A

Contract — Misrepresentation — Sale and purchase agreement

— Representations by second and third defendants about functionality of
machinery — Whether plaintiff relied on representations — Whether second
and third defendants were experts in field — Breach — Whether
B representations included as terms of contract — Whether clauses formed
fundamental terms of contract — Whether machinery unfit for intended
purpose — Whether first defendant liable for breach of fundamental term of
agreement — Remedies — Rescission — Whether plaintiff entitled to rescind
contract — Counterclaim — Costs — Whether costs claimed were in contract
C
Eco Power Synergy Sdn Bhd v Ecopyrotech
International Sdn Bhd & Ors
HIGH COURT (KUALA LUMPUR) — CIVIL SUIT NO 22NCC-431–11
D OF 2014
HARMINDAR SINGH J
10 AUGUST 2015

The second and third defendants, a husband and wife team, were directors
E of Ecopyrotech International Sdn Bhd (‘the first defendant’), a producer of
the Scrap Tyre Pyrolysis System (‘STPS’) including the machinery. The
purpose of the STPS was to process 20MT of scrap tyres a day and to
produce not less than 40% diesel, 45% black carbon and 15% steel per day
from scrap tyres in an environmental friendly manner. The plaintiff, which
F was principally involved in green technology related businesses, entered
into a sale and purchase agreement to purchase one unit of the STPS
machinery (‘the machinery’) from the first defendant. A sum of
RM4,147,988.50 was then paid by the plaintiff to the first defendant being
the full sum stated in the agreement. Upon installation of the machinery at
G the plaintiff’s premises, it was discovered that the machinery failed to
produce any finished product during the trial runs. The defendants
attempted to remedy the defective machinery through third party
contractors. However, all attempts seemed futile. Owing to the failure of
the first defendant to remedy the breaches, the plaintiff decided to rescind
H the agreement. Subsequently the plaintiff filed an action against the
defendants premised on misrepresentation or in the alternative for breach
of contract. By way of this action the plaintiff sought, inter alia, a refund of
the purchase price of RM4,147,988.50 for the defendants’ failure to deliver
functional machinery, interest on the RM4,147,988.50 and general
I damages. The plaintiff averred that it had been induced to enter into the
agreement by representations made by the second and third defendants
about the functionality and profitability of the machinery. Thus, the plaintiff
contended that the first, second and third defendants were jointly and
severally liable to refund the total sum of RM4,147,988.50, for failure to
105 [2016] 7 MLJcon
106 MLJournal IN FOCUS [2016] 7 MLJcon

deliver functional machinery. The plaintiff also submitted that the said A
representations about the machinery had been incorporated into the
agreement (cll 7.2 and 7.4) and now formed fundamental terms of the
agreement. The defence put forward by the defendants was that the
machinery was functional and that there was no misrepresentation made
by the defendants to the plaintiff. The first defendant thus counterclaimed B
for rental costs, equipment costs and costs of transportation on delivery.

Held, allowing the plaintiff’s claim against the first defendant with costs of
RM70,000 but dismissing the claim against the second and third defendants
with costs of RM20,000; dismissing the first defendant’s counterclaim: C

(1) In this case, the misrepresentations that were said to have induced
the plaintiff to enter into the agreement with the first defendant had
been incorporated into the agreement, particularly in cl 7.2 and cl 7.4
of the agreement. It is trite law that once a representation was D
included as a term of the contract that the representation was
merged into the contract and the remedy would be for breach of
contract. However, the claim of misrepresentation with regard to the
second and third defendants as directors of the first defendant, was
without merit because neither the second nor third defendants were E
experts in the field and had limited education. Instead, based on the
evidence it would be more accurate to say that the plaintiff relied
materially on one John Choo (‘the engineer’), who was the real
person behind the technology of the machinery. However, the
engineer was not made a party to this suit. Thus, in conclusion the F
claim on misrepresentation should fail (see paras 18–22).
(2) Under cll 7.2 and 7.4 of the agreement, which were fundamental
terms of the agreement, the first defendant promised to deliver to the
plaintiff functional machinery. The evidence however disclosed that G
the machinery failed to perform as was agreed. Clearly the machine
constructed by the first defendant was unfit for its intended purpose.
This constituted a clear breach of a fundamental term of the
agreement. In the circumstances, the first defendant was liable for a
breach of a fundamental term of the agreement for which the plaintiff H
was entitled to rescind the contract. The plaintiff was also entitled to
be refunded by the first defendant the sum of RM4,147,988.50, which
sum was paid for the purchase of the machinery (see paras 23–24 &
41).
(3) The costs claimed by the first defendant in its counterclaim were I
without basis. There was no case for any of the costs either in the
contract or by way of agreement by the parties. It was more likely
that these costs were brought as a reprisal action and were wholly
without merit (para 40).
 Eco Power Synergy Sdn Bhd v Ecopyrotech International
[2016] 7 MLJcon Sdn Bhd & Ors (Harmindar Singh J) 107

A [Bahasa Malaysia summary

Defendan kedua dan ketiga, pasangan suami isteri, merupakan
pengarah-pengarah Ecopyrotech International Sdn Bhd (‘defendan
pertama’), pengeluar Scrap Tyre Pirolisis System (‘STPS’) termasuk jentera.
Tujuan STPS adalah untuk memproses 20MT tayar skrap sehari dan untuk
B
menghasilkan tidak kurang daripada 40% diesel, 45% karbon hitam dan 15%
keluli setiap hari daripada skrap tayar terpakai dengan cara mesra alam
sekitar. Plaintif, yang terutamanya terlibat dalam perniagaan berkaitan
teknologi hijau, telah memeterai perjanjian jual beli untuk membeli satu unit
C jentera STPS (‘jentera’) daripada defendan pertama. Sejumlah
RM4,147,988.50 kemudiannya dibayar oleh plaintif kepada defendan
pertama yang merupakan jumlah penuh yang dinyatakan dalam perjanjian
tersebut. Setelah pemasangan jentera di premis plaintif, didapati bahawa
jentera tersebut gagal untuk menghasilkan apa-apa produk siap semasa ujian
D percubaan. Defendan-defendan cuba membetulkan jentera yang rosak
melalui kontraktor pihak ketiga. Bagaimanapun, semua percubaan
seolah-olah sia-sia. Disebabkan kegagalan defendan pertama untuk
membetulkan pelanggaran, plaintif memutuskan untuk membatalkan
perjanjian. Sehubungan dengan itu, plaintif memfailkan tindakan terhadap
E defendan-defendan berpremiskan salah nyata atau secara alternatif untuk
pelanggaran kontrak. Melalui tindakan ini plaintif menuntut antara lain
pemulangan harga pembelian RM4,147,988.50 atas kegagalan defendan
untuk menyerahkan jentera yang berfungsi, faedah ke atas RM4,147,988.50
dan ganti rugi am. Plaintif menegaskan bahawa ia telah didorong untuk
F membuat perjanjian berdasarkan representasi yang dibuat oleh defendan
kedua dan ketiga mengenai fungsi dan keuntungan jentera tersebut. Oleh
itu, plaintif menegaskan bahawa defendan pertama, kedua dan ketiga adalah
secara bersama dan berasingan bertanggungan untuk membayar balik
jumlah keseluruhan sebanyak RM4,147,988.50, kerana gagal untuk
G menyerahkan jentera yang berfungsi. Plaintif juga berhujah bahawa
representasi tentang jentera tersebut telah dimasukkan dalam perjanjian
(klausa 7.2 dan 7.4) dan kini membentuk syarat asas perjanjian. Pembelaan
yang dikemukakan oleh defendan-defendan adalah bahawa jentera tersebut
berfungsi dan bahawa tiada salah nyata yang dibuat oleh defendan-defendan
H kepada plaintif. Defendan pertama dengan itu membuat tuntutan balas
untuk kos sewa, kos peralatan dan kos pengangkutan penghantaran.

Diputuskan, membenarkan tuntutan plaintif terhadap defendan pertama

dengan kos sebanyak RM70,000 tetapi menolak tuntutan terhadap
I defendan kedua dan ketiga dengan kos sebanyak RM20,000; menolak
tuntutan balas defendan pertama:
(1) Dalam kes ini, salah nyata yang dikatakan telah mendorong plaintif
untuk memasuki perjanjian dengan defendan pertama telah
dimasukkan ke dalam perjanjian itu, terutamanya di dalam klausa 7.2
108 MLJournal IN FOCUS [2016] 7 MLJcon

dan 7.4 perjanjian. Undang-undang terpakai ialah bahawa sebaik sahaja A

representasi dimasukkan sebagai syarat, representasi tersebut telah
digabungkan ke dalam kontrak dan remedi adalah untuk pelanggaran
kontrak. Walau bagaimanapun, tuntutan salah nyataan berkenaan
dengan defendan kedua dan ketiga sebagai pengarah-pengarah
defendan pertama, adalah tanpa merit kerana defendan kedua atau B
ketiga bukanlah pakar-pakar dalam bidang tersebut dan mempunyai
pendidikan yang terhad. Sebaliknya, berdasarkan keterangan adalah
lebih tepat untuk mengatakan bahawa plaintif bergantung secara
material kepada John Choo (jurutera), iaitu orang yang sebenar di
sebalik teknologi jentera. Walau bagaimanapun, jurutera tersebut C
tidak dijadikan pihak kepada saman ini. Oleh itu, secara
kesimpulannya, tuntutan ke atas salah nyata seharusnya gagal (lihat
perenggan 18–22).
(2) Di bawah klausa 7.2 dan 7.4 perjanjian, yang merupakan syarat asas D
perjanjian, defendan pertama berjanji untuk menyerahkan kepada
plaintif jentera yang berfungsi. Keterangan bagaimanapun
mendedahkan bahawa jentera gagal beroperasi seperti yang telah
dipersetujui. Jelas mesin yang dibina oleh defendan pertama tidak
layak untuk tujuan yang dimaksudkan. Ini merupakan pelanggaran jelas E
tentang syarat asas perjanjian. Dalam keadaan itu, defendan pertama
bertanggungan untuk pelanggaran syarat asas perjanjian di mana
plaintif berhak untuk membatalkan kontrak. Plaintif juga berhak untuk
dibayar balik oleh defendan pertama jumlah sebanyak
RM4,147,988.50, iaitu jumlah wang telah dibayar untuk pembelian F
jentera (lihat perenggan 23–24 & 41).
(3) Kos yang didakwa oleh defendan pertama dalam tuntutan balas adalah
tidak berasas. Tiada kes untuk apa-apa kos sama ada dalam kontrak
atau melalui perjanjian oleh pihak-pihak. Adalah berkemungkinan
bahawa kos ini telah dibawa sebagai tindakan balas dan pada G
keseluruhannya tanpa merit (lihat perenggan 40). ]

Cases referred to
Adams v Cape Industries Plc [1991] 1 All ER 929 (refd)
Gurbachan Singh s/o Bagawan Singh & Ors v Vellasamy s/o Pennusamy & Ors (on H
their behalf and for the 213 sub-purchasers of plots of land known as
PN35553, Lot 9108, Mukim Hutan Melintang, Hilir Perak) and other
appeals [2015] 1 MLJ 773; [2015] 2 AMR 1, FC (refd)
Low Keang Guan v Sin Heap Lee-Marubeni Sdn Bhd [2005] 7 MLJ 216, HC
(refd) I
Mackt Logistics (M) Sdn Bhd v Malaysian Airline System Bhd [2014] 2 MLJ 518,
CA (refd)
Prest v Prest and others [2013] 4 All ER 673, SC (refd)
Salomon v A Salomon & Co Ltd (1897) AC 22, HL (refd)
 Eco Power Synergy Sdn Bhd v Ecopyrotech International
[2016] 7 MLJcon Sdn Bhd & Ors (Harmindar Singh J) 109

A Sim Thong Realty Sdn Bhd v Teh Kim Dar @ Tee Kim [2003] 3 MLJ 460, CA
(refd)
Woolfson v Strathclyde Regional Council [1978] SC (HL) 90 (refd)

Legislation referred to
B Contracts Act 1950
Civil Law Act 1956
Cindy Goh Joo Seong (Keong Ming Wai with her) (Cheang & Ariff) for the plaintiff.
Amos Ho Chern Wey (Paul Ong & Assoc) for the defendants.
C
Harmindar Singh J:

INTRODUCTION

D [1] The plaintiff’s cause of action against the defendants is premised on

misrepresentation or in the alternative, for breach of contract for total
failure of consideration. Further, the plaintiff seeks the remedy of lifting the
corporate veil of the first defendant to find the second and third defendants
as directors of the first defendant company liable to the plaintiff.
E
[2] The plaintiff sought the following relief:
(a) a declaration that the one unit of the 20MT/day Scrap Tyre Pyrolysis
System (‘the machinery’) delivered by the defendants to the plaintiff
F is defective and that the sale and purchase agreement dated 8
February 2010 (‘the agreement’) was rightfully rescinded by the
plaintiff;
(b) the first, second, and third defendants to jointly and severally pay the
G plaintiff the total sum of RM4,147,988.50 for failure to deliver a
functional machinery pursuant to the sale and purchase agreement
dated 8 February 2010;
(c) the machinery be removed by the defendants from the plaintiff’s
premises within seven days from the date of judgment;
H
(d) general damages to be assessed by the court to be jointly and
severally borne by the first, second, and third defendants;
(e) pre-judgment interest pursuant to Civil Law Act 1956 at the rate of
5%pa on the sum of RM4,147,988.50 starting from 17 October 2014
I until the date of judgment;
(f) interest on the sum of RM4,147,988.50 at the rate of 5% pa from the
date of judgment until full and final settlement; and
(g) costs.
110 MLJournal IN FOCUS [2016] 7 MLJcon

[3] The defense put forward by the defendants is that the machinery A
was functional and that there was no misrepresentation made by the
defendants to the plaintiff. The first defendant also counterclaimed for the
following:
(a) RM195,000 being the rental cost of the alternative site for the B
delivery/fabrication/installation of the system from the period from
June 2011–June 2012;
(b) RM26,050 being the cost for laying the required foundation in the
rented site for the delivery/fabrication/installation of the system and
the equipment cost; C

(c) RM135,000 being the costs for redelivery of the system from the
rented site to the plaintiff’s premises (including but not limited to the
dismantling, delivery and reassembling the machine);
(d) RM10,845.20 being the rental costs of equipment to provide D
electricity supply for the system on the rented site; and
(e) interest of 5%pa from the date of the counterclaim till realisation as
well as costs.
E
BACKGROUND FACTS

[4] The plaintiff is a company incorporated on 10 November 2009. It

had a business address at No 13, Jalan Sungai Pinang 5/2, Taman
Perindustrian Pulau Indah, 42920 Pelabuhan Klang, Selangor. F

[5] The first defendant company was incorporated on 17 October

2008. The first defendant is a producer of the Scrap Tyre Pyrolysis System.
The first defendant was incorporated by the second and third defendants,
both being husband and wife, as its founders and only directors. The second G
and third defendants hold 90% of the shares in the first defendant. The only
other 10% shareholder is the second defendant’s son.

[6] On 8 February 2010, the plaintiff and the first defendant entered
into an agreement wherein the first defendant agreed to sell and the H
plaintiff agreed to purchase the Scrap Tyre Pyrolysis System (‘the system’).
The purpose of the Scrap Tyre Pyrolysis System is to process 20MT of
scrap tyres a day and to produce not less than 40% diesel, 45% black carbon
and 15% steel per day from scrap tyres in an ‘environmental friendly’
manner. I

[7] One unit of the Scrap Tyre Pyrolysis System was subsequently
installed at the plaintiff’s premises. The plaintiff had paid the sum of
RM4,147,988.50 to the first defendant as purchase consideration. The
 Eco Power Synergy Sdn Bhd v Ecopyrotech International
[2016] 7 MLJcon Sdn Bhd & Ors (Harmindar Singh J) 111

A background to the purchase of the system and the machinery was

somewhat disputed but the evidence adduced at the trial revealed the
following.

[8] The plaintiff company is principally involved in green technology

B related businesses. Knowing the plaintiff’s passion in green technology, the
second and third defendants approached the plaintiff to purchase
machineries and equipment from the first defendant, comprising of
20MT/day scrap tyre pyrolysis system which the second and third
defendants claimed to be environmental friendly and state of art as it could
C
‘heat the input material without requiring any burning’ which will therefore
save a lot of energy.

[9] On multiple occasions via meetings, discussions and power point

D presentations, the defendants made the following representations to the
plaintiff, inter alia:
(a) that the scrap tyre pyrolysis system that they are selling including the
machinery is able to process 20MT of scrap tyres a day and to
E
produce not less than 40% diesel, 45% black carbon and 15% steel
per day from scrap tyres in an ‘environmental friendly’ manner;
(b) that the machinery is environmental friendly and one of its kind; and
(c) that the business of the company will be extremely profitable.
F
[10] As the second defendant wanted to persuade the plaintiff to enter
into the agreement, the second defendant personally invested into the
plaintiff and became a shareholder prior to the signing of the agreement.

G [11] The plaintiff now asserts that in reliance of the conduct and
representations made by the second and third defendants, the plaintiff
agreed to enter into the agreement with the first defendant on 8 February
2010 for the purchase of the machinery and equipment comprising of the
Scrap Tyre Pyrolysis System. It appeared to be the case that the second and
H third defendants’ representations about the functionality of the machinery
were also incorporated into the agreement (cl 7.4) being the fundamental
term of the same. A sum of RM4,147,988.50 was then paid by the plaintiff
to the first defendant being the full sum stated in the agreement.
I
[12] Upon the installation of the machinery at the plaintiff’s premises in
July–October 2012, a few trial runs were conducted by both parties.
Unfortunately, the machinery failed to produce any finished product which
was intended to be produced during the trial runs.
112 MLJournal IN FOCUS [2016] 7 MLJcon

[13] Despite numerous attempts to remedy the seemingly defective A

machinery by the defendants through third party contractors (UC Blasting
& Painting Sdn Bhd and Ardent Focus Sdn Bhd), the defendants however
failed to repair the same and subsequently, failed and/or neglected to repair
the machinery altogether.
B
[14] In light of the defendants’ failure and then refusal to remedy the
situation, the plaintiff issued several notices to the first defendant to
remedy the defects. Owing to the failure of the first defendant to remedy
the breaches, the plaintiff rescinded and/or terminated the agreement by
C
serving on the first defendant a termination notice dated 17 October 2014.

ISSUES FOR TRIAL

[15] Arising from the factual background as set out earlier, the issues for
D
consideration and decision by the court can be summarised as follows:
(a) whether the defendants’ misrepresentations have induced the
plaintiff to enter into the agreement dated 8 February 2010 with the
first defendant for the purchase of the machinery (‘issue of
defendants’ misrepresentation’); E
(b) whether the first defendant had breached the terms of the
agreement dated 8 February 2010 by delivering a 20 MT/day Scrap
Tyre Pyrolysis System which is defective and not fit for its purpose
(‘issue of breach of contract’); and
F
(c) whether the corporate veil of the first defendant can be lifted as
against the second and third defendants (‘issue of lifting the
corporate veil’).

ISSUE OF THE DEFENDANTS’ MISREPRESENTATION G

[16] It is not uncommon for parties to make representations prior to the

finalisation of a contract. These representations often induce the party to
whom such representations are made to enter into the contract. The
problem arises when after the contract has been signed the H
representations turn out to be false. These representations then become
misrepresentations which may give rise to liability.

[17] The law pertaining to misrepresentation is well settled. A

misrepresentation has been defined as an unambiguous, false statement of I
fact which is addressed to the party misled and which materially induces the
contract (Sim Thong Realty Sdn Bhd v Teh Kim Dar @ Tee Kim [2003] 3 MLJ
460 at p 465 following Professor McKendrick’s Contract Law (3rd Ed).
Misrepresentation is also defined in the Contracts Act 1950.
 Eco Power Synergy Sdn Bhd v Ecopyrotech International
[2016] 7 MLJcon Sdn Bhd & Ors (Harmindar Singh J) 113

A [18] In the instant case, the misrepresentations alleged by the plaintiff,

which are set out in para 9 above, refer specifically to the functionality and
profitably of the Scrap Tyres Pyrolysis System. It is these representations
which are said to have induced the plaintiff to enter into the agreement
with the first defendant.
B
[19] Now it cannot be disputed that these representations have been
incorporated into the agreement as warranties or fundamental terms
particularly in cl 7.2 and cl 7.4. It is trite law that once a representation is
C
included as a term of the contract then that representation is merged into
the contract and the remedy that lies is one for breach of contract (Low
Keang Guan v Sin Heap Lee-Marubeni Sdn Bhd [2005] 7 MLJ 216 at p 224). In
addition, the claim on profitably is one of mere puff and sales talk and
cannot amount to misrepresentation of fact. In any event, the evidence
D disclosed that the plaintiff had made their own judgment about profitably
independently of any claim made by the defendants.

[20] The claim of misrepresentation with regard to the second and third
defendants (‘D2 and D3’) as directors of the first defendant is also without
E merit as I do not think that the plaintiff will have relied on any
representations by D2 and D3 who are not experts in the field and have
limited education.

[21] There is no doubt in my mind that the plaintiff relied materially on

F
one John Choo Fei Tho (‘John Choo’), the engineer and the real person
behind the technology of the machinery. In actual fact, John Choo is the
only person qualified to make technical representations on the quality,
specification and the productivity of the system and the machine. John
G Choo was also present at each of the meetings that took place and had
made the relevant representations. However, despite his active role, John
Choo was not made a party to this suit.

[22] In a nutshell, the plaintiff would not have entered into the contract
H but for the claims made by John Choo. No reasonable person in my view
would have entered into any such agreement based on the claims by D2
and D3 alone. For these reasons, the claim on misrepresentation must fail.

ISSUE OF BREACH OF CONTRACT

I
[23] In this regard, by virtue of cl 7.2 and cl 7.4 of the agreement, the first
defendant had promised to deliver to the plaintiff a functional machinery
that can produce 40% diesel, 45% black carbon and 15% steel. Although
114 MLJournal IN FOCUS [2016] 7 MLJcon

stated as a warranty, this was, to my mind, a fundamental term of the A

contract as that was the very purpose for which the machinery was
contracted.

[24] The evidence however disclosed that the machinery failed to

perform as was agreed. From the trial runs itself the machine was badly B
leaking. Despite some repairs, the machine was not able to produce any
pyrolytic oil as promised. Clearly, the machine constructed by the first
defendant was unfit for it intended purpose. This was in my assessment a
clear breach of a fundamental term of the agreement.
C
CLAIM AGAINST THE SECOND AND THIRD DEFENDANTS —
LIFTING THE CORPORATE VEIL

[25] It is significant that the agreement for the machinery was between D
the plaintiff and the first defendant company only. Not being satisfied with
judgment against the first defendant, the plaintiff is seeking to make the
directors of the first defendant liable as well. Their motivation to do so is
probably due to the possible inability of the first defendant to settle its
debts. Standing in the way of the plaintiff, however, is the century old E
doctrine of corporate personality and limited liability established by the
House of Lords in Salomon v A Salomon & Co Ltd [1897] AC 22.

[26] So what are the grounds relied upon by the plaintiff to cast aside the
doctrine of separateness of the company with its members and directors F
or sometimes known as piercing the corporate veil? The plaintiff here
asserts that the second and third defendants were using the first defendant
as a RM2 company to enter into an agreement for a contract valued at
RM24m with the plaintiff. They also allege that the second and third
defendants are the directing minds of the first defendant and have full G
control and make all decisions in respect of the first defendant. The first
defendant also had no other business or customers except for the plaintiff.
It was also claimed that the first defendant was a loss making company and
in poor financial position when it entered into the agreement with the
plaintiff. H

[27] Prior to the English Supreme Court case of Prest v Prest and others
[2013] 4 All ER 673 (SC), the scope and applicability of the doctrine of
piercing/lifting the corporate veil was elusive and difficult to decipher. The
Supreme Court in Prest in conducting an exhaustive analysis of the I
development of the doctrine referred to some important cases, two of
which merits mention. The starting point of the analysis was the case of
Woolfson v Strathclyde Regional Council [1978] SC (HL) 90where the House
of Lords decided that it would be appropriate to pierce the corporate veil
 Eco Power Synergy Sdn Bhd v Ecopyrotech International
[2016] 7 MLJcon Sdn Bhd & Ors (Harmindar Singh J) 115

A only where special circumstances exist indicating that it is a mere façade

concealing the true facts. Subsequently in Adams v Cape Industries Plc [1991]
1 All ER 929, the House of Lords took the position that the corporate veil
of the company could be disregarded only in cases where it was used for a
deliberately dishonest purpose. Their Lordships further emphasised that
B the court is not free to disregard the principle of Saloman v A Saloman & Co
Ltd merely because it considers that justice so requires.

[28] In Prest, Lord Sumption who delivered the leading judgment, clarified
the position of English law with regards to the lifting of the corporate veil
C
at para 35; at p 694 as follows:
I conclude that there is a limited principle of English law which applies when a
person is under an existing legal obligation or liability or subject to an existing
legal restriction which he deliberately evades or whose enforcement he
D deliberately frustrates by interposing a company under his control. The court
may then pierce the corporate veil for the purpose, and only for the purpose,
of depriving the company or its controller of the advantage that they would
otherwise have obtained by the company’s separate legal personality.

E [29] The question before the Supreme Court in Prest was that whether
the court would be entitled to pierce the corporate veil to order the
transfer properties held by the husband’s companies to the wife as a result
of their divorce.
F
[30] It is clear that from the judgment of Lord Sumption that the
corporate veil can be pierced only if it is found that a person is evading an
existing liability by interposing a company to frustrate his liability. Lord
Sumption called it the ‘evasion principle’.
G
[31] The reasoning of Prest recently affirmed and adopted by our Federal
Court in the case of Gurbachan Singh s/o Bagawan Singh & Ors v Vellasamy s/o
Pennusamy & Ors (on their behalf and for the 213 sub-purchasers of plots of land
known as PN35553, Lot 9108, Mukim Hutan Melintang, Hilir Perak) and other
H appeals [2015] 1 MLJ 773; [2015] 2 AMR 1 and the Court of Appeal in
Mackt Logistics (M) Sdn Bhd v Malaysian Airline System Bhd [2014] 2 MLJ 518.

[32] With the decision of the Federal Court in Gurbachan Singh, it is clear
that there are only limited circumstances in which the court could
I disregard separate personality, namely:
(a) where there was fraudulent transaction; or
116 MLJournal IN FOCUS [2016] 7 MLJcon

(b) where a person is under an existing legal obligation or liability or A

subject to an existing legal restriction which he deliberately evades
or whose enforcement he deliberately frustrates by interposing a
company under his control.

[33] Applying the foregoing principles in the instant case, it is plain that B
the plaintiff’s arguments to pierce the corporate veil are without merit and
must fail. There is no suggestion of fraud on the part of the second and third
defendants in the sale and purchase of machine. In any case, fraud was not
pleaded by the plaintiff and no particulars were provided.
C
[34] There was also, in my view, no evidence that the second and third
defendants were interposing the first defendant under their control to
avoid existing liability or legal obligation. In actual fact, the first defendant
was long incorporated in 17 October 2008 before the second and third
D
defendants even introduced the machine to the directors/shareholders of
the plaintiff. The plaintiff’s claim that the first and second defendants have
used the first defendant as a sham or stratagem to evade the plaintiff’s claim
is certainly not borne out by the evidence. With respect, there appears to
be a misapprehension of both the law and the facts by the plaintiff in this
E
regard.

[35] Learned counsel for the plaintiff also attempted to establish the case
that the first defendant company was a ‘RM2 dollar company’ to impute the
fact that the first and second defendants have attempted to avoid liability F
being incurred onto them. With respect, such reasoning has long fell out of
favour in light of the established principle of Saloman v A Saloman Co Ltd To
use the words of Lord Sumption in Prest v Prest, at p 694; para 34: it is not an
abuse to cause a legal liability to be incurred by the company in the first place. It
is not an abuse to rely upon the fact (if it is a fact) that a liability is not the G
controller’s because it is the company’s. On the contrary, that is what
incorporation is all about.

[36] At this juncture, it is also apt to recall the pertinent observations of

Lord Macnaghten in Saloman at p 53: H
The unsecured creditors of A Salomon and Company, Limited, may be entitled
to sympathy, but they have only themselves to blame for their misfortunes.
They trusted the company, I suppose, because they had long dealt with Mr
Salomon, and he had always paid his way; but they had full notice that they were
no longer dealing with an individual, and they must be taken to have been I
cognisant of the memorandum and of the articles of association.

[37] In the instant case as well, the plaintiff knew and chose to deal with
a limited liability company when the time came to enter into a contractual
 Eco Power Synergy Sdn Bhd v Ecopyrotech International
[2016] 7 MLJcon Sdn Bhd & Ors (Harmindar Singh J) 117

A relationship. They could very well have chosen to enter into an agreement
with D2 and D3 personally as well. Significantly as well, the financial
background of the plaintiff could easily be ascertained by the plaintiff before
any legal contract was entered into.

B [38] It is thus not open to the plaintiff to now argue that the second and
third defendants were using the first defendant as a sham which entitles the
piercing of corporate veil. As Lord Sumption puts it in Prest, at para 34; p
694: … the fundamental objection to the argument was that the principle was
being invoked so as to create new liability that would not otherwise exist. The
C
objection to that argument is obvious in the case of a consensual liability under a
contract, where the ostensible contracting parties never intended that anyone else
should be party to it. But the objection would have been just as strong if the liability
in question had not been consensual.
D
[39] It is pertinent to note also the observations in Prest, by the Supreme
Court at paras 35, 67, 100 and 103 that after their clarification on the limits
of the doctrine, the cases which would entitle the court to pierce the
corporate veil would be very rare. The instant action, unfortunately for the
E plaintiff, is not such a case. For the reasons already stated, the plaintiff’s
reliance on the doctrine in attempting to hold the second and third
defendants jointly and severally liable with the first defendant is
fundamentally misplaced. Suffice it to add, any such claim in this regard
cannot succeed.
F
COUNTERCLAIM BY THE FIRST DEFENDANT

[40] The first defendant is counterclaiming for rental costs, equipment

costs and costs of transportation on delivery. In this regard, I agree with the
G plaintiff’s submission that these claims are without basis and an
afterthought as these claims were introduced only after the plaintiff had
brought this action. I think the evidence clearly showed that the first
defendant had never informed the plaintiff about these claims. In any event,
H
a significant and decisive proven fact at the trial is that the machinery had
failed to be functional even before delivery. This was why the trial runs
were done at the first defendant’s rented premises at Kampung Jawa and
later delivered to the plaintiff’s factory. I do not see a case for any of the
costs either in the contract or by way of agreement by the parties. On the
I contrary, these costs, in my view, were agreed to be borne by the first
defendant by the parties as the whole chronology of events appeared to
show. My impression of the evidence and conduct of the first defendant is
that these claims were brought as a reprisal action and for the reasons
stated wholly without merit.
118 MLJournal IN FOCUS [2016] 7 MLJcon

CONCLUSION AND ORDERS A

[41] In the circumstances, I find the first defendant liable for breach of a
fundamental term of the agreement for which the plaintiff was entitled to
rescind the contract which action in my judgment was valid and lawful. As
a consequence, the plaintiff is entitled to be refunded by the first defendant B
the sum of RM4,147,988.50 which sum was paid for the purchase of the
machinery in question.

[42] Accordingly, the plaintiff is entitled to the declaration as per para

28(a) and (b) of the amended statement of claim against first defendant C
only. I also allow para 28(c) for the machinery to be removed by the first
defendant from the plaintiff’s premises within 14 days from the date of the
judgment.
D
[43] I do not however see how a claim for general damages by the plaintiff
is valid here. There was some reference in the submissions to the purchase
of some ancillary equipment but these should have been claimed as special
damages. There would therefore be no order for general damages to be
assessed. E

[44] The claim for interest is allowed as set out in para 28(e) and (f). The
claim against the second and third defendant is dismissed. The counter
claim by the first defendant is also dismissed. On the question of costs, on
the claim by the plaintiff against the first defendant and the counterclaim by F
first defendant, the first defendant is ordered to pay costs of RM70,000 to
the plaintiff. The plaintiff is to pay the second and third defendants costs of
RM20,000.

Plaintiff’s claim against the first defendant allowed with costs of RM70,000 but G
claim against second and third defendants dismissed with costs of RM20,000;
first defendant’s counterclaim dismissed.

Reported by Kohila Nesan

H