Lifting the Veil: When Malaysian Courts Disregard Corporate Personality

We were recently appointed to act in a matter involving alleged breaches of investment agreements by a Malaysian company. In reviewing the case, one troubling pattern emerged: the company appeared to be nothing more than a shell, used by its director to attract investor funds while shielding himself from liability should the company default. This raised an important legal question: can one go after the director personally, or must recourse be limited only to the company?

In answering this, I took a deep dive into Malaysian jurisprudence on the doctrine of lifting the corporate veil, a powerful, though rarely exercised, tool that courts can invoke to ensure justice is done.

In business and corporate law, one of the most fundamental principles is that a company has a legal personality of its own, therefore, it is a separate entity from its shareholders and directors. However, in certain cases, the courts may “lift” or “pierce” the corporate veil and look beyond this separate identity. But when exactly does this happen in Malaysia?

Understanding Corporate Personality

Section 20 of the Companies Act 2016 reaffirms the principle established in the famous UK case of Salomon v A Salomon & Co Ltd [1897] AC 22: a company is a separate legal entity, distinct from its members. This means it can sue and be sued in its own name, hold property, and bear liability independently of its shareholders or directors.

This protection is what gives companies their main appeal, which is that it limits personal liability. However, this shield is not impenetrable.

What Does It Mean to “Lift the Veil”?

Lifting the corporate veil means the Court disregards the company's separate legal personality to hold individuals (typically directors or shareholders) personally liable. This is usually done when the company is being used as a vehicle for wrongdoing or to evade legal obligations.

In Gurbachan Singh s/o Bagawan Singh & Ors v Vellasamy s/o Penusamy & Ors [2015] 1 MLJ 773, the Federal Court explained that lifting the veil is an exceptional measure, only justified in situations where justice demands it, particularly where the corporate structure is abused.

When Do Malaysian Courts Lift the Veil?

The Courts in Malaysia have been cautious in exercising this power, but there are well-established grounds on which the veil may be pierced. Here are some key circumstances:

1. Fraud or Improper Conduct

If a company is used to perpetrate fraud or engage in dishonest dealings, the Courts are willing to pierce the veil. In Aspatra Sdn Bhd & 21 Ors v Bank Bumiputra Malaysia Bhd & Anor [1988] 1 MLJ 97, the Court held that if a company is formed to conceal wrongdoing, the Courts will look beyond the company to hold the actual wrongdoers accountable.

Similarly, in Tan Lai v Mohamed bin Mahmud [1982] 1 MLJ 264, the Court lifted the veil to prevent an individual from hiding behind a company to avoid his obligations.

2. Evasion of Legal Obligations

If a company is used merely as a façade to avoid legal duties, the Courts may disregard its personality. In Prest v Petrodel Resources Ltd [2013] UKSC 34 (though a UK case, its principles are persuasive), the UK Supreme Court made clear that the corporate veil may be pierced when a company is used as a tool or method to frustrate or prevent legal enforcement.

Malaysian Courts have followed similar reasoning. In Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers [1980] 1 MLJ 109, the Court looked into the relationship between the company and its subsidiaries to determine if the parent company should be liable for unfair labour practices.

3. Sham or Alter Ego

When a company is essentially the "alter ego" of its controlling individuals and there is no true separation between the company and those individuals, the Courts may step in. In Kosmopolitan Credit & Leasing Sdn Bhd v Soon Lian Hock [2000] 2 MLJ 421, the Court found that the company was merely a device used by the Defendant to avoid liability

4. Agency and Group Enterprises

In some group company structures, especially where a subsidiary acts as an agent or is tightly controlled by the parent, courts may look at the group as a whole instead of individually.

In Thean Lip Ping v Seacera Tiles Bhd & Ors [2019] 1 LNS 2553, the court considered the interwoven nature of the group’s operations and decided that liability should extend beyond a single legal entity within the group.

Statutory Exceptions: Companies Act 2016

There are also express provisions under the Companies Act 2016 that allow for personal liability in certain situations, for example: Section 539: Liability for fraudulent trading and Section 540: Criminal liability for carrying on business to defraud creditors.

These statutory provisions reinforce the Court’s power to hold directors personally accountable when corporate structures are misused.

The Threshold for Lifting the Veil

Courts do not take this lightly. The burden of proof is high. A mere suspicion of impropriety is not sufficient. Evidence must show that the company’s structure is being abused to achieve unjust ends. As reiterated in Gurbachan Singh, the Court must balance the sanctity of separate legal personality with the need to prevent injustice.

Conclusion

While the principle of separate legal entity remains the cornerstone of company law in Malaysia, the Courts have shown that they will not hesitate to pierce the corporate veil when justice so requires. This doctrine ensures that individuals cannot hide behind corporate structures to commit fraud, avoid responsibility, or undermine the rule of law

For businesses, this serves as a reminder that legal protections come with responsibilities, and that the line between the company and its controllers must not be crossed recklessly.