In Law, All Roads Lead to the Interest of Justice

Jason Teoh provides a commentary on a recent case on lifting the corporate veil

 

INTRODUCTION

In the realm of company law, the concept of separate legal personality sits uncomfortably with the doctrine of lifting the corporate veil.

Whilst the Companies Act 1965recognises that a corporation is treated as a separate legal person which is solely responsible for the liability it incurs and is the sole beneficiary of any benefits it receives, the courts have from time to time exercised their discretion to disregard the separate legal personality and lift the corporate veil to impute liability on the parties who operate behind it.

 

THE ISSUE

In the recent case of Irham Niaga Sdn Bhd & Irham Niaga Logistics Sdn Bhd v Tenaga Nasional Berhad (unreported), the Kuala Lumpur High Court had the opportunity to consider the circumstances in which the court would exercise its discretion to lift the corporate veil of a subsidiary company so as to impute the liability of the subsidiary onto its holding company.

 

THE FACTS

The Defendant, Tenaga Nasional Berhad (“TNB”), the national electric company, is the holding company of TNB Transmission Network Sdn Bhd (“TNBT”) and owns 100% of TNBT’s equity. TNBT was set up to provide management and support services to TNB in relation to the national electricity transmission network. TNBT is a dormant company and remained a RM2 company at all material times after its incorporation.

Irham Niaga Sdn Bhd and Irham Niaga Logistics Sdn Bhd (“Plaintiffs”) and TNBT entered into 5 Lease and Warehouse Management Agreements (“Agreements”) between October 2001 and September 2002.

The parties were eventually embroiled in a dispute over TNBT’s termination of the Agreements, essentially on the ground of alleged misrepresentation.

The dispute was referred to arbitration pursuant to the arbitration clauses in the Agreements, where TNBT was the claimant and the Plaintiffs were the respondents. TNB was not a party to the arbitration proceedings. The Plaintiffs counter-claimed against TNBT for wrongful termination of the Agreements in the arbitration and succeeded in their counter-claim. They were awarded a sum of approximately RM113 million with interest and costs.

TNBT exhausted all avenues to set aside the award and its application for leave to appeal to the Federal Court was dismissed. The final award has since been registered as a judgment of the court.

The Plaintiffs filed a claim in the High Court against TNB. The Plaintiffs claimed that TNB and TNBT, in maintaining TNBT as a dormant company, had refused to honour the final award and in the circumstances, the veil of incorporation of TNBT ought to be lifted so as to render TNB liable for the final award made against TNBT.

 

THE LEGAL PRINCIPLES

The Defendant contended that since the Court of Appeal’s decision in Law Kam Loy & Another v Boltex Sdn Bhd & Others [2005] 3 CLJ 355, the law in Malaysia no longer allows the courts to disregard the corporate personality on the ground of “interest of justice” as propounded in Hotel Jayapuri Sdn Bhd v National Union Bar & Restaurant Workers [1980] 1 MLJ 109.

The Court of Appeal in Law Kam Loy had refused to lift the corporate veil and criticised the interest of justice exception on 2 grounds. First, that the concept was inherently vague and, second, that it did not provide the courts or the business community with any clear guidance as to when normal company law rules should be displaced.

Notwithstanding the criticism of the interest of justice exception in Law Kam Loy, the learned judge, Dato’ Mohamed Ariff J,opined that the interest of justice concept remains important as a “policy impetus for creating exceptions to the doctrines of separate legal personality and limited liability” and ought not to be rejected outright.

The learned judge went on to state that while companies in a group should in law be free to arrange their affairs in the ordinary way, including transacting part of the business of the group through subsidiaries, the veil of incorporation could still be lifted in exceptional circumstances, such as in cases where special circumstances exist which indicate that the corporate personality is a mere façade that conceals the true facts.

His Lordship highlighted that this principle was recognised in Law Kam Loy where the Court of Appeal held that although the court could no longer disregard the corporate veil purely on the interest of justice exception, it could still do so in special circumstances, such as in a situation where actual fraud at common law or some inequitable or unconscionable conduct amounting to fraud in equity exists. 

Having laid down the guiding principles, the Court then proceeded to consider whether the facts warranted the corporate veil to be lifted in the present case.

 

FINDINGS OF THE COURT

Having considered the evidence produced at the trial, the Judge was of the view that this was not a case where TNBT had been used as a front or a façade from the outset. Neither was it a case where actual fraud existed on the part of TNB and TNBT from the outset.

However, based on the totality of the evidence adduced during the trial, the Court was of the view that “this is a case where special circumstances (exist) in a situation where there is inequitable or unconscionable conduct amounting to fraud in equity”.

The learned judge was satisfied that TNB was “from the very outset at the centre of things and was the driving force” of TNBT. TNB was in full control of TNBT through the provisions of funds, premises, personnel and through the legal structures that were put in place to ensure that ultimate control of TNBT resided in TNB at all times.

On the facts adduced, Dato’ Mohamed Ariff J was satisfied that there was more than a “functional integrality” of TNB and TNBT. The judge was of the view that TNBT could not have a meaningful functional existence without the financial resources and personnel support from TNB.

The Court also held that TNB, in carrying out the corporate exercise of integrating TNBT back as a division of TNB but leaving TNBT to continue exist as a dormant company, had totally disregarded the interests of the Plaintiffs who had been previously paid the rentals through funds supplied by TNB but routed through TNBT.

Against this backdrop, the Court found it inequitable and unconscionable for TNB to have collapsed back TNBT’s business into TNB, leaving TNBT as an empty shell without funds and without any meaningful personnel. In this regard, the Court took cognisance of the fact that documentary evidence had been produced which showed that a board paper had been circulated by TNB to deal with the legal, contractual and financial commitments to third parties that arose from the collapsing back exercise, but that TNB had not taken steps to implement the same.

The High Court allowed the Plaintiffs’ claim and ordered TNB to pay to the Plaintiffs the final award made against TNBT.

 

CONCLUSION

The decision in Irham Niaga indicates that the interest of justice exception per se is no longer a sufficient ground for the court to lift the corporate veil. A claimant must show that special circumstances exist which warrant the court to take such action.

Although the interest of justice exception no longer enjoys the status it once had, it remains important as it forms the underlying basis for creating exceptions to the doctrines of separate legal personality and limited liability. As with all matters which involve the exercise of judicial discretion, the basis for the exercise of such discretion is always rooted in the interest of justice. 

TNB has appealed to the Court of Appeal against the decision of the High Court.

 

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