Lifting the Shroud over the Doctrine of Piercing the Corporate Veil: The Federal Court Decision of Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & Ors

Recently, the Federal Court case in Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & Ors [2021] MLJU 393 has clarified the doctrine of piercing the veil of incorporation of a company as well as the applicability of the English Supreme Court decision of Prest v Prest and Others [2013] 4 All ER 673.

The Factual Background of the Appeal

Although the Federal Court did not delve into the findings of fact made by the High Court, it would be helpful to note the factual matrix of the appeal. The dispute is centred around the construction of the Melawati Mall Project. In 2013, Bina Puri Holdings Berhad (“Bina Puri’) was appointed as the main contractor for the project. Bina Puri in turn appointed Perfect Selection Sdn Bhd (“Perfect Selection”) as its sub-contractor who in turn sub-contracted the work to PS Bina Sdn Bhd (“PS Bina”) who in turn sub-contracted the work out to Keller (M) Sdn Bhd (“Keller”), the Plaintiff in the original claim. 

The Appellant, Tony Ong, was a director and shareholder of both Perfect Selection and PS Bina in which he holds 50% and 40% shares, respectively. 

In the High Court, Keller initiated an action against the Appellant, PS Bina, and Perfect Selection for unpaid sums amounting to RM7,462,720.19 arising from Empty Bore Works (“EBW”) undertaken by Keller. After full trial, the High Court made, among others, the following findings: 

1. The Appellant controlled both PS Bina and Perfect Selection. As the controller of Perfect Selection, he procured the contract with Bina Puri which contained a term that Bina Puri would not pay for the EBW. 
2. The Appellant also knew that Perfect Selection would not be able to carry out the earth works and EBW by itself and would require a sub-contractor to perform the same. 
3. With this knowledge, the Appellant incorporated PS Bina as a shell company with no assets, specifically for the purpose of contracting with Keller and to be interposed between Perfect Selection and Keller. 
4. The Appellant was then found to have induced Keller into entering into the sub-contract with PS Bina and misrepresented that the EBW would be fully paid for by Bina Puri. Keller would not have entered into the sub-contract but for the representations of the Appellant. 
5. Keller carried out the entirety of the EBW on the belief that it would be paid. Although PS Bina initially made full payment to Keller, it subsequently reversed the entire sum. 
6. Keller therefore suffered losses whilst Perfert Selection enjoyed the benefit of monies for the EBW completed, under its contract with Bina Puri. Meanwhile, Keller had no way of enforcing its claim against PS Bina as it was a shell company with no assets. 

Based on the foregoing, the High Court found that that the Appellant had defrauded Keller and that PS Bina was a mere façade and sham utilized by the Appellant to shield Perfect Selection from having to pay for the EBW. In light of the fraud and equitable fraud perpetrated against Keller, the High Court lifted the corporate veil and established liability against the Appellant, PS Bina and Perfect Selection jointly and severally. 

The High Court’s decision was affirmed and endorsed by the Court of Appeal. Dissatisfied, the Appellant and Perfect Selection appealed to the Federal Court.

The Federal Court’s Analysis

The Concealment Principle vs the Evasion Principle

In dismissing the Appeal, the Federal Court clarified the applicability of the two distinct principles formulated by Lord Sumption in the English Supreme Court decision of Prest v Prest and others [2013] 4 All ER 673 for dealing with ‘facades’ and ‘shams’. 

Firstly, where an alleged wrongdoing relates to the abuse of corporate personalities as a ‘façade’, the principle to be applied is the concealment principle, that is: 

“The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases, the court is not disregarding the ‘façade’ but only looking behind it to discover the facts which the corporate structure is concealing.”

Where the concealment principle is applied, the court may disregard the corporate shell or personality to enable it to look behind the façade and determine the true facts which were concealed by the corporate personality. However, no piercing of the veil is involved, and liability is not necessarily visited upon the corporate personality or the controller of the company. 

On the other hand, where the alleged wrongdoing relates to the abuse of corporate personalities as a sham, the evasion principle is to be utilised. Per Lord Sumption in Prest: 

“The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories but in some circumstances the difference between them may be critical…”

To pierce the corporate veil under the evasion principle, the court must first identify the company with the shareholder or controller for a particular purpose which must relate to an existing liability or obligation of the shareholder or controller. It is therefore only applicable in cases where the is a legal right available against the controller of the company and where the company is interposed to frustrate the enforcement of that right or to defeat the legal right. When applied, the evasion principle enables the court to impose liability against the controller, the company, or both, as well as to other related parties. 

In the present Appeal, the Federal Court concluded that there is an existing liability or obligation of the Appellant to Keller based on his misrepresentations which induced Keller to enter into the contract with PS Bina. Keller therefore enjoyed a legal right against the Appellant which exists independently of PS Bina’s involvement. Hence, the trial court was entitled to pierce the corporate veil based on the evasion principle.

Disregarding the Corporate Personality by Reason of Fraud

The Federal Court further clarified that the ability of a court to unravel transactions by reason of fraud is independent from the doctrine of piercing the corporate veil. A court is entitled to disregard corporate personalities in its entirety when imposing liability in cases where fraud is found without needing to invoke the doctrine of piercing the corporate veil. 

Applying the doctrine to the present Appeal, the Federal Court also found that the court was entitled to disregard the corporate personalities and find liability against the Appellant and both PS Bina and Perfect Selection by reason of fraud alone.