Malaysian Company Law: Lifting the Corporate Veil

To what extent does, and to what extent should, Malaysian company law allow the lifting of the corporate veil between a parent company and its subsidiaries?

Separate legal entity means that is a different legal existence to individual members or stockholder who as natural person of company. A company may sue and be sue in its own name and holds property separately to its shareholders, directors and officers. They do not own the assets of the company and personally liable for its debt and obligation. In many aspect, company are treated as artificial person under the law. As an artificial person, the company is subject to many of the same rights and obligations under the law as a natural person.

Separate legal entity

In this case, Salomon incorporated a company named “Salomon & Co. Ltd.”, with seven subscribers consisting of himself, his wife, four sons and one daughter. This company took over the personal business assets of Salomon for £ 38,782 and in turn, Salomon took 20,000 shares of £ 1 each, debentures worth £ 10,000 of the company with charge on the company’s assets and the balance in cash. His wife, daughter and four sons took up one £ 1 share each. Subsequently, the company went into liquidation due to general trade depression. The unsecured creditors contended that Salomon could not be treated as a secured creditor of the company, in respect of the debentures held by him as he was the managing director of one-man company which was not different from Salomon and the cloak of the company was a mere sham and fraud.

This case was taken to court and the High court held that the creditors could not recover their debts as their contract were with the company and not with Salomon. On furthe appeal to the House of Lord, it was held that Slomon case is a twin concepts of separate company and limited liability. Therefore, the company are liable to its debts and not its members. A company can entry contract with its shareholder if there is necessary, the company can be sue to recover its losses if any wrong has been committed against the company and comapany can own assets but the shareholders have no obligation to hold the interests of the assets.

Corporate veil

Corporate veil is separates the personality of a corporation from the personalities of its stockholders (shareholders), and protects them from being personally liable for the firm’s debts and other obligations. This protection, however, is not ironclad or impenetrable. Where a court determines that a firm’s business was not conducted in accordance with the provisions of corporate-legislatio. It may hold the stockholders personally liable for the firm’s obligations under the legal concept of lifting the corporate veil.

Lifting of the corporate veil

However, the courts have not always applied the separate legal entity principle as the Salomon case. In a number of circumstances, the court will pierce the corporate veil or will ignore the corporate veil to reach the person behind the veil or reveal the true form and character of the concerned company. Another meaning of corporate veil is lift is a legal term where the court allows a lawsuit or prosecution to proceed against the individual shareholders or directors of a corporation instead of allowing them to be protected from individual liability due to their corporate status. This qualification prevents the possible abuse of the separate entity principle by unscrupulous traders. Therefore, there are statutory as well as common law exception to the principle in Salomon’s case.

Lifting of the veil by statute

Malaysia’s legislature has seen fit to provide for many situation in the Companies Act 1965 that allow the courts in dealing with the lifting of the corporate veil. in some situation, the lifting of veil makes the reader officers criminally liable for their company’s beaches of the act. Section 67 (3) allows the officers guilty of the criminal offence. In others situation, the Act makes the officer personally liable for to creditors for debts incurred by the company. Section 169 refer to the requirment of preparation consolidated accounts of financial position of the parent company and its subsidiaries. This preparation is done by directors of the parent company. View from this point, the act is recognize group of related companies function as a single entity.

According to Arjunan, personal liability is imposed under section 36 of the act. Under this provision, if the membership falls below the statutory minimum of two. Any member who knowingly carries on business for more than six months is personally liable for all debts of the company incurred after the six months. Under section 121 (2), any person who is an officer of a company was liable to the holder of the bill or other negotiable instrument if he signs, issues or authorizes to be signed on the company’s behalf any bill of exchange, cheque or promissory note on which the company’s name is not properly or legibly written.

Lifting of the veil by the common law court

In malaysia, the court will lift the corporate veil when the justice of the case so require which is Hotel Jaya Puri Sdn Bhd v National Union Bar& Restaurant Workers (1980), Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd (1988).

Situation where the Malaysia Courts did lift the veil between parent company and subsidiary companies

Fraud

The courts are prepared to lift the corporate veil where an element of fraud exists or where there is abuse of the separate entity principle. The companies tend to avoid contractual obligations. Setting up companies to enable majority shareholders to remove minority shareholders. Thus, court will lend its aid where a fraudulent scheme is involved. The separate personality of a company has often been used to disguise a fraud or enable a person to avoid his legal obligations.