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T3 Lifting The Veil of Incorporation Answer
T3 Lifting The Veil of Incorporation Answer
2. List and explain the situations in which the veil will be lifted?
(1) Fraud
These occur where individuals have used the separate legal entity to do
something they are personally forbidden from doing.
Gilford Motor Co Ltd v Horne (1933)
H was the MD of Gilford Motors (G), and left G. His contract stated that he
wasnt allowed to sell to Gs customers for a period after leaving. H set up a
company using the wifes name, he then approached his former customers; H
argued that firstly it was his company that was approaching the customers,
not him; and secondly, if there was wrongdoing, his company was liable and
not him.
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 injunction against his company as well as him.
Jones v Lipman [1962].
In this case Lipman agreed to sell land to Jones but before completion of the
contract, and later having changed his mind about selling the land, Lipman
sold the land to a company of which he and another were the sole directors
and shareholders. He did this to put the land out of reach from the
purchasers.
The judges ordered specific performance against Lipman and the company.
The company was described as a device and a sham, a mask which Lipman
held before his face in an attempt to avoid recognition by the eye of equity.
Suffice to say that a litigant who seeks the court's intervention to pierce the
corporate veil must establish special circumstances showing that the
company in question is a mere facade concealing the true facts.
Perman Sdn Bhd- vs -European Commodities Sdn Bhd per Gopal Sri
Ram JCA
In Lam Kam Loy & Anor v Boltex Sdn Bhd & Ors [2005]
I had occasion to discuss the more recent cases on the subject and had this
to say about the present state of the law:
In my judgment, in the light of the more recent authorities such as Adams v.
Cape Industries Plc,[1990] Ch 433 it is not open to the courts to disregard the
corporate veil purely on the ground that it is in the interests of justice to do so.
It is also my respectful view that the special circumstances to which Lord
Keith referred [inWoolfson v. Strathclyde Regional Council [1978] SLT 159]
include cases where there is either actual fraud at common law or some
inequitable or unconscionable conduct amounting to fraud in equity.
per Gopal Sri Ram JCA.
(2) Agency
If a subsidiary company is acting as an agent for its holding company, it may
be bound by the same liabilities and rights of its holding company.
However, no court has yet found subsidiary companies liable for their
holding companys debts.
Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant
Workers In this case, the hotel appealed against the award of the Industrial
Court in awarding compensation to restaurant workers employed by the
subsidiary of the hotel. The court found that in the particular circumstances of
the dispute, the hotel was in law the employer of the retrenched workers even
though they were employed by the restaurant. The two companies were under
the same MD, who had ultimate authority over the employees the hotel and
the restaurant is one enterprise.
While in Asparta and Hotel Jayapuri the court did lift the veil in a group of
companies there are other cases where they declined to do so. For example
in:
People's Insurance Co (M) Sdn Bhd v People's Insurance Co LtdIndependent legal entity. Veil not lifted. The 4 directors from the holding
company were not the agent of the holding company but directors and agent
of the subsidiary company.
Court of Appeal in ATA Management Consultants Sdn Bhd v. Makumaran
Sdn Bhd liberal interpretation is no longer supported by current authorities
see Abdul Aziz vin Atan & 87 Ors v. Ladang Rengo Malay Estate Sdn Bhd
as per Shankar J., that the incorporation of the company creates a separate
legal person distinct from the shareholders.
In Double Acres Sdn Bhd v Tiara Setia Sdn Bhd [2000] the court was of
the view that Malaysian courts have been lifting the corporate veil in relation
to a group of companies rather too easily.
However in the recent case of Visvanathan a/l Perumal & 2 Ors v. Mona
Industries (M) Sdn Bhd [2004], applied the legal principle found in Hotel
Jayapuri and furthermore the Court of Appeal in ATA Management
Consultants Sdn. Bhd., v. Makumaran Sdn Bhd [2004] did not overruled Hotel
Jayapuri.
Adams v. Cape Industries Plc and Another (1991) 1 All ER. 929 CA
A, worked for a US subsidiary of CI, which marketed asbestos in the US. The
US subsidiary had no assets. A, suffered injuries through exposure to
asbestos dust and wanted to sue. If he had sued the US subsidiary, he would
have received no compensation since there was no money to pay out. He
therefore sued CI in the UK and claimed that the company was a single
economic unit. The courts held that, even though they recognised that the
corporate structure was designed to minimise liability and taxation, it was not
illegal and should not be considered a single economic unit.
had the power to grant Mareva injunction and as such the lifting of the corporate
veil was appropriate and found Aspatra Sdn Bhd to be liable.
The Bhopal disaster, also referred to as the Bhopal gas tragedy, was a gas
leak incident in India, considered one of the world's worst industrial
disasters.[1] It occurred on the night of 23 December 1984 at the Union
Carbide India Limited (UCIL) pesticide plant in Bhopal, Madhya Pradesh. A
leak of methyl isocyanate gas and other chemicals from the plant resulted
in the exposure of hundreds of thousands of people. The toxic substance
made its way in and around the shantytowns located near the plant.[2]
Estimates vary on the death toll. The official immediate death toll was
2,259 and the government of Madhya Pradesh has confirmed a total of
3,787 deaths related to the gas release.[3] Others estimate 8,000 died
within two weeks and another 8,000 or more have since died from gasrelated diseases.[4][5] A government affidavit in 2006 stated the leak
caused 558,125 injuries including 38,478 temporary partial and
approximately 3,900 severely and permanently disabling injuries.[6]
UCIL was the Indian subsidiary of Union Carbide Corporation (UCC), with
Indian Government controlled banks and the Indian public holding a 49.1
percent stake. In 1994, the Supreme Court of India allowed UCC to sell its
50.9 percent share. Union Carbide sold UCIL, the Bhopal plant operator, to
Eveready Industries India Limited in 1994. The Bhopal plant was later sold
to McLeod Russel (India) Ltd. Dow Chemical Company purchased UCC in
2001.
Civil and criminal cases are pending in the United States District Court,
Manhattan and the District Court of Bhopal, India, involving UCC, UCIL
employees, and Warren Anderson, UCC CEO at the time of the disaster.[7]
[8] In June 2010, seven ex-employees, including the former UCIL
chairman, were convicted in Bhopal of causing death by negligence and
sentenced to two years imprisonment and a fine of about $2,000 each, the
maximum punishment allowed by law. An eighth former employee was
also convicted, but died before the judgment was passed.[1]
Legal proceedings leading to the settlementOn 14 December 1984, the
Chairman and CEO of Union Carbide, Warren Anderson, addressed the
US Congress, stressing the company's "commitment to safety" and
promising to ensure that a similar incident "cannot happen again".
However, the Indian Government passed the Bhopal Gas Leak Act in
March 1985, allowing the Government of India to act as the legal
representative for victims of the disaster,[45] leading to the beginning of
In 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 justice dictates?
Answer:
Good Health Sdn. Bhd. is a well-established pharmaceutical company which is the
parent company of a large group of subsidiary companies involved in different
aspects of the pharmaceutical industry.
Testing Sdn. Bhd. is one these subsidiaries and was set specifically for the purpose
of carrying out commercially risky ventures in the search for profitable new drugs.
Owing to this aspect of the business, Testing Sdn. Bhd.s total assets are
intentionally capped at approximately RM 50,000.00.
While the subsidiary is undercapitalised, that appears to be irrelevant as the
doctrine of corporate personality implies that the Testing is a separate entity
from Good Health. Ownership 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 DHN Food Distributors. However if
a company is not totally owned or controlled in such manner then the laws
governing Group of Companies may apply.
The single economic entity argument can Good Health and Testing be
treated as one and the same?
If it is like DHN - Single Economic Entity. From the facts we are told that
Testing was structured to do risky ventures developing new drugs for
deadly influenza. If operationally different then it will be more like
Woolfsons case (unlike DHN there is no unity of ownership in this case).
Although Woolfsons case doubted DHN, it did not overrule as the Court of
Appeal in Woolfsons distinguished the facts in both cases. (That is
In the more recent case of Prest v Petrodel Resoruces Ltd [2013] the
Supreme Court made it clear that the strict, conservative and legalistic
approach rather than the economics analysis of company law are favoured. In
this case Mrs. Prest recently divorced from her husband then, sought to claim
ancillary relief over seven properties owned by her husbands companies (the
Petrodel Group of Companies). At the heart of the argument was whether the
veil of these companies can be pierced and be shown that the husband
actually owned the company and Mrs. Prest would have matrimonial rights
under section 24 of the Matrimonial Causes Act 1973, to claim relief for these
properties. At the Supreme Court, the Lordships held that the veil of
incorporation could be lifted and that these companies were holding the
properties in trust for Mr. Prest and as such the transfer of properties could be
made to the plaintiff. Lord Sumption delivered the principal judgement and
stated that the correct law in lifting the veil of incorporation is found within
company law and not matrimonial laws and stated that the veil of
incorporation would be lifted where companys legal personality is abused for
the purposes of some wrong doing and propounded that fraud may be seen in
This is a disputed area. Malaysian law appears to follow the principles laid
down in Adams although English courts have recently re-evaluated this. One
argument could be on the basis of the nature of the business and public
safety. On the other hand, there appears to be nothing morally culpable about
undercapitalizing the subsidiary. In the present context, Malaysian courts are
unlikely to extend the scope of veil lifting to cover this.
Recently, Testing undertook experiments to try and develop a new drug to cure a
new strain of deadly influenza. Barry Tablet, the Managing Director of Testing Sdn.
Bhd., appeared live on the television to make a personal appeal for volunteers for
the experiment. After an intensive media campaign involving Barry Tablet, 100
volunteers were chosen.
Unfortunately, the experiment went disastrously wrong resulting in several volunteers
losing their eyesight permanently. The experiment was not properly researched and
there is clear evidence of negligence. Testing now faces claims of millions of ringgit.
Applying the legal principles adopted in the strict approach under Group
enterprises, it may be argued that Good Health may not be found liable
for the acts of the subsidiary as fraud could not be proven in this case.
The likely party liable for the negligent act would be Testing Sdn Bhd
and the volunteers must be advised that the under capitalisation of the
subsidiary may mean that very little in terms of compensation could be
recovered.
(b)
It may be difficult for Barry to say that he is of the opinion that the work
done at Testing is not regarded as high risks work as the company was
under-capitalised and they were testing new experimental drugs. On the