Per Nallini Pathmanathan FCJ
Leong Wai Hong and Karen Tan provide a commentary on a recent decision by the Federal Court in Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & 2 Ors. Leong Wai Hong and Karen Tan successfully represented Keller (M) Sdn Bhd.
The appellants sought to challenge the principles applicable to Malaysia as to when a corporate veil can be disregarded to find a person liable in light of the UK Supreme Court's decision in Prest v Prest and others  4 All ER 673 ("Prest").
The Federal Court analysed the 'concealment principle' and the 'evasion principle' as expounded by Lord Sumption in Prest, and affirmed that the analysis ought to be adopted in Malaysia but should not be applied too rigidly. The Federal Court also affirmed that the position in Malaysia has been correctly set out by the Federal Court in Gurbachan Singh s/o Bagawan Singh & Ors v Vellasamy s/o Pennusamy & Ors  1 MLJ 773.
a. Nallini Pathmanathan FCJ applied Denning LJ's famous statement in Lazarus Estates v Beasley  1 All ER 341: -
" ...No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister can be allowed to stand if it has been obtained by fraud. Fraud unravels everything..."
(emphasis by the Federal Court)
The dispute between the parties centred around the construction of the Melawati Mall Project ("Project"), a 10-storey shopping mall and business complex. The Project was constructed vide a joint venture company, Sime Darby Capitalmalls Asia (Melawati Mall) Sdn Bhd ("Sime Darby").
In 2013, Sime Darby appointed Bina Puri Holdings Berhad ("Bina Puri") as the main contractor for the Project. Bina Puri contracted the works out to Perfect Selection Sdn Bhd ("Perfect Selection") who in turn sub-contracted it out to PS Bina Sdn Bhd ("PS Bina"). Tony Ong was the Managing Director of both Perfect Selection and PS Bina and a majority shareholder. PS Bina then sub-contracted the works out to Keller (M) Sdn Bhd ("Keller"). Keller was the entity that carried out the actual works for the Project.
Events after Keller completed the works
Keller was initially paid against PS Bina's certification of works done in the interim certificates. However, problems began with the sixth interim progress certificate. On receipt of this certificate some 15 days later, PS Bina had reversed out a sum of RM4,520,824.21 for empty bore works completed by Keller ("EBW"). Such decertification continued until the whole of the EBW in the sum of RM7,462,720.19 was reversed out.
Shocking discoveries by Keller
After having benefited from the EBW carried out by Keller, and for which Keller was not paid, Keller discovered that in the contract between Bina Puri and Perfect Selection, it was expressly stipulated that Perfect Solution would not be paid for EBW.
Keller further discovered that both the shareholding and directorships of PS Bina were changed. The shareholding of PS Bina and directorships of PS Bina were transferred to a foreign national who was a construction worker and a local national who had no knowledge of PS Bina's obligations to Keller.
Keller initiated a civil suit, seeking for, among others, the return of the sum of RM7,462,720.19 for the unpaid EBW. Justice Lee Swee Seng (as His Lordship then was), in a well-written judgment particularising various findings of fraud, allowed Keller's claim against Tony Ong, Perfect Selection and PS Bina. His Lordship found that Perfect Selection and PS Bina were utilised by Tony Ong to commit fraud or equitable fraud on Keller and therefore lifted the corporate veils of PS Bina and Perfect Solution to find Tony Ong, Perfect Solution and PS Bina jointly and severally liable to Keller for the debt in relation to the performance of the EBW.
Court of Appeal
The Court of Appeal affirmed the findings of the High Court in its entirety.
The Federal Court held that there was no basis to depart from the clear findings of fact made by the trial judge after a thorough examination and analysis of the evidence on record. The Federal Court also examined the position in law in relation to disregarding the corporate veil in light of the seminal decision of the UK Supreme Court in Prest.
Federal Court analyses Lord Sumption's Dichotomy of Concealment and Evasion Principles in Prest
In Prest, the UK Supreme Court reviewed the entire case-law on the lifting and piercing of a corporate veil. In the leading judgment given by Lord Sumption, His Lordship held that the company's veil of incorporation might be lifted if it is being utilised for the purpose of some relevant wrongdoing. The difficulty, however, lies in identifying such relevant wrongdoing. In this regard, Lord Sumption held that the interchangeable use of 'façade' and 'sham' is too vague and gives rise to confusion. Thus, Lord Sumption formulated the two distinct principles that lie behind the terms 'façade' and 'sham', in which His Lordship called as the 'concealment principle' and the 'evasion principle'.
Nallini Pathmanathan FCJ, after analysing Lord Sumption's judgment, made the following conclusions:-
a. "There subsists a long line of authority over the years in Malaysia which recognises that fraud, whether common law fraud or fraud in equity permits the court disregarding of the corporate personality. This body of law as adopted from the United Kingdom takes its line of reasoning from the 'fraud unravels all' principle as expounded by Denning LJ in Lazarus v Beasley. That body of law remains correct and relevant and ought not to be lightly tampered with...
However, the limitation of liability envisages that such future conduct of the company's business is to be conducted honestly and with integrity - the law is predicated on that assumption.Once honesty is abandoned and the company is utilised as a vehicle for dishonest conduct, or fraud, or unconscionable conduct, then the basis for the separate corporate personality is jeopardised and undermined...This body of law relating to fraud subsists outside of the doctrine of 'piercing' the corporate veil as explained in Prest..."
b. "I would respectfully concur with the legal rationale prescribed by Lord Sumption in Prest, which explains that in order to ascertain whether the veil of incorporation ought to be 'pierced', the nature of the wrongdoing in issue ought to be analysed to ascertain whether it falls within the purview of the 'concealment' principle or the 'evasion' principle. To this end, the distinction between the two principles of concealment and evasion are of importance and benefit to enable a court to analyse with greater accuracy the basis on which the corporate personality is being disregarded. It also results in different consequences as explained earlier."
c. "Concealment Principle
The analysis in Prest, namely that the concealment principle does not in reality pierce the veil of incorporation, but allows the court to disregard or look behind the corporate personality to ascertain the true facts ought to be considered for use and application in this jurisdiction..."
d. "Evasion Principle
If the wrongdoing warrants the application of the evasion principle, the consequence is that the corporate veil is pierced, so as to enable liability to imposed on a person, seemingly unconnected to the transaction in dispute. First it is necessary to ascertain if there is a legal right against the person in control of a company which exists independently of the company's involvement, and a company is interposed such that the legal personality of the company defeats the legal right or frustrates its enforcement..."
e. "In many instances, the facts will not allow for a clean and clear application of either one of these principles. Both principles might come into play. It has also been demonstrated that the application of these different principles might well give rise to the same result. This is a practical reality that should be borne in mind when analysing the particular factual matrix..."
f. "Having reviewed some of the relevant case-law in this jurisdiction, I conclude, with respect, that there has been no confusion in the application of the principles..."
The Federal Court's judgment is significant as it is the first decision by the apex court to examine Lord Sumption's concealment and evasion principles in Prest and its application in Malaysia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.