Introduction

In the recent decision of our Federal Court in the case of Ahmad Zahri Mirza Abdul Hamid v AIMS Cyberjaya [2020] 6 CLJ 557 (“AIMS Cyberjaya”), the Court endorsed group enterprise as a valid ground under general law to pierce the corporate veil.

Mohd Zawawi Salleh FCJ succinctly captured this group enterprise argument at paragraph 15, where he held as follows:-

“A court may lift/pierce the corporate veil where the relationship between companies in the same group is so intertwined that they should be treated as a single entity to reflect the economic and commercial realities of the situation. An argument of “group enterprise” is that in certain circumstances a corporate group is operating in such a manner as to make each individual entity indistinguishable, and therefore it is proper to lift/ pierce the corporate veil to treat the parent company as liable for the acts of the subsidiary. Lifting/piercing the corporate veil is one way to ensure that a corporate group, which seeks the advantages of limited liability, must also accept the corresponding responsibilities.”

The Law

The general rule is that Creditors of a company are unable to avail of any recourse from the shareholders of a company due to the fact that a corporate veil exists that separates the company from its shareholders.

In accordance to Section 20 of the Companies Act 2016, a company incorporated under the Companies Act 2016 is a body corporate and shall have legal personality separate from that of its members.

Further, Section 21(1) of the Companies Act 2016 states that a company shall be capable of exercising all the functions of a body corporate and have full capacity to carry on or undertake any business or activity including to sue and be sued.

However, the separate legal personality principle of the company has in certain instances been disregarded albeit the dichotomy between a company and the natural person behind it. This is known as piercing/lifting the corporate veil.

There are a number of instances where our Courts have been prepared to pierce the corporate veil, one such ground namely the argument of group enterprise.

Group Enterprise to Pierce the Corporate Veil in Malaysia

The first mention of group enterprise was in the locus classicus case of Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers & Anor [1980] 1 MLJ 109 (“Hotel Jaya Puri”) where Salleh Abas FJ (as he was then, later Lord President) referring to Professor Gower’s book on Principles of Modern Company Law, 3rd edition, at page 213 which stated that the Courts:--

“…are coming to recognize the essential unity of a group enterprise rather than the separate legal entity of each company within the group. Other examples of this can be found. In The Roberta (1937) 58 Ll LR 159, a parent company was held liable on a bill of lading signed on behalf of its wholly owned subsidiary, the court saying that the subsidiary was 'a separate entity…in name alone and probably for the purposes of taxation'. In another case, Spittle v Thames Grit & Aggregates Ltd [1937] 4 All ER 101, the court found no difficulty in treating a subsidiary as 'to all intents and purposes' the same as the parent company which held 90 per cent of its shares. A licensing authority in exercise of its discretion has been held entitled to have regard to the fact that a parent and subsidiary company, though technically separate legal persons, in fact constituted a single commercial unit ( Merchandise Transport Ltd v British Transport Commission [1962] 2 QB 173, Devlin LJ at page 202)…A good example of this is Bird & Co v Thos Cook & Son [1937] 2 All ER 227, in which an indorsement of a cheque to 'Thos. Cook & Son Ltd.' was treated as an indorsement to the allied but separate company of Thos. Cook & Son (Bankers) Ltd. by regarding it as a mere misdescription to be ignored under the principle falsa demonstratio non nocet”

In Hotel Jaya Puri, the basis upon which the Court pierced the corporate veil was on the following reasons:-

1. The Restaurant was wholly owned by the Hotel;
2. Hotel and Restaurant were inter-dependent;
3. The functioning and management of the Hotel and Restaurant were a single unit;
4. Common Managing Director between both Hotel and Restaurant; and
5. Senior officers like the Secretary and Assistant Manager were common to both the Hotel and Restaurant.

The Court was mindful of the essential unity of the group enterprise where the two entities were treated as being in one group.

There is then the case of Double Acres Sdn Bhd v Tiarasetia Sdn Bhd [2000] 7 CLJ 550. Abdul Malik Ishak J (as he was then was, later Court of Appeal Judge) stated as follows:-

“Malaysian courts have been very magnanimous in lifting the veil in so far as a group enterprise is concerned unlike the Australian court in Pioneer Concrete Services Ltd v. Yelnah Pty Ltd [1986] 11 ACLR 108 a decision of the Supreme Court of New South Wales, and also unlike the New Zealand court in the case of Re Securitibank Ltd (No 2) [1978] 2 NZLR 136, 158-159.”

The Industrial Court likewise has decided on the application of group enterprise to pierce the Corporate Veil in the case of SSAS Golf Resort Management Services Sdn Bhd v Rajadurai Muthusamy [2003] 2 ILR 72 where it was held that, there were sufficient nexus between SSAS Golf Resort Management Services Sdn Bhd (“SSAS”), Nam Fatt Corporation Berhad (“Nam Fatt”) and Maddusalat Nerhad (“Maddusalat”) as follows:-

1. Golf Resort was owned by Maddusalat;
2. Nam Fatt was the parent company of Maddusalat;
3. Golf Resort and Maddusalat both shared the common Director and Secretary;
4. Record of an informal dialogue between Nam Fatt’s human resource manager and the Golf Resort’s employees’ union;
5. Nam Fatt’s human resource manager was a witness to the Collective Agreement between the Golf Resort and the Golf Resort’s employees’ union; and
6. The Letterhead of the Golf Resort and advertisement for jobs both had the Golf Resort referred to as the wholly owned subsidiary of Nam Fatt. This was ample evidence to demonstrate that Nam Fatt was involved directly and indirectly in the management and decision making of the Golf Resort.

In Epic Quest Sdn Bhd & Anor v Sheila Eleanor De Costa [2011] 8 CLJ 518, the group enterprise argument was upheld as special circumstances to warrant the piercing of the corporate veil. The companies in this case had ignored their corporate personality and operated as one group enterprise when dealing with the respondent. The Court of Appeal further held as follows:-

1. The deponent of all Affidavits filed by the Appellants allude to the fact that the deponent is the company secretary of the Titijaya Group of Companies and that the Appellants are component members of the Titijaya Group of Companies;
2. The Titijaya Group of Companies had a common director;
3. Correspondence and part payments of bills by the Appellants were made without any regard as to the principle of separate legal entity amongst others as follows:
   
   
   1. a letter to Epic Quest Sdn Bhd was acknowledged by Titijaya (M) Sdn Bhd; and
   2. a Letter from Titijaya (M) Sdn Bhd stating that the overpayment of a bill issued to Epic Quest Sdn Bhd should be utilized to contra bills issued to Prestine Valley Sdn Bhd, Titijaya (M) Sdn Bhd and Titijaya Hotel Sdn Bhd.

In Pamol (Sabah) Ltd & Anor v Joseph Paulus Lantip & Ors [2012] 1 LNS 466, the Court of Appeal placed utmost importance to the failure on the part of the Plaintiffs to particularize the plea in order to show that all the four defendants were operating as a group enterprise constituting one single commercial unit as distinct from being separate legal entities. As such, there was no plea taken before the Honourable Court that it was an appropriate case for the veil of incorporation to be pierced.

Conclusion

The recent decision of the Federal Court in AIMS Cyberjaya fortified and echoed what has been decided by the earlier Courts that one such ground to pierce the corporate veil of incorporation, will be to show the existence of a Group Enterprise. However, this must be expressly pleaded.

There must be tangible evidence that the said group enterprise is so intertwined that they should be treated as a single entity/economic unit. In essence, once the company operates indistinguishably from other companies within the same group, such situation warrants the separate legal personality of the said company to be ignored and the corporate veil to be pierced accordingly.