Section 211 and 233 of the Communication and Multimedia Act 1998: A Double Edges Sword.

Mackt Logistic (M) Sdn Bhd v Malaysian Airline Bhd; separate legal entity revisit

Abstract

Separate legal entity or the Salomon Principle has been a fundamental principle of corporate law. This established principle has been confirmed and affirmed as early as in 1897 by the House of Lords in the case of Aron Salomon (pauper) v A Salomon and Company Limited. In the case of Mackt Logistic (M) Sdn Bhd v Malaysian Airline Bhd [2014] 2 MLJ 518, the issue before the court was whether we can uplift the corporate veil when justice of the case demands.

Mackt Logistic (M) Sdn Bhd v Malaysian Airline System Bhd [2014] 2 MLJ 518

Court of Appeal.

Facts

Mackt Logistic (M) Sdn Bhd (“the Plaintiff”) carried business cargo transportation. The Plaintiff deals with various airlines, which include Malaysia Airlines System (“the Defendant”). The two parties entered into a Sales Agency Agreement (“SAA”) on 5.5.1987.

The SAA requires the Plaintiff to provide a bank guarantee as a security for the payment of the service provided by the Defendant. The bank guarantee was for a period of 1.1.2002 until 31.12.2002 (“Guarantee Period”). Nearing the end of the Guarantee Period, the Defendant issued the demand to the bank to call on the guarantee.

There is no breach of the SAA but the Defendant stated that there were arrears from another company known as Mackt HWT Freight Sdn Bhd under a tenancy agreement and electricity charges.

Issue (s)

1.     Whether the Plaintiff and Mackt HWT Sdn Bhd is the same entity.

2.     Whether the court can uplift the veil of the company and see who is the actual controller of the Plaintiff.

The Court’s decision

Incorporation of a company gives a company a legal personality, separate from the members of the company. The effect of separate legal entity is that the company may sue and be sued in its own corporate name and the company will continue to exist even though the member of the company dies.

The court had taken the opportunity to revisit the case of Aaron Salomon (pauper) v A Salomon and Company, Limited v Aaron Salomon (“the Salomon’s case”). In this case, the owner, Salomon, sold his boot and leather business to his own company. As a return, the company gave him fully paid up shares allotted to him and his family. Salomon also received secured debentures as an acknowledgement of the company’s debt to him. The secured debentures were later mortgaged to third party.

Soon after the formation of the company, the company was put under liquidation. The creditors of the company applied to the court to liquidate the company. Since the secured debentures were secured by a charge on the company’s assets, it ranked priority to the trade creditors. Aaron, as secured charge, claimed priority for his debentures over the other creditors. The other creditors claimed that Aaron is the owner of the company and should not be indemnified like the other debenture holder.

The House of Lords affirmed Aaron’s claim for priority of his debentures. The House of Lords confirmed that the company is separate from controlling shareholder, thus giving effect to the limited liability doctrine.

This principle was later referred to as the Salomon Principle.

Sixty-four years later, the Salomon principle was applied in the case of Catherine Lee v Lee’s Air Farming Ltd [1961] AC 12 (PC). Lee formed the company with the main business is aerial top-dressing. Lee holds all the shares on the company except for one share that was held by his nominee. He managed the company and was also employed as the pilot of the company. While flying for the company’s business, he met with an accident and was killed. His widow claimed compensation under New Zealand Workers’ Compensation Act. Of course, the widow need to prove that Lee falls under the definition of ‘worker’ under the said Act.

Privy Council applied the Salomon Principle. Lee and Lee’s Air Farming Ltd are two different persons hence Lee’s Farming Ltd may enter into a contract with its owner.

The Salomon Principle was followed in Malaysian case of Abdul Aziz bin Atan & 87 ors v Ladang Rengo Malay Estate Sdn Bhd [1985] 2 MLJ 165 when the court held that an incorporated company was a legal person separate and distinct from the shareholders of the company. The court held that:

It is a trite law that an incorporated company is a legal person separate and distinct from the shareholders of the company. The Company from the date of incorporation has a perpetual succession and the Companies Act provides that the liability on the part of the shareholders to contribute to the assets of the company will be limited in the manner provided by the law and its memorandum and articles of the association. The whole point of forming a limited company that the shareholders can have in their hands the management of the business without incurring the risk of being under unlimited liability for the debt of the company.

In the case of Lee Eng Eow (as director of Lee Guat Cheow & Co Sdn Bhd) v Mary Lee (as executrix of the estate of Low Ai Lian) & ors [1999] 3 MLJ 481 at page 486, NH Chan JCA held that:

In addition to the statutory effects of incorporation, there is also a fundamental difference between an incorporated and unincorporated association, in that an incorporated association has a legal personality of its own apart from the persons who comprise it. The separate legal personality of a company is not specifically provided for in the Companies Act. Nevertheless, the whole scheme of the Act is predicated upon the company’s separate existence.

  

These cases are in line with section 16(5) of the Companies Act 1965 (“CA 1965”) that explains the effect of incorporation.

Section 16(5) of the CA 1965:

On and from the date of incorporation specified in the certificate of incorporation but subject to this Act the subscribers to the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name contained in the memorandum capable forthwith of exercising all the functions of an incorporated company and of suing and being sued and having perpetual succession and a common seal with power to hold land but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as provided by this Act.

If a natural person born by birth, a company is born after its incorporation date. After incorporation, a company became a person, a legal fiction, a person created by the law and an independent identity separate from its members and directors.

However, following the Salomon Principle strictly may cause injustice. “..the court will use its powers to pierce the corporate veil if it is necessary to achieve justice”: Re A Company (1985) 1 BCC 99. 

There are circumstances when the court will uplift the corporate veil only if it is necessary to achieve justice. Can we challenge the Salomon Principle by saying that justice demands that the court uplift the corporate veil. The question then what is ‘justice’?

In the case of Adam v Cape Industries Plc [1990] BCC 786, the Court of appeal held that: 

…it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts.

Circumstances when the court will uplift corporate veil.

1.  Company being used as device to conceal true facts.

The company was used to conceal the true facts to avoid or concealing any liability of individual behind the company: Trustor AB v Smallbone & ors [2002] BCC 795.

2.  Equity, good conscience, and merits of the case.

When the case touches on Industrial Relations Act 1967. The court was required to disregard technicalities and take into account the rules of equity, good conscience and merits of the case. In this case, the court held that the sister’s company as one entity. Case: Hotel Jayapuri Bhd v National Union of Hotel, Bar & Retaurant Workers & anor [1980] 1 MLJ 109.

3. Fraud

The court must determine whether legal relationship between two persons is honest. Lord Denning in the case of Lazarus Estates Ltd v Beasley [1956] 1 All ER 341 at page 345 stated that:

“No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved, but once it is proved, it vitiates judgments, contracts and all transactions whatsoever…”

This impact of this judgment is that the moment fraud was detected; it nullifies the judgments, contracts, and transactions. Hence, once the court detected fraud, Salomon principle ought to be set aside and corporate veil shall be lifted.

In the case of Tenaga Nasional Bhd v Irham Niaga Sdn Bhd & Anor [2011] 1 MLJ 752, Abdul Malik bin Ishak JCA held that:

You cannot simply raise the veil of incorporation just because you feel that it is in the interest of justice. But if there is fraud, then the veil of incorporation may be lifted.

The need for special circumstances of fraud was further crystallized by Gopal Sri Ram JCA (as he then was) in Law Kam Loy & Anor v Boltex Sdn Bhd & Ors [2005] MLJ 225:

In my judgment, in the light of the more recent authorities such as Adam 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 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 include cases where there is either actual fraud at common law or some inequitable or unconscionable conduct amounting to fraud in equity.

Conclusions

Having perused the facts and the relevant laws in this case, the court found that there are no special circumstances for the court to uplift the veil of incorporation between the Plaintiff and Mackt HWT Freight Sdn Bhd. It is not sufficient that the party claiming that justice demands that the court must uplift the corporate veil. The party must show special circumstances that may engender the need to uplift the corporate veil.