Tutorial 3: The Lifting of the Veil of Incorporation
1. Explain the significance of the “veil of incorporation”? When a company is formed, the owner and the company become separate legal persons, hence the term, veil of i ncorporation. The veil of incorporation gives the protection sought for in having limited liability. If the court lifts up the corporate veil it will be able to discover the identity of the participants of the company and impose liability upon them. Thus, the separation between the company and its participants members and officers! does not e"ist anymore. There must be some e"ceptional circumstance for the court to lif t the veil of incorporation.
2. List and explain the situations in which the veil will be lifted? #! $raud
These occur where individuals have used the separate legal entity to do soething they are personally forbidden fro doing.
Gilford Motor Co Ltd v Horne (1933)
! was the "# of $ilford "otors %$&' and left $. !is contract stated that he wasn(t allowed to sell to $(s custoers for a period after leaving. ! set up a copany using the wife(s nae' he then approached his forer custoers) ! argued that firstly it was his copany that was approaching the custoers' not hi) and secondly' if there was wrongdoing' his copany was liable and not hi.
The courts held that the company was sham, lifted the veil of incorporation to show that he and the company was one and the same and granted an in%unction against his company as well as him.
Jones v Lipman &#'()*.
*n this case Lipan agreed to sell land to +ones but before copletion of the contract' and later having changed his ind about selling the land' Lipan sold the land to a copany of which he and another were the sole directors and shareholders. !e did this to put the land out of reach fro the purchasers. The ,udges ordered specific perforance against Lipan and the copany. The copany was described as a device and a sha' a as- which Lipan held before his face in an attept to avoid recognition by the eye of euity.
“/uffice to say that a litigant who see-s the court0s intervention to pierce the corporate veil must establish special circumstances showing that the company in +uestion is a mere facade concealing the t rue facts .” erman -dn hd/ vs /0uropean 1ommodities -dn hd per 2opal -ri am 415
“*n Lam 6am Loy 7 5nor v olte" -dn hd 7 8rs &)99* * had occasion to discuss the ore recent cases on the sub,ect and had this to say about the present state of the law “*n y ,udgent' in the light of the ore recent authorities such as Adams v. Cape Industries Plc'13345 6h 788 it is not open to the courts to disregard the corporate veil purely on the ground that it is in the interests of ,ustice to do so. *t is also y respectful view that the special circustances to which Lord 9eith referred inWoolfson v. Strathclyde Regional Council 13:;5 /LT 1<35 include cases where there is either actual fraud at common law or some ine+uitable or unconscionable conduct amounting to fraud in e+uity .” per 2opal -ri am 415.
)! 5gency
*f a subsidiary copany is acting as an agent for its holding copany' it ay be bound by the same liabilities and rights of its holding company.
!owever' no court has yet found subsidiary companies liable for their holding company;s debts.
Smith, Stone & Kniht Ltd v !irminham Corporation (1939)
//9 owned =iringha >or-s %=>& soe land' and a subsidiary copany %=>& operated on this land. =6 issued a copulsory purchase order on this land. =6 would reasonably copensate any owner for the business they ran on the land. /ince the subsidiary copany did not own the land' =6 claied they were not entitled to the copensation. The courts held that the subsidiary company was an agent and 1 must pay compensation.
3! 2roup of companies
The 6opanies ct does not refer to a @group of copanies( but ters li-e @holding copany( or @wholly owned subsidiary( are used in the ct. %see s<' <' <= and A&
Crease" v !rea#h$ood Motors %1993
n eployee brought an action for unfair disissal against his eployer who transferred the copany assets to another copany fored for the purpose. The eployee won but there were no assets to pay his clai. The %udge allowed him to transfer the claim to the new company< i.e. =e lifted the veil.
'rd v !elhaven *s Limited %199+
The plaintiffs were suing the defendant for isrepresentation. The defendant copany was part of a group that underwent a nuber of reorganisations. This worried the plaintiffs who feared the defendant copany would have no funds to pay if they won. The plaintiffs went to court to substitute the copany with another copany in the group. The 1ourt of 5ppeal refused to allow the substitution saying they would only lift the veil in cases of impropriety and there was none in this case.
dams v Cape -ndstries pl# and nother (1991)
' wor-ed for a B/ subsidiary of 6*' which ar-eted asbestos in the B/. The B/ subsidiary had no assets. ' suffered in,uries through exposure to asbestos dust and wanted to sue. *f he had sued the B/ subsidiary' he would have received no copensation since there was no oney to pay out. !e therefore sued 6* in the B9 and claied that the copany was a single econoic unit. The courts held in refusing to lift the veil of incorporation that, even though they recognised that the corporate structure was designed to minimise liability and ta"ation, it was not illegal and should not be considered a single economic unit. 8n the test of the >mere facade;, it was emphasised that the motive was relevant whenever such a sham or cloa? is alleged, as in 4ones v Lipman. 5 company must be set up to avoid e"isting obligations, not future and hypothetical obligations which have not yet arisen.
The Liberal 5pproach /
sparta Sdn !hd v !an. !miptra Mala"sia !hd %19+/
The court would generally lift the corporate veil in order to do %ustice particularly when an element of fraud is involved and here there was abuse fro the very structure of the copanies after lifting the corporate veil.
Hotel Ja"a ri !hd v 0ational nion of Hotel, !ar & 2estarant or.ers *n this case' the hotel appealed against the award of the *ndustrial
6ourt in awarding copensation to restaurant wor-ers eployed by the subsidiary of the hotel. The court found that in the particular circustances of the dispute' the hotel was in law the eployer of the retrenched wor-ers even though they were eployed by the restaurant. The two copanies were under the "#' is who had ultiate authority over the eployees C the hotel and the sae restaurant one enterprise.
>hile in sparta and !otel +ayapuri the court did lift the veil in a group of copanies there are other cases where they declined to do so. Dor exaple in
eople4s -nsran#e Co (M) Sdn !hd v eople4s -nsran#e Co Ltd5
*ndependent legal entity. eil not lifted. The 7 directors fro the holding copany were not the agent of the holding copany but directors and agent of the subsidiary copany.
1ourt of 5ppeal in 5T5 @anagement 1onsultants -dn hd v. @a?umaran -dn hd A liberal interpretation is no longer supported by current authorities see 5bdul 5BiB vin 5tan 7 CD 8rs v. Ladang engo @alay 0state -dn hd as per -han?ar 4., that the incorporation of the copany creates a separate
legal person distinct fro the shareholders.
*n 6o*le #res Sdn !hd v 7iara Setia Sdn !hd %8 the court was of the view that "alaysian courts have been lifting the corporate veil in relation to a group of copanies rather too easily.
!owever in the recent case of Visvanathan aEl erumal 7 ) 8rs v. @ona Industries @! -dn hd &)99F* ' applied the legal principle found in !otel +ayapuri and furtherore the 6ourt of ppeal in T "anageent 6onsultants /dn. =hd.' v. "a-uaran /dn =hd 24475 did not overruled !otel +ayapuri.
F! -ingle 0conomic 0ntity
6H0 :ood 6istri*tors Ltd v London !oroh of 7o$er Hamlets (19/;)5 Li*eral ppora#h
#!F owned all the shares in its subsidiaries' @=ronGe( and @Transport(. subsidiary copany @=ronGe( owned all the land on which L=T= issued a copulsory purchase order on. The 1ourt of 5ppeal held, in lifting the veil of incorporation that G=H was able to claim compensation because it and its subsidiary was a single economic unit. G=H own all t he shares of the subsidiaries and control every movement of the subsidiaries.
oolfson v Strath#l"de 2eional Con#il (19/+)
This was siilar to 6H0 v 7o$er Hamlets. !owever' the !ouse of Lords ruled that oolfson and its subsidiary was not a single econoic unit due to operational practices. Fote that since this case was based in /cotland' different law applied.
! Hational 0mergency
6aimler Co Ltd v Continental 7"re and 2**er (G!) Ltd (191;)
6 sued # for debts owing. 6 was a B9 copany) however all the shareholders were $eran except for one =ritish /ecretary. # argued that they should not pay the debt to $eran individuals to prevent oney going towards $erany(s war effort. The court held lifting the veil that 1 was 2erman company therefore have no locus standi tin 0nglish courts.
(! Ta" 0vasion
6opanies ay transfer assets between subsidiary copanies to reduce tax liability' but the courts ay then treat the as a single unit.
D! Tortious claims
illiams v 0atral Life Health :oods Ltd %199+
*n its ,udgent the !ouse of Lords considered that a director or eployee of a copany could only be personally liable for negligent isstateent if there was reasonable reliance by the claiant on an assuption of personal responsibility by the director so as to create a special relationship between the. There was no evidence in the present case.
8. Hesearch the following incidents •
das v. 6ape *ndustries Ilc and nother %1331& 1 ll EH. 323 6
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Adams v Cape Industries plc and Another (1991
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' wor-ed for a B/ subsidiary of 6*' which ar-eted asbestos in the B/. The B/ subsidiary had no assets. ' suffered in,uries through exposure to asbestos dust and wanted to sue. *f he had sued the B/ subsidiary' he would have received no copensation since there was no oney to pay out. !e therefore sued 6* in the B9 and claied that the copany was a single econoic unit. The courts held that' even though they recognised that the corporate structure was designed to iniise liability and taxation' it was not illegal and should not be considered a single econoic unit.
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The ="D scandal J Lorraine Ese Ksan
Hesearch the following incidents 1. The ="D scandalJLorraine Ese Ksan *n "alaysia' the case that was labelled as the one that shoc-ed the nation is sparta /dn =hd v =an- =uiputra "alaysia =hd 15 %9oh' 244A&. Draud was perpetrated against the copany. *n this case' =uiputra "alaysia Dinance Ltd %="D& sued Lorrain Ese Ksan %Lorrain& for the full aount figure of "2:'A2<';<8.4A which they have described that Lorrain has ade secret profit on for which the copany has had no disclosure fro the accused. Lorrain was a director of =an- =uiputra "alaysia =hd %=="=& and also the 6hairan of ="D. They received news that Lorrain had disappeared fro "alaysia and so apply to the 6ourt for an order to restrain %"areva *n,unction& Lorrain fro oving his assets out of the country' and also for an order for disclosure of the value of Lorrain(s assets %nton Iiller Krder& and the nature of these assets. They discovered that Lorrain(s assets were in 82 ban-s and 147 other copanies. The court(s decision to ta-e this action was because the court in agreeent with =="= wanted to prevent Lorrain fro ta-ing out his asset out ,urisdiction which y deter recovery process later on. Durtherore' the court has also found that Lorrain has secretly transferred the profit to spatra and this supported the decision of the court to issue the "areva in,unction. !owever' lawyer for En. Lorrain argued that he is not the culprit who has the oney that was siphoned' the copany %spatra&' is the real culprit as the oney is with the copany and not with hi. The lawyers cited separate legal personality where the eber(s and the anageent are separate fro the copany. Lawyers for Lorrain relied on the authority of /aloon v /aloon 25 and s 1A%<& of the 6opanies ct 13A< 85 to argue separate legal personality. The court on other hand thought otherwise and instead found sufficient evidence to lift the corporate veil establish actual ownership of assets in copanies with the Lorrain $roup. *n this case' the /upree 6ourt held that courts in "alaysia
had the power to grant "areva in,unction and as such the lifting of the corporate veil was appropriate and found spatra /dn =hd to be liable.
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The =hopal disaster
The =hopal disaster' also referred to as the =hopal gas tragedy' was a gas lea- incident in *ndia' considered one of the world0s worst industrial disasters.15 *t occurred on the night of 2C8 #eceber 13;7 at the Bnion 6arbide *ndia Liited %B6*L& pesticide plant in =hopal' "adhya Iradesh. lea- of ethyl isocyanate gas and other cheicals fro the plant resulted in the exposure of hundreds of thousands of people. The toxic substance ade its way in and around the shantytowns located near the plant.25 Estiates vary on the death toll. The official iediate death toll was 2'2<3 and the governent of "adhya Iradesh has confired a total of 8':;: related the gas release.85 estiate died within deaths two wee-s and to another ;'444 or oreKthers have since died;'444 fro gasM related diseases.75<5 governent affidavit in 244A stated the leacaused <<;'12< in,uries including 8;'7:; teporary partial and approxiately 8'344 severely and peranently disabling in,uries.A5 B6*L was the *ndian subsidiary of Bnion 6arbide 6orporation %B66&' with *ndian $overnent controlled ban-s and the *ndian public holding a 73.1 percent sta-e. *n 1337' the /upree 6ourt of *ndia allowed B66 to sell its <4.3 percent share. Bnion 6arbide sold B6*L' the =hopal plant operator' to Eveready *ndustries *ndia Liited in 1337. The =hopal plant was later sold to "cLeod Hussel %*ndia& Ltd. #ow 6heical 6opany purchased B66 in 2441. 6ivil and criinal cases are pending in the Bnited /tates #istrict 6ourt' "anhattan and the #istrict 6ourt of =hopal' *ndia' involving B66' B6*L eployees' and >arren nderson' B66 6EK at the tie of the disaster.:5 ;5 *n +une 2414' seven exMeployees' including the forer B6*L chairan' were convicted in =hopal of causing death by negligence and sentenced to two years iprisonent and a fine of about 2'444 each' the axiu punishent allowed by law. n eighth forer eployee was also convicted' but died before the ,udgent was passed.15 Legal proceedings leading to the settleentKn 17 #eceber 13;7' the 6hairan and 6EK of Bnion 6arbide' >arren nderson' addressed the B/ 6ongress' stressing the copany0s Ncoitent to safetyN and proising to ensure that a siilar incident Ncannot happen againN. !owever' the *ndian $overnent passed the =hopal $as Lea- ct in "arch 13;<' allowing the $overnent of *ndia to act as the legal representative for victis of the disaster'7<5 leading to the beginning of
legal wrangling. *n 13;<' !enry >axan' a 6alifornia #eocrat' called for a B/ governent inuiry into the =hopal disaster' which resulted in B/ legislation regarding the accidental release of toxic cheicals in the Bnited /tates.7:5 "arch 13;A saw Bnion 6arbide propose a settleent figure' endorsed by plaintiffs0 B/ attorneys' of 8<4 illion that would' according to the copany' Ngenerate a fund for =hopal victis of between <44CA44 illion over 24byyearsN. *n "ay' litigation was transferred fro the *ndian courts B/ #istrict 6ourt +udge. Dollowing an appeal of B/ thisto decision' the B/ 6ourt of ppeals affired the transfer' ,udging' in +anuary 13;:' that B6*L was a Nseparate entity' owned' anaged and operated exclusively by *ndian citiGens in *ndiaN.7<5 The ,udge in the B/ granted B660s foru reuest' thus oving the case to *ndia. This eant that' under B/ federal law' the copany had to subit to *ndian ,urisdiction. Litigation continued in *ndia during 13;;. The $overnent of *ndia claied B/ 8<4 illion fro B66.<5 The *ndian /upree 6ourt told both sides to coe to an agreeent and Nstart with a clean slateN in Foveber 13;;.7<5 Eventually' in an outMofMcourt settleent reached in 13;3' Bnion 6arbide agreed to pay B/ 7:4 illion for daages caused in the =hopal disaste r' 1arren nderson and others B66 6hairan' 6EK >arren nderson was arrested and released on bail by the "adhya Iradesh Iolice in =hopal on : #eceber 13;7. The arrest' which tooplace at the airport' ensured nderson would eet no har by the =hopal counity. nderson was ta-en to B660s house after which he was released six hours later on 2'144 bail and flown out on a governent plane. These actions were allegedly ta-en under the direction of then chief secretary of the state' who was possibly instructed fro chief inister0s office' who hiself flew out of =hopal iediately.735<45<15 Later in 13;:' the *ndian governent suoned nderson' eight other executives and two copany affiliates with hoicide charges to appear in *ndian
court.<25 *n response' Bnion 6arbide bal-ed' saying the copany is not under *ndian ,urisdiction.<25 *n 1331' the local =hopal authorities charged nderson' who had retired in 13;A' with anslaughter' a crie that carries a axiu penalty of 14 years in prison. !e was declared a fugitive fro ,ustice by the 6hief +udicial "agistrate of =hopal on 1 Debruary 1332 for failing to appear at the court hearings in a culpable hoicide case in which he was naed the chief defendant. Krders were passed to the $overnent of *ndia to press for an extradition fro the Bnited /tates. The B./. /upree 6ourt refused to hear an appeal of the decision of the lower federal courts in Kctober 1338' eaning that victis of the =hopal disaster could not see- daages in a B/ court.7<5 *n 2447' the *ndian /upree 6ourt ordered the *ndian governent to release any reaining settleent funds to victis. nd in /epteber 244A' the >elfare 6oission for =hopal $as ictis announced that all srcinal copensation clais and revised petitions had been NclearedN.7<5 The /econd 6ircuit 6ourt of ppeals in Few Por- 6ity upheld the disissal of reaining clais in the case of =ano v. Bnion 6arbide 6orporation in 244A. This ove bloc-ed plaintiffs0 otions for class certification and clais for property daages and reediation. *n the view of B66' Nthe ruling reaffirs B660s longMheld positions and finally puts to restQboth procedurally and substantivelyQthe issues raised in the class action coplaint first filed against Bnion 6arbide in 1333 by !aseena =i and several organiGations representing the residents of =hopalN.7<5 *n +une 2414' seven forer eployees of the Bnion 6arbide subsidiary' all *ndian nationals and any in their :4s' were convicted of causing death by negligence and each sentenced to two years iprisonent and fined Hs.1 la-h %B/2'127&. ll were released on bail shortly after the verdict. The naes of those convicted are 9eshub "ahindra' forer nonMexecutive chairan of Bnion 6arbide *ndia Liited) .I. $o-hale' anaging director) 9ishore 9adar' viceMpresident) +. "u-und' wor-s anager) /.I. 6howdhury' production anager) 9.. /hetty' plant superintendent) and /.*. Rureshi' production assistant. Dederal class action litigation' /ahu v. Bnion 6arbide et al. is presently pending on appeal before the /econd 6ircuit 6ourt of ppeals in Few Por-. The litigation see-s daages for personal in,ury' edical onitoring and in,unctive relief in the for of cleanup of the drin-ing water supplies for residential areas near the =hopal plant. related coplaint see-ing siilar relief for property daage claiants is stayed pending the outcoe of the /ahu appeal before the federal district court in the /outhern #istrict of Few Por-.
*n reviewing the facts of the above incidents identify how the concept of separate legal identity operates and whether the veil ought to be lifted when ,ustice dictates?
7. $ood !ealth /dn. =hd. is a wellMestablished pharaceutical copany which is the parent copany of a large group of subsidiary copanies involved in different aspects of the pharaceutical industry. Testing /dn. =hd. is one these subsidiaries and was set specifically for the purpose of carrying out coercially ris-y ventures in the search for profitable new drugs. Kwing to this aspect of the business' Testing /dn. =hd.(s total assets are intentionally capped at approxiately H" <4'444.44. Hecently' Testing undertoo- experients to try and develop a new drug to cure a new strain of deadly influenGa. =arry Tablet' the "anaging #irector of Testing /dn. =hd.' appeared live on the television to a-e a personal appeal for volunteers for the experient. fter an intensive edia capaign involving =arry Tablet' 144 volunteers were chosen. Bnfortunately' the experient wentThe disastrously wrong in several volunteers losing their eyesight peranently. experient was resulting not properly researched and there is clear evidence of negligence. Testing now faces clais of illions of ringgit. #iscuss Testing /dn. =hd.(s liability and advise =arry if he can be held personally liable and further' if clais can be brought against $ood !ealth /dn. =hd.
5nswer:
$ood !ealth /dn. =hd. is a wellMestablished pharaceutical copany which is the parent copany of a large group of subsidiary copanies involved in different aspects of the pharaceutical industry.
The concept of a company being a legal entity and therefore it is a separate legal person from the owner -alomon v. -alomon, @acaura v. Horthern 5ssurance, or Lee v Lee 5ir $aming! can sometimes give undesirable results. In particular, shareholders could use a company to obtain funds dishonestly, and then not be liable for repayment. There are therefore numerous e"ceptions to the rules defined by -alomon v -alomon 7 1o Ltd. These can be implemented by the courts on a case/by/case basis, or by statute. =ence if the court lifts up the corporate veil it will be able to discover the identity of the participants of the company and impose liability upon them. Thus, the separation between the company and its participants members and officers! does not e"ist anymore. There must be some e"ceptional circumstance for the court to lif t the veil of incorporation.
-ince the courts rule on a case/by/case basis, it can be difficult to classify the e"ceptions. This would imply that it may be possible for substitution of defendants to ta?e place. 5pply any two to three authorities from: / o o o o o o
o
Salomon v Salomon & Co< %1+9/ Ma#ara v 0orthern ssran#e Co< %198= Lee v Lee>s ir :armin %19;1 s<1;(=) C 19;= Goh Hooi ?in v Lim 7eon Ghee *dl @i@ *in tan & +/ 'rs v Ladan 2eno Mala" Astate Sdn< !hd< %19+= erman Sdn< !hd< v Aropean Commodities Sdn< !hd< (8=)
Testing /dn. =hd. is one these subsidiaries and was set specifically for the purpose of carrying out coercially ris-y ventures in the search for profitable new drugs. Kwing to this aspect of the business' Testing /dn. =hd.(s total assets are intentionally capped at approxiately H" <4'444.44. While the subsidiary is undercapitalised, that appears to be irrelevant as t he doctrine of corporate personality implies that the Testing is a separate entity from 2ood =ealth. 8wnership however is significant. If the company is totally owned by the parent company and control all its movement then it will be regarded as a single economic entity as in G=H $ood Gistributors. =owever if a company is not totally owned or controlled in such manner then the laws governing 2roup of 1ompanies may apply.
$irst issue: -ingle 0conomic 0ntity •
The single econoic entity arguent C can $ood !ealth and Testing be treated as one and the sae? 1ases: 6H0 :ood 6istri*tors Ltd v London !oroh of 7o$er Hamlets (19/;), oolfson v Strath#l"de 2eional Con#il (19/+), dams v Cape -ndstries pl# and nother (1991)
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*f it is li-e #!F M /ingle Econoic Entity. Dro the facts we are told that Testing was structured to do ris-y ventures Cdeveloping new drugs for deadly influenGa. *f operationally different then it will be ore li-e >oolfson(s case %unli-e #!F there is no unity of ownership in this case&.
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lthough >oolfson(s case doubted #!F' it did not overrule as the 6ourt of ppeal in >oolfson(s distinguished the facts in both cases . %That is
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#!F and >oolfson do not have the sae facts.& ssuing that since the pay up capital is only H" <4'444 and Testing is to developed drugs that are highly profitable for $ood !ealth' the control could be li-e #!F' in which case Testing would be found liable. *n this case Testing ay be found to be operationally different and as such Testing ay be regarded as a separate legal entity and the veil ay not be lifted %rules in $roup of 6opanies&.
-econd Issue: 2roup of companies / liberal approach: @alaysia 1ould 2ood =ealth and Testing be part of a 2roup 0nterprise 1ourts are reluctant to lift the veil of i ncorporation in 2roup 0nterprise because each company in a group enterprisethere may not have identical creditors with ta?en / identical claims. Hevertheless were instances that courts have The Liberal 5pproach /
sparta Sdn !hd v !an. !miptra Mala"sia !hd %19+/
The court would generally lift the corporate veil in order to do %ustice particularly when an element of fraud is involved and here there was abuse fro the very structure of the copanies after lifting the corporate veil.
Hotel Ja"a ri !hd v 0ational nion of Hotel, !ar & 2estarant or.ers *n this case' the hotel appealed against the award of the *ndustrial
6ourt in awarding copensation to restaurant wor-ers eployed by the subsidiary of the hotel. The court found that in the particular circustances of the dispute' the hotel was in law the eployer of the retrenched wor-ers even though they were eployed by the restaurant. The two copanies were under the sae "#' who had ultiate authority over the eployees C the hotel and the restaurant is one enterprise.
>hile in sparta and !otel +ayapuri the court did lift the veil in a group of copanies there are other cases where they declined to do so. These are instances where the courts in "alaysia have adopted the strict approach. Dor exaple in eople4s -nsran#e Co (M) Sdn !hd v eople4s -nsran#e Co Ltd5
*ndependent legal entity. eil not lifted. The 7 directors fro the holding copany were not the agent of the holding copany but directors and agent of the subsidiary copany.
1ourt of 5ppeal in 5T5 @anagement 1onsultants -dn hd v. @a?umaran -dn hd A liberal interpretation is no longer supported by current authorities see 5bdul 5BiB vin 5tan 7 CD 8rs v. Ladang engo @alay 0state -dn hd as per -han?ar 4., that the incorporation of the copany creates a separate
legal person distinct fro the shareholders.
*n 6o*le #res Sdn !hd v 7iara Setia Sdn !hd %8 the court was of the view that "alaysian courts have been lifting the corporate veil in relation to a group of copanies rather too easily.
!owever in the recent case of Visvanathan aEl erumal 7 ) 8rs v. @ona Industries @! -dn hd &)99F* ' applied the legal principle found in !otel +ayapuri and furtherore the 6ourt of ppeal in T "anageent 6onsultants /dn. =hd.' v. "a-uaran /dn =hd 24475 did not overruled !otel +ayapuri.
The arguent then lies on whether fraud has been coitted. *f fraud is evident' as per spatra and !otel +ayapuri cases then the veil will be lifted and $ood !ealth ay be found liable. Bnder capitaliGing the subsidiary is not indicative of fraud.
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Law 6am Loy v olte" -dn hd 244<5 8 6L+ 8<<' 6 adopted the strict
approach and courts will lift the veil of incorporation only when there are evidence of fraud. *n this regard' it should be noted that =otel 4aya uri hd was applied by the 6ourt of ppeal as recent as 2414 %see Vellasamy ennusamy 7 8rs v 2urbachan -ingh agawan -ingh 7 8rs 24145 < "L+ 78:' 6&' >hereas Law 6am Loy was applied by the 6ourt of ppeal as recent as 2411 %see 0pic Juest -dn hd 7 5nor v -heila 0leanor Ge 1osta 24115 ; 6L+ <1;' 6&. Fo attept was ade to reconcile the conflicting decisions in either case' and the Dederal 6ourt has yet to a-e an authoritative ruling on this issue.
*n the ore recent case of rest v etrodel esoruces Ltd &)9#3* the /upree 6ourt ade it clear that the strict' conservative and legalistic approach rather than the econoics analysis of copany law are favoured. *n this case "rs. Irest recently divorced fro her husband then' sought to clai ancillary relief over seven properties owned by her husband(s copanies %the Ietrodel $roup of 6opanies&. t the heart of the arguent was whether the veil of these copanies can be pierced and be shown that the husband actually owned the copany and "rs. Irest would have atrionial rights under section 27 of the "atrionial 6auses ct 13:8' to clai relief for these
properties. t the /upree 6ourt' the Lordships held that the veil of incorporation could be lifted and that these copanies were holding the properties in trust for "r. Irest and as such the transfer of properties could be ade to the plaintiff. Lord /uption delivered the principal ,udgeent and stated that the correct law in lifting the veil of incorporation is found within copany law and not atrionial laws and stated that the veil of incorporation would be lifted where copany(s legal personality is abused for the purposes of soe wrong doing and propounded that fraud ay be seen in •
two distinct principles of concealent and evasion. There would be concealent when copanies “Sconceal the identity of the real actorsS” and evasion “Sif there is a legal right against the person in controlS and the copany is interposedS to5 defeat the right or frustrate its enforceent.” Lord /uption further added that courts should only lift the veil of incorporation when “Sa person is under an existing legal obligation or liability or sub,ect to an existing legal restriction which he deliberately evades or whose enforceent he deliberately frustrates by interposing a copany under his control. The court ay then pierce the corporate veil for the purpose' and only for the purpose' of depriving the copany or its controller of the advantage that they would otherwise have obtained by the copany(s separate legal personality.”
Third Issue: 5gency
5gency: *f a subsidiary copany is acting as an agent for its holding
copany' it ay be bound by the sae liabilities and rights of its holding copany. Smith, Stone & Kniht Ltd v !irminham Corporation (1939)
$ourth Issue: 4ustice as a criterion •
This is a disputed area. "alaysian law appears to follow the principles laid down in Adams although English courts have recently reMevaluated this. Kne arguent could be on the basis of the nature of the business and public safety. Kn the other hand' there appears to be nothing orally culpable about undercapitaliGing the subsidiary. *n the present context' "alaysian courts are unli-ely to extend the scope of veil lifting to cover this.
Hecently' Testing undertoo- experients to try and develop a new drug to cure a new strain of deadly influenGa. =arry Tablet' the "anaging #irector of Testing /dn. =hd.' appeared live on the television to a-e a personal appeal for volunteers for the experient. fter an intensive edia capaign involving =arry Tablet' 144 volunteers were chosen. Bnfortunately' the experient went disastrously wrong resulting in several volunteers losing their eyesight peranently. The experient was not properly researched and there is clear evidence of negligence. Testing now faces clais of illions of ringgit. 5pplying the legal principles adopted in the strict approach under 2roup enterprises, it may be argued that 2ood =ealth may not be found liable for the acts of the subsidiary as fraud could not be proven in this case. The li?ely party liable for the negligent act would be Testing -dn hd and the volunteers must be advised that t he under capitalisation of the subsidiary may mean that very little in terms of compensation could be recovered.
=arry had appeared on T on behalf of Testing' unfortunately' the experient went disastrously wrong resulting in several volunteers losing their eyesight peranently. The experient was not properly researched and there is clear evidence of negligence. Testing now faces clais of illions of ringgit
K
-ection #3)#5! 1omp anies 5ct #'( provides that a dire ctor of a company shall e"ercise reasonable care, s?ill and diligence with: a!
the ?nowledge, s?ill a nd e"perience which may reasonably be e"pected of a director having the same responsibilities< and
b!
any additional ?nowledge, s?ill and e"perience which the director in fact has.
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Where a director has additional ?nowledge, s?ill and e"perience, that director will be assessed against a reasonable person who has that additional ?nowledge, s?ill and e"perience.
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The actual ?nowledge and e"perience of a director is to be considered in addition to the minimum standard.
K
There is no minimum ob%ective standard re+uired of a director. -ince the sub%ective standard of care varies according to not the be s?ill a director has, a director with no specific s?ill or e"pertise need accountable.
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It may be difficult for arry to sa y that he i s of th e opinion that the wo r? done at Testing is not regarded as high ris?s wor? as the company was under/capitalised and they were testing new e"perimental drugs. 8n the
balance of probabilities, arry may be found liable as the director due to provision of section #3) #5! 1ompanies 5ct #'(. $urthermore as a director, arry may have tortious liability as provided for under the authority of William v. Hatural =ealth $ood due to breach of duty of care and as such may be found to have been negligent. K
nder section )#F )! 1ompanies 5ct #'(, if a company is wound/up, directors will have unlimited liability personally.
