will look at the liability of members involved and not the liability of the company.

This principle has been described in the case of Aspatra PT. Ltd. v. Bank Bumiputra

Malaysia Berhad, (1988) 1 MLJ 97 (Supreme Court of Malaysia). In this case, Bank

Bumiputra Malaysia Berhad (BBMB) and its subsidiary, Bumiputra Malaysia Finance Ltd.

(BMF) claimed Lorrain to profit in secrets when he became chairman of directors of BBMB

and BMF. BBMB and BMF also filed an application for a mareva injunction order to restrain

Lorrain from transferring its assets. This injunction order also applies to the Aspatra PT. Ltd.

who then filed an injunction in respect of the claim that the order be cancelled. The Company

also claimed that the court should not consider the company’s assets as personal assets of

Lorrain because both are two distinct entities in law. Court finds Lorrain play a key role in

holding the shares and the board Aspatra PT. Ltd. Therefore, the court has the right to reveal

the corporate veil to determine whether assets of Aspatra PT. Ltd. was the assets of the

company or has been abuse of the principle of separate entity. Based on the facts of this case

clearly shows that Aspatra PT. Ltd. was used by Lorrain as a tool to transfer all the benefits

of the results of malpractice committed by him.

Clearly based on the above case, the court will not see the liability of the company,

otherwise the court will find members who act on behalf of the company if there is elements

of fraud in which the members are involved in fraud will be liable. The members no longer

can hide behind the name of the company to avoid liability.

No Matrik: 125308 7


c. When a company made a mask to protect the real fact

Generally, if a company is established in order to make a mask to hide the facts, the

court will not wear a separate entity principle. Instead the court will reveal the ‘corporate

veil’ and assume the company and its members as an entity.

Referring to the case of Re FG (Films) Ltd. (1953) 1 WLR 483 (High Court,

England), where 90 percent of shares held by A, an American citizen and the remaining

shares owned by B, British citizens. This company has no employees. In fact, the company

established solely to publish a movie titled “Monsoon”. An agreement was made between the

company and a company of American, Film Group Incorporated (FGI), which will contribute

capital and related equipment of the film. FG (Films) Ltd. then wish to register the film

“Monsoon” as a British film under Cinematography Act 1938-48. However, the application

has been rejected due to the fact that the film is produced by the Company FGI. The Court

ruled FG Films Ltd. Company is not the company that produced the film. Instead the

company established just to qualify the film to be recognized as a British film. Therefore, the

film “Monsoon” is not eligible for recognition as a British film since it was produced by

American companies.

d. When court decide on the basis of equity and analogies

Equity policy and the analogy means the court exercising its discretion and not

according to the rule of law set forth in some cases requiring the decision of the court to do so

for justice. For example, when the court issued the order requested ’delay implementation’

(stay of execution), the court will reveal the ‘corporate veil’ to find the person concerned.

Order of ‘delay implementation’ is an order issued by the court to suspend the court’s

decision that has been made in certain cases. This principle can be seen in the case v. Orri

Mounderas (1981) Com LR 168 (High Court, England). Orri chartered from a Panamanian

company owned by the brother-in-law, Mounderas. A misunderstanding arose between the

two sides, and the company claimed Orri Mounderas. In this case, he was ordered to pay the

rent arrears ship. In this trial, Orri has claimed Mounderas to pay the loan given to him

because in the past he had lent money to Orri Mounderas. This trial has nothing to do with

the allegations against Orri Mounderas by the company.

No Matrik: 125308 8


However, Orri has applied for a court injunction to postpone implementation of the

action against him until his claim towards Mounderas completed. According to Judge J.

Mustill, usually the order of ‘delay implementation’ will not be allowed by the court if the

parties involved in the two cases are different. The first case is between the companies with

Orri, while the second case is between Orri with Mounderas. However, the court is entitled in

certain circumstances to look behind the establishment of companies to find the relevant

parties and then issue an order ‘delay implementation’. In this case the court has authorized

the application of Orri to defer the decision of the court in claims against the company until

the trial of Orri’s claim against Mounderas completed.

e. When involving a group of companies

According to the general rule, the parent company and its subsidiaries considered as

two different entities. However in some instances, a group of companies will be treated as a

single entity. For example, let’s look at the case of Hotel Jaya Puri Bhd. v. National Union of

Hotel, Bar & Restaurant Workers (1980) 1 MLJ 109 (High Court, Malaysia). In this case,

several employees of Jaya Puri Chinese Garden Restaurant Pte. Ltd. have lost their jobs after

the restaurant closed. This company is actually owned subsidiary of Hotel Jaya Puri Bhd.

Unions claimed that the workers had been dismissed by their employer whom actually the

Hotel Jaya Puri Bhd. and the right to seek compensation. Workers should not be dismissed as

Jaya Puri Hotel is still operating. Industrial Court has agreed with this claim and direct the

Hotel Jaya Puri to pay compensation to the workers concerned. However, Hotel Jaya Puri

refused to do so instead took the case to court. High Court ruled that, although technically

Jaya Puri Chinese Garden Restaurant and Hotel Jaya Puri Sdn. Ltd. are two different entities,

but in fact the two companies operated as one entity. The court also considered the restaurant

workers as employees Hotel Jaya Puri.

Based on the above case clearly shows that if a group of company have the same

functions and operate as a body owned and controlled by the same parties, the court will treat

the company as an entity.

No Matrik: 125308 9


CONCLUSION

The act of piercing the corporate veil until now remains one of the most controversial

subjects in corporate law, and it would continue to remain so, even for the years to come. By

and large, as discussed in the essay, the doctrine of piercing the corporate veil remains only

an exceptional act orchestrated by courts of law. Courts are most prepared to respect the rule

of corporate personality, that a company is a separate legal entity from it's shareholders,

having it' own rights and duties, and can sue and be sued in it's own name.

As we move from jurisdiction to jurisdiction across the globe, it's application narrows

down to how that system of the law appreciates the subject. Common law jurisdictions are

examples par excellence where the piercing of the corporate veil has gained notoriety, and as

the various cases indicate, courts under this system of the law generally appreciates every

case by it's merits.

The above notwithstanding, there are general categories such as fraud, agency, sham

or façade, unfairness and group enterprises; which are believed to be he most peculiar basis

under which the common law courts would pierce he corporate veil. But these categories are

just a guideline and by no means far from being exhaustive.

No Matrik: 125308 10

Documents

Principles of Corporate Curtain Exclusion