Lifting The Veil of Incorporation

LIFTING THE VEIL OF
INCORPORATION
(EXCEPTIONS TO THE SEPARATE LEGAL
PERSONALITY/ ENTITY’S RULE)
BY:
MR. MOHD AB MALEK BIN MD SHAH
SENIOR LECTURER
DEPARTMENT OF LAW
UiTM CAWANGAN MELAKA
OVERVIEW
 Gen.: Once registered, a company
acquires a legal personality which
separates it from the members (Sec. 20).
 This is like the company is wearing a
cover to hide itself from outsiders.
 As a result, they only deal with the
company (not the shareholders).
 Any problems arising from that association
will be dealt with the company only (The
shareholders are not involved at all).
 Hence, the phrase ‘veil of incorporation’
arises.
OVERVIEW
 Nevertheless, the veil of incorporation has
frequently been subjected to abuse and
manipulation.
 The court will lift the veil of incorporation if the
matter falls under the exceptions provided
by statutes or the Common law:
 Statutory lifting of the veil
(Exceptions provided by provisions in statutes)
 Judicial lifting of the veil (Common Law)
(Exceptions provided by the courts in case law)
A. STATUTORY EXCEPTIONS
 The exceptions provided by statutes are
commonly found in the Companies Act
2016.
 Other statutes may also provide
exceptions such as Income Tax Act
1967, Employee Provident Fund (EPF)
Act 1991, Employees Social Security
Act 1969 (SOCSO) & Employment Act
1955.
1. WHEN THE DEBTS CONTRACTED AT THE
TIME THE COMPANY HAS NO ABILITY OF
REPAYMENT: SECTIONS 539 (3) & 540 (2)
 Sect. 539 (3): In the event any officer of the
company contract a debt in the knowledge
that there is no reasonable or probable
ground of expectation that the company can
pay off the debt, that officer is guilty of an
offence (liable for imprisonment not
exceeding 5 years/ fine not more than
RM50k or both).
 Sec. 540 (2): The member may be declared
as personally liable without any limitation of
liability for the repayment the whole/ partly of
the losses (on the application by the
liquidator/ creditor/ contributory).
2. INVOLVMENT IN THE FRAUDULENT
TRADING: SECTION 540 (1)
 In the course of winding up of the company, if it
appears that the business of the company has been
carried out with the intention to defraud creditors
of the company or for any other fraudulent
purpose, the liquidator or creditor of the company
may apply to court to make the said officer
personally liable for the debts or liabilities.
 There must be an application to the court to lift
the corporate veil and make the officer
personally liable.
 Application is by either a creditor/ liquidator/
contributory of the company.
CHIN CHEE KEONG V TOLING
CORPORATION [2016] 1 AMCR 634;
[2016] 3 MLJ 479
 Held:
The company’s business was facing
cashflow problem, in financial difficulty and
had no reasonable prospect of the debt
payment (had been carried out with the
intention to defraud creditors/
fraudulent purposes).
3. FAILURE OF OBTAINING MINIMUM
SUBSCRIPTION: SECTION 186 (4)
 Directors may be imposed joint and several

liability to refund money to investors if the
minimum subscription is not received within 4
months of the issuance of the prospectus.
 This situations happens if the company
issues a prospectus (a printed document
that advertises or describes a school,
commercial enterprise, forthcoming book,
etc., in order to attract or inform clients,
members, buyers, or investors).
3. FAILURE OF OBTAINING MINIMUM
SUBSCRIPTION: SECTION 186 (4)
 Failure to refund within 5 months after

the issuance: May be jointly/ severally
liable with the interest of 10% per annum
(from the expiration of the 5 months).
 Not liable: Default of repayment is not
due to his misconduct/ negligence .
4. BREACH OF THE FINANCIAL
ASSISTANCE RULE: SEC. 123 (4)
 Prohibits any company from giving any
financial assistance for the purchase of
shares in the company/ shares in the
holding company.
 Failure to comply with: Offence (maybe
liable for fine/ imprisonment).
 The officer cannot escape from his
personal liability (pay the compensation
for the losses suffered).
5. EVADING TAX PAYMENT :
SEC. 140 (1) OF THE INCOME TAX
ACT 1967 (ACT 53)
 Allows the Director – General of Inland
Revenue to ignore transactions which
have the effect of evading tax (may
disregard the concept of separate legal
entity).
 Case: SBP Sdn Bhd v Director General
of Inland Revenue (1988) 1 MSTC 243.
6. FAILURE OF THE COMPANY TO
REMIT CONTRIBUTION TO THE
FUND: SEC. 46 OF THE EPF ACT 1991
 A compulsory saving for retirement plan for
each employees (12% – employer & 11%
- employee).
 Failure to remit by company: Offence.
 Both company and directors are 1
single entity.
7. FAILURE TO REMIT THE PREMIUM TO
THE SOCSO: SEC. 108A OF THE
EMPLOYEES SOCIAL SECURITY ACT 1969
 SOCSO: To implement employees’ injury
insurance scheme for their benefits.
 Both employer and employee will
contribute towards its premium.
 Failure to remit: Offence.
 Both company and directors are 1
single entity.
8. OFFENCES UNDER
EMPLOYEMENT ACT 1955:
SEC. 101B
 Purpose: Protect the employees through
the minimum terms of employment (those
who are lower ranking employees/
doing manual work).
 Maybe charged jointly with the company.
 Both company and officers are 1 single
entity.
B. JUDICIAL EXCEPTIONS
 Common law: The courts have evolved the
doctrine of separate legal entity to encompass
certain exceptions aimed at providing justice
whenever necessary (judicial discretion).
 The grounds for lifting the corporate veil are usually
associated with the intent to do justice when the
circumstances of the particular case demand it.
 The courts generally look at the persons in the
company to determine whether the separate
legal entity should be ignored or not.
 This is necessary as a cunning person could
find creative ways to abuse the concept of
separate entities (to avoid injustice).
1. USING THE COMPANY TO
EVADE LEGAL OBLIGATIONS
 The principle of separate legal entity is
disregarded.
 Both company and officers are 1 single
entity (jointly liable).
GILFORD MOTOR CO v
HORNE [1933] Ch. 935
Fact: An employee had entered into an agreement
not to compete with his former employer after
ceasing employment.
In order to try to avoid this restriction, the
employee set up a company an acted through
that (used his company to avoid contractual
obligation).
Held: The veil would be lifted and an injunction

would be issued against the company too (as 1
single entity).
JONES v LIPMAN
[1962]1 WLR 832
Fact: Lipman entered into a contract to sell a
house to Jones. Subsequently, he changed his
mind. In order not to transfer the house to
Jones, Lipman transferred the house to a
company which he wholly owned and
controlled (Alamed Ltd).
Held: The veil was lifted and specific

performance was ordered against Lipman
and the company (treated as a single
body).
2. USING THE COMPANY TO
COMMIT FRAUD/ IMPROPER
PURPOSES
 As a cloak/ sham to commit fraud.
 Imposed the liability upon the offender.
RE DARBY [1911] 1 KB 95
Held:
The defense was rejected because the
company (“City”) was a “dummy company”
formed for the purpose of enabling Darby
to commit fraud.
3. THE COMPANY EMPLOYED AS AN
AGENT/ ALTER EGO OF ITS
CONTROLLERS
 Being the principals, the controllers/ shareholders
are liable for the company’s acts on normal
agency principles.
SMITH, STONE AND KNIGHT LTD V

BIRMINGHAM CORPORATION
[1939] 4 All ER 116
Held: The veil was lifted to enable a subsidiary
company operating business on land owned by the
holding company to claim compensation on the
ground of agency (appointed as an agent by its
controllers/ shareholders).
4. WHEN THE COURT IS ASKED TO
PROMOTE JUSTICE/ TO EXERCISE
AN EQUITABLE DISCRETION
 The court may lift the veil of incorporation
and treat the company and its members or
its controllers as a single entity if it is just
and equitable.
 This is based on the overall
circumstances of the company.
 Thus, injunction may be granted against a
company in action against its controller (to
give justice); especially in fraud cases.
ASPATRA SDN BHD V BBMB
[1988] 1 MLJ 97
Held:
The Supreme Court lifted the veil of
incorporation to give justice as far
BBMB and BMF were concerned when
an element of fraud is involved
(injunction was necessary).
5. GROUPS OF COMPANIES ARE
A SINGLE UNIT/ AN ECONOMIC
UNIT
 General rule: Each company in a group is a
separate legal entity (A holding company and
its subsidiaries are distinct).
 Yet, certain circumstances might require that
the whole group be treated as a single entity
(becomes as 1 single unit/ 1 economic unit).
 This depends on the facts of each case
(especially in the fraud case).
 The principle of independent legal entity in the
group of companies has been well accepted in
Malaysian legal system.
HOTEL JAYA PURI BHD V NATIONAL
UNION OF HOTEL, BAR & RESTAURANT
WORKERS [1980] 1 MLJ 109
 The Jaya Puri Chinese Garden Restaurant
Sdn. Bhd. was a wholly owned subsidiary
of Hotel Jaya Puri Bhd (holding company).
 The restaurant retrenched several workers
when it closed down.
 The workers’ union disputed the retrenchment
on the ground that the real employer was the
hotel (a single economic unit).
 Since the hotel was still in operation, the
workers were actually dismissed and not
retrenched.
HOTEL JAYA PURI BHD V NATIONAL
UNION OF HOTEL, BAR & RESTAURANT
WORKERS [1980] 1 MLJ 109
Held:
 Despite the separate personality of the
hotel and the restaurant, they were for
practical purposes; essentially one
and the same (functionally one).
 Hence, the restaurant workers were also
the hotel workers (the hotel was liable).
TIU SHI KIAN V RED ROSE
RESTAURANT SDN. BHD.
[1984] 2 MLJ 313
Held:
• Hotel Berjaya and Red Rose Restaurant
were functionally one and be treated as
1 single body (2 corporate bodies are in
fact 1 single authority).
• The directors of the Hotel Berjaya are
also the directors of the Red Rose
Restaurant.
VISVANATHAN A/L PERUMAL & 2 ORS
V MONA INDUSTRIES MALAYSIA SDN.
BHD. & ANOR [2004] 2 AMR 710
Held:
The 2nd defendant was liable for the
debts as he controlled and managed both
the 1st defendant and Tirathrai (as the
ultimate holding company).
CONCLUSION
 The corporate veil is an important effect of a
company’s incorporation.
 Purpose: To protect members from
becoming personally liable for the
company’s legal obligation.
 If misuse: The corporate veil can be lifted
and the member will be treated as the same
person as the company (1 single entity/ 1
economic unit).
 Effect: Personally liable.
WASSALAM…
The absent are always in the wrong.

~ English Proverb

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LIFTING THE VEIL OF

 Directors may be imposed joint and several

 Failure to refund within 5 months after

Held: The veil would be lifted and an injunction

Held: The veil was lifted and specific

SMITH, STONE AND KNIGHT LTD V

The absent are always in the wrong.

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