Dispelling the uncertainty in the doctrine of ‘Lifting or Piercing the Corporate Veil’

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

Introduction

The Federal Court in the case of Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & Ors [2021] 4 CLJ 821, is one of the most recent apex court cases that revisited the legal doctrine of ‘lifting or piercing the corporate veil’.

Brief Facts of Ong Leong Chiou

The facts of the case of Ong Leong Chiou stem from the construction of a 10-storey shopping mall and business complex known as the Melawati Mall Project (“the Project”). In this case, Bina Puri Holdings Bhd (“Bina Puri”) was appointed as the main contractor for the Project. Bina Puri contracted the works, including Empty Bore Works (“EBW”), to Perfect Selection Sdn Bhd (“Perfect Selection”) who in turn sub-contracted it out to PS Bina Sdn Bhd (“PS Bina”), a newly incorporated company.

At this point in time, Perfect Selection’s directors are one Tony Ong Leong Chiou (“Tony”) and Liew. In addition to one Chang, both Tony and Liew are also directors and shareholders of PS Bina.

The Plaintiff, Keller (M) Sdn Bhd (“Keller”) was invited by Chang on behalf of CFT Build Sdn Bhd to provide a quotation for works to be carried out in the Project. Keller received 2 blank Bill of Quantities. Keller was unaware of the fact that the second bill had a missing page, indicating that the EBW would not be paid for.

On the other hand, Tony was aware of the Bill of Quantities supplied by Bina Puri of the same. Further, it was found during trial that Tony had made certain untrue representation which induced Keller to enter into several Letters of Award with PS Bina.

Keller carried out the work smoothly, but problems ensue when Keller discovered that PS Bina reversed for the EBW. Such decertification continued until the whole EBW amounting to RM7,462,720.19 was reversed out.

Subsequently, Tony, Liew and Chang resigned as Directors of PS Bina after they benefitted from Keller having completed the EBW and for which Keller was deliberately not paid. They were replaced by persons who has no knowledge or comprehension of the company’s obligation. Keller filed an action in the High Court, where its claim is allowed. The High Court made the following findings:

1. In light of fraud or equitable fraud, the corporate veils of Perfect Solution and PS Bina are lifted;

2. PS Bina, Perfect Solution and Tony is jointly and severally liable to Keller.

The decision in the High Court was affirmed in the Court of Appeal and hence the appeal to the Federal Court. In dismissing the Appeal, the Federal Court held:

The Corporate Personality of a company may be disregarded by reason of Fraud

The Federal Court upheld the High Court’s finding that Tony, as well as Perfect Solution and PS Bina, companies which he controlled has perpetrated fraud against Keller. That in itself warranted the Courts to disregard the corporate personality of Perfect Solution and PS Bina.

In other words, based on the factual matrix of the case, the Federal Court found that the said 2 companies’ separate legal personality has been abused for the purpose of wrongdoing and to perpetrate fraud. For that reason alone, the corporate personality of the said companies is disregarded, without the need to pierce the corporate veil. This is a well-established principle that is independent of the doctrine of lifting the corporate veil.

The Doctrine of lifting the corporate veil in the case of Prest v Prest & Ors [2013] 4 All ER 673 (“Prest”) The thrust of the case of Ong Leong Chiou is where the Federal Court clarified legal principles surrounding the doctrine of ‘lifting or piercing of the corporate veil’ as expounded in the case of Prest. In concurring with Prest, the Federal Court held that the steps taken in deciding if the corporate veil may be pierced are as follows:

1. Firstly, the nature of the wrongdoing in issue ought to be determined to ascertain if the abuse of the corporate personality is as a ‘façade’ or a ‘sham’;

2. If the wrongdoing relates to the abuse of the corporate personality as a ‘façade’, the principle of concealment applies. The principle does not entail the piercing of the corporate veil. But, it allows the court to disregard or look behind the corporate personality to determine the actual facts and consequently, the legal principle of substantive law (e.g. principles of agency or trust) the Court will utilise to decide if the party is liable;

3. If the wrongdoing relates to an abuse of the corporate personality as a ‘sham’, the corporate personality would be pierced to enable liability to be imposed on a person, seemingly unconnected to the transaction in dispute. The evasion principle is only available if there is a legal right against the person in control of the company that exists independently of the company’s involvement. The company is interposed so that the legal personality of the company defeats the legal right of the Plaintiff or frustrates enforcement by the same.

It must be noted that the Federal Court also warned that the principles contained in Prest ought not to be applied rigidly as not all cases fall neatly within the principles of concealment or evasion.