The doctrine of a separate legal entity according to company law is that when a company is incorporated, the company is considered as a separate legal entity where the rights and liabilities of the company are separate from its members.
According to section 20 of the Companies Act 2016, a company incorporated under this Act is a body corporate and shall have legal personality separate from that of its members and continue in existence until it is removed from register.
WHAT IS THE RATIONALE BEHIND THE DOCTRINE OF SEPARATE LEGAL ENTITY AND LIFTING THE CORPORATE VEIL?
Corporate veil differentiates the personality of a corporation from its shareholders, and protects them from being personally liable for the company’s obligations.
However, this protection is not wholly practiced if the court determines that a company’s business was not conducted in accordance with the corporate law, it may hold the shareholders personally liable for the firm’s obligations under the concept of lifting the corporate veil.
Another meaning lifting the corporate veil is 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.
CONDITIONS TO BE FULFILLED FOR A COMPANY TO BE LIFTED OR PIERCED
In order to lift the corporate veil, the parties (who is seeking to lift it) must prove:
The piercing or lifting of a corporate veil is in the interest of justice; and there exist special circumstances to pierce or lift the corporate veil such as:-
- There has been commission of actual fraud or common law fraud;
- Equitable fraud or constructive fraud has been committed;
- To prevent an evasion of liability; or
- To prevent an abuse of corporate personality
WHY CORPORATE VEIL NEEDS TO BE LIFTED?
When there is evidence of fraud or misuse of the doctrine of a separate entity, the courts are willing to lift the corporate veil. The companies tend to avoid contractual obligations and the separate personality of a company has often been used to disguise a fraud or enable a person to avoid his legal obligations.Thus, the court will lend its aid where a fraudulent scheme is involved.
YOU WANT TO KNOW THE COURT CASE ABOUT THE CONCEPT OF ‘PIERCING AND LIFTING THE CORPORATE’ VEIL?
In RB v OC & Anor [2014] 11 MLJ 606, the plaintiff, a subcontractor for a mixed residential project, filed a claim for the balance due under a settlement agreement signed between SC Sdn Bhd and the plaintiff. The plaintiff claimed that SC Sdn Bhd, a company of two directors and shareholders, was dissolved without settling its debts.The action was filed not against SC Sdn Bhd but against the two defendants who were husband and wife because a search with SSM revealed that Springs Court had been ‘dissolved’ on the application of the first defendant. The plaintiff argued that the defendants had no intention of dissolving Springs Court, absolving its directors and shareholders from liabilities to third parties. The defendants argued that there was no specific plea in the statement of claim for lifting the corporate veil, resulting in no sustainable claim in law against the defendants. The second defendant sought to distance herself in the claim, claiming to be a mere sleeping partner or someone who doesn’t take an active part in managing the business.
For all the reasons stated above, the court is satisfied that the plaintiff has proved its claim on a balance of probabilities. The plaintiff’s claim is accordingly allowed; the defendants are personally, jointly and severally liable to the plaintiff for the sum of RM861,189.81 together with interest at the rate of 5%pa from the date of judgment to the date of realisation together with agreed costs of RM70,000.
WHAT OTHER CASE HAVE BEEN DECIDED IN COURT REGARDING THE CONCEPT OF PIERCING AND LIFTING THE CORPORATE’ VEIL?
In PA Sdn Bhd v TS Sdn Bhd & Ors (Shan & Ors, Third Parties), The plaintiff, a company manufacturing air conditioners, filed a lawsuit against the first defendant, a freight forwarder, and its directors. The plaintiff alleged fraud by issuing false invoices, despite no services being rendered. The plaintiff also claimed breach of fiduciary duty and unjust enrichment. The plaintiff argued that the first defendant’s directors were personally liable for the fraud under common law and the Companies Act 1965.
The court allowed the plaintiff’s claim against the defendants with costs of RM30,000. The court further allowed the defendants claim for indemnity from the third parties with costs of RM10,000.
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