Fixus Construction Sdn Bhd v k&e Design Ideas Sdn. Bhd. (WA-22NCvC-559-10/2023)

K&E DESIGN IDEAS SDN. BHD. (No. Pendaftaran Syarikat: 201401007500 (1083578-D))

KAW MAN KONG (NO. K/P: 761026-14-6013) …DEFENDAN-DEFENDAN GROUNDS OF JUDGMENT Introduction [1] The Plaintiff in this case has prayed in its Statement of Claim, inter alia, for a specific order to lift the corporate veil of the 1st Defendant and/or to pierce the corporate veil of the 1st Defendant, to hold the 2nd Defendant jointly and severally liable with the 1st Defendant. The 2nd Defendant responded with an application under Order 18 rule 19 Rules of Court 2012 to strike out the Plaintiff’s claim against him. [2] The issue for determination regarding the 2nd Defendant’s application was simply whether the Plaintiff’s claim against the 2nd Defendant was obviously unsustainable and ought to be struck out. I 08/12/2024 13:43:35 WA-22NCvC-559-10/2023 Kand. 42 found that the facts and evidence adduced by both sides showed that it was, and I had therefore allowed the 2nd Defendant’s application. The Plaintiff’s claim against the 1st Defendant shall proceed to trial. My reasons for allowing the 2nd Defendant’s application are as set out below. Background Facts [3] The Plaintiff is a private limited company. So is the 1st Defendant. [4] The Plaintiff appointed the 1st Defendant on 15th July 2020 as its contractor for a project in Kuala Pilah, Negeri Sembilan. Details of the project was not clearly pleaded in its Statement of Claim but it did disclose that the project was for some upgrading works, including the supply of materials. Para 12 of the Statement of Claim pleaded: [5] The 2nd Defendant is a director and shareholder of the 1st Defendant company. The Plaintiff’s Claim [6] It was pleaded by the Plaintiff in paragraph 19 of the Statement of Claim that the works performed by the 1st Defendant was defective and/or failed to follow specifications and/or incomplete. [7] In paragraph 20 of the Statement of Claim, the Plaintiff stated that notice was given to the 1st Defendant about the complaints, and the 1st Defendant undertook to rectify the same. Paragraph 20 of the Statement of Claim reads as follows: [8] It was further pleaded that advance payments were made by the Plaintiff to the 1st Defendant upon the 2nd Defendant’s request, and that a sum of RM1,582,943.36 was overpaid to the 1st Defendant. The Plaintiff’s plea is that the 1st Defendant is in breach of contract and ought to be ordered to repay the said sum of money to the Plaintiff. [9] As against the 2nd Defendant, the Plaintiff pleaded that one Kenny Low, who was the Plaintiff’s manager, had used his influence to convince the Plaintiff’s directors to award two projects to the 1st Defendant, subject to guarantee, undertaking and representation made by the 1st and 2nd Defendants. The Plaintiff blames its manager, the said Kenny Low, for using his influence to convince its directors to award the two projects and make advance payments to the 1st Defendant. [10] In trying to justify an order to lift/pierce the corporate veil of the 1st Defendant, the Plaintiff pleaded that the 2nd Defendant was the alter ego of the 1st Defendant company, has control of it and made all its decisions. [11] The Plaintiff further averred that the 2nd Defendant promised to sign a personal guarantee in favour of the Plaintiff to guarantee the liabilities of the 1st Defendant, but had failed to sign the letter of guarantee prepared by the Plaintiff. [12] It was finally pleaded that the 2nd Defendant is the backbone (“tulang belakang” in Bahasa Malaysia) of the 1st Defendant company. The 2nd Defendant’s Application to strike out the claim against him [13] The 2nd Defendant averred that he was not privy to the Letter of Award issued by the Plaintiff to the 1st Defendant, which is the contract that forms the basis of the Plaintiff’s claims in this civil suit. [14] The essence of the 2nd Defendant’s grounds for seeking a striking out order was that as a director and shareholder, he is a separate legal entity from the 1st Defendant. [15] The 2nd Defendant averred that the Plaintiff had failed to plead any facts that would justify an order to lift or pierce the corporate veil of the 1st Defendant to impute liability upon him personally. His learned counsel cited several authorities, including a judgment of the Federal Court in Gurbachan Singh s/o Bagawan Singh & Ors v. Vellasamy s/o Pennusamy [2015] 1 CLJ 719 on the lifting of corporate veil. The Plaintiff’s submissions to resist the 2nd Defendant’s Application [16] In his submissions, learned counsel for the Plaintiff submitted that there are issues for trial, which he summed up as follows:- “a) Whether the 2nd Defendant had made assurance and/or representations to the Plaintiff’s manager, Kenny Low whereby Kenny Low had convinced the directors of the Plaintiff to award the projects to the 1st Defendant; b) Whether the 2nd Defendant had made assurance and/or representations that the 1st Defendant would carry out and perfect all works for the project in the agreed upon time; c) Whether the 2nd Defendant had made assurance and/or representations to persuade and/or convince the Plaintiff to made advance payment many times to the 1st Defendant; d) Whether the 2nd Defendant had made assurance and/or representations that any excess advance payment will be returned/refunded to the Plaintiff; e) The full extent of the 2nd Defendant’s role and involvement in the facts of the case must be investigated; f) The full investigation on the 2nd Defendant’s assurance and/or representations must be carried out.” [17] It was submitted by learned counsel for the Plaintiff that since RM1,582,943.36 was the “advance payment overpaid” by the Plaintiff to the 1st Defendant, its corporate veil ought to be lifted and that the 2nd Defendant be held liable to pay the Plaintiff the sum RM1,582,9943.36. Analysis of the Law and Facts [18] In order to understand the definition of “corporate veil” of a company, it is necessary to understand the fundamental principle of company law: that a company is a separate legal entity from its shareholders and directors. [19] In Malaysia, all limited companies incorporated under the Companies Act 2016 have a separate legal personality from that of its members, i.e. its shareholders, and may theoretically exist perpetually until its dissolution, by virtue of Section 20 of the said Act that reads: “A company incorporated under this Act is a body corporate and shall-

have legal personality separate from that of its members; and

continue in existence until it is removed from the register.” [20] A private limited company’s powers to carry out business in its own name as a body corporate are statutorily set out in S.21 of the Companies Act 2016, as follows: “(1) A company shall be capable of exercising all the functions of a body corporate and have the full capacity to carry on or undertake any business or activity including-

to sue and be sued;

to acquire, own, hold, develop or dispose of any property; and

to do any act which it may do or to enter into transactions.

A company shall have the full rights, powers and privileges for the purposes mentioned in subsection (1).” [21] By Sections 20 and 21 of the Companies Act 2016 expressly declaring that limited companies are separate legal entities from their shareholders and vested with independent powers to transact in its own name, to sue and be sued in its own name, a company is legally separated from its shareholders – unlike a partnership and the partners. This dichotomy between a company and its shareholders is commonly referred to as the “corporate veil of the company”. However, it is not cast in stone. The courts have the power to lift the corporate veil to hold a fraudster shareholder cum director jointly liable with the company. In cases where multiple companies are used to perpetuate fraud, the courts have held it permissible to pierce their corporate veils to hold the companies and their mutual shareholders jointly liable. In other words, the corporate veil of a company is neither absolute nor impenetrable. [22] As for the situations when the lifting of corporate veil would be justified, I found guidance in three judgments of the Federal Court. They are referred to, in chronological order, below. [23] The first judgment of the Federal Court that I relied on was Solid

Investments Ltd v. Alcatel Lucent (Malaysia) Sdn Bhd [2014] 3 CLJ In this case, it was highlighted that 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, and that there must be evidence either of actual fraud or some conduct amounting to fraud in equity to justify the lifting of corporate veil. The relevant passages are as follows: “[46] We agree with the Court of Appeal that the learned trial judge erred in lifting the corporate veil of the defendant to make the defendant liable to account to the plaintiff. The reason given by the learned trial judge was that it was in the interest of justice to prevent associated companies of Alcatel Group including the defendant from "darting in and out with the corporate labyrinth" before the court. We also agree with the Court of Appeal that there must be evidence either of actual fraud or some conduct amounting to fraud in equity to justify the lifting of corporate veil. The position of the law on this subject had been clearly stated by Gopal Sri Ram JCA (as he then was) in Law Kam Loy v. Boltex Sdn Bhd [2005] 3 CLJ 355 at p. 362 as follows: In my judgment, in the light of the more recent authorities such as Adams v. Cape Industries Plc, 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 include cases where there is either actual fraud at common law or some inequitable or unconscionable conduct amounting to fraud in equity…” [24] The second Federal Court judgment that I relied on was Gurbachan Singh s/o Bagawan Singh & Ors v Vellasamy s/o Pennusamy & Other Appeals [2015] 1 CLJ 719. It was held by Richard Malanjum CJ (as he then was) that the corporate veil of a corporation may be lifted if such corporation was set up for fraudulent purposes, or where it was established to avoid an existing obligation. “Fraudulent purpose” was stated to include both actual fraud or fraud in equity. The relevant passages from Gurbachan Singh (supra) read as follows: “[96] … we are of the view that it is now a settled law in Malaysia that the court would lift the corporate veil of a corporation if such corporation was set up for fraudulent purposes, or where it was established to avoid an existing obligation or even to prevent the abuse of a corporate legal personality. [97] As to what constitutes fraudulent purposes it has been described as to include actual fraud or fraud in equity. And fraud in equity occurred in '... cases where there are signs of separate personalities of companies being used to enable persons to evade their contractual obligations or duties, the court would disregard the notional separateness of the companies...” [25] The Federal Court in Gurbachan Singh (supra) also cited Takako Sakao v. Ng Pek Yuen & Anor [2010] 1 CLJ 381 which held, inter alia, 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. Those passages opine as follows: “[98] Quite recently this court also discussed on the issue of lifting a corporate veil in the case of Takako Sakao v. Ng Pek Yuen & Anor [2010] 1 CLJ 381. It said this: ... As for principle, the starting point is no doubt the doctrine of corporate personality. The general rule is that a company has an existence that is separate and distinct from its shareholders. It finds expression in the seminal case on the subject, Salomon v. A Salomon & Co Ltd [1897] AC 22. Lord Halsbury LC there stated the rule thus: ... once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are. The Lord Chancellor however provided for cases in which the veil of incorporation may be lifted. He said: If there was no fraud and no agency, and if the company was a real one and not a fiction or a myth, every one of the grounds upon which it is sought to support the judgment is disposed of. The proposition when inverted states that if there is fraud or an agency relationship or if the company is a myth or fiction, the doctrine of corporate personality does not insulate the shareholders or directors from being assailed directly. [22] A more recent statement of the doctrine of corporate personality is to be found in the case of Woolfson v. Strathclyde Regional Council 1978 SLT 159 which is authority for the proposition 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 façade concealing the true facts.” [26] The third Federal Court judgment that expounded the law on lifting of corporate veil is the judgment of Nallini Pathmanathan FCJ in ONG LEONG CHIOU & ANOR v. KELLER (M) SDN BHD [2021] 4 CLJ 821. [27] In ONG LEONG CHIOU (supra), Nallini FCJ went through the salient parts of earlier Federal Court judgments and concluded as follows:- “[99] The following conclusions may be drawn in relation to the disregarding of the corporate veil:

There subsists a long line of authority over the years in Malaysia which recognises that fraud, whether common law fraud or fraud in equity permits the court disregarding of the corporate personality. This body of law as adopted from the United Kingdom takes its line of reasoning from the 'fraud unravels all' principle as expounded by Denning LJ in Lazarus v. Beasley (above). That body of law remains correct and relevant and ought not to be lightly tampered with. It is reflective of the position in law recognised in Salomon v. Salomon (above). It is moreover, with respect, entirely legally coherent because the theoretical concept of the separate corporate personality was founded to enable business to be conducted. It is the essence of incorporation that the shareholder/controller of the company limits his liability in respect of the future conduct of the company's affairs. There is nothing wrong with that. Advantage is taken of limited liability to avoid personal liability if things go wrong. (see Persad v. Singh per Lord Neuberger [2017] UKPC 32). However, the limitation of liability envisages that such future conduct of the company's business is to be conducted honestly and with integrity - the law is predicated on that assumption. Once honesty is abandoned and the company is utilised as a vehicle for dishonest conduct, or fraud, or unconscionable conduct, then the basis for the separate corporate personality is jeopardised and undermined. It no longer serves the purpose it was intended for. As such it is only correct that a court investigating the injury or loss suffered by reason of the wrongful utilisation of the corporate personality, or the abuse of the corporate personality, is allowed to both look behind the façade to ascertain the true facts and also impose liability against the persons perpetrating such wrongdoing as is required on the facts of a particular case. This body of law relating to fraud subsists outside of the doctrine of 'piercing' the corporate veil as explained in Prest;

(ii) I would respectfully concur with the legal rationale prescribed by Lord Sumption in Prest, which explains that in order to ascertain whether the veil of incorporation ought to be 'pierced', the nature of the wrongdoing in issue ought to be analysed to ascertain whether it falls within the purview of the 'concealment' principle or the 'evasion' principle. To this end, the distinction between the two principles of concealment and evasion are of importance and benefit to enable a court to analyse with greater accuracy the basis on which the corporate personality is being disregarded. It also results in different consequences as explained earlier; Concealment Principle

(iii) The analysis in Prest, namely that the concealment principle does not in reality pierce the veil of incorporation, but allows the court to disregard or look behind the corporate personality to ascertain the true facts, ought to be considered for use and application in this jurisdiction. The reason is because after ascertaining the true facts concealed behind the corporate personality, it will enable a court to determine which legal principle of substantive law it will then utilise to determine whether liability subsists, or does not subsist, against a party to the dispute, on a given set of facts. This may involve the utilisation of the principles of agency or trusts or some other area of the law. Such application allows for a greater analysis of the basis on which liability is imposed, rather than simply stating that the corporate veil has been lifted and imposing liability on a party without explaining the legal basis for doing so. It is also important to note that it does not engage the evasion principle such that the corporate veil is not pierced; Evasion Principle

(iv) If the wrongdoing warrants the application of the evasion principle, the consequence is that the corporate veil is pierced, so as to enable liability to be imposed on a person, seemingly unconnected to the transaction in dispute. First, it is necessary to ascertain if there is a legal right against the person in control of a company which exists independently of the company's involvement, and a company is interposed such that the legal personality of the company defeats the legal right or frustrates its enforcement. This is a considerable obstacle to overcome, and it is only rarely that an appropriate set of facts will allow for such 'piercing'. Ultimately, the narrow and rigid test ensures that the corporate personality is not lightly disregarded. Even when the facts of a particular case warrant invoking the evasion principle enabling the corporate veil to be pierced, the court may only apply the doctrine to deprive the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality.” [28] I applied the principles gleaned from those three Federal Court judgments to the pleadings and evidence in this case, to determine if the Plaintiff’s prayer for an order to lift/pierce the corporate veil of the 1st Defendant could be sustainable. Unfortunately for the Plaintiff, I found the answer to be in the negative, and that not even a contortionist would be able to twist the facts of this case – as pleaded in the pleadings and averred in the Plaintiff’s affidavit – to fit those requirements set by the Federal Court. My reasons are as stated below. [29] As adverted to above, the Federal Court in Solid Investments Ltd v. Alcatel Lucent (Malaysia) Sdn Bhd (supra) ruled that 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, and that there must be either actual fraud or fraud in equity to justify the lifting of a company’s corporate veil. I found that there was neither actual fraud nor any conduct of the 2nd Defendant amounting to fraud in equity to justify the lifting of the 1st Defendant’s corporate veil. There was no basis for the Plaintiff to allege that the 2nd Defendant had done anything extraordinary that could possibly be construed as fraud. Simply put, there was nothing fraudulent about the 2nd Defendant, in his capacity as a director of the 1st Defendant, lobbying for a contract to be awarded to the 1st Defendant. [30] The Federal Court in Gurbachan Singh (supra) held that the corporate veil of a corporation may be lifted if such corporation was set up for fraudulent purposes, or where it was established to avoid an existing obligation. With respect, there was no evidence to suggest that the 1st Defendant was set up to defraud the Plaintiff or to avoid any existing obligation. As a matter of fact, the Plaintiff’s own Statement of Claim pleaded that the 1st Defendant did perform the contractual works and the Plaintiff’s complaint was about defective workmanship and/or failed to follow specifications and/or incomplete. Paragraph 19 of the Statement of Claim admitted that the 1st Defendant did perform the works, albeit below the Plaintiff’s expectation. [31] Thus, there is no way the Plaintiff could possibly contort its own pleadings to allege that the 1st Defendant was set up for fraudulent purpose. Based on the Plaintiff’s own plea, at worst the 1st Defendant was a lousy contractor, but not a company set up for fraudulent purpose. [32] Finally, do the Plaintiff’s plea and evidence against the 2nd Defendant satisfy the tests set out by Nallini Pathmanathan FCJ in ONG LEONG CHIOU (supra)? I found that this was not a case where the lifting of the 1st Defendant’s corporate veil could possible unveil any “true facts” behind its corporate personality. The Plaintiff was well aware that the 2nd Defendant is a director and shareholder of the 1st Defendant, and was not deceived in any way by this fact. Hence, the “concealment principle” was inapplicable. [33] Neither do the facts of this case satisfy the test laid down under the “evasion principle” because the Plaintiff has no legal right against the 2nd Defendant (the person in control of the 1st Defendant company) which exists independently of the company's involvement. [34] I noted from the undisputed facts that this is obviously not a case of multiple companies being used to cloak the ultimate owner for the purpose of evading liability. The facts of this case were simply that the Plaintiff decided to appoint the 1st Defendant – which its directors knew from the outset to be a private limited company related to the 2nd Defendant – as its contractor for the said project. The Plaintiff obviously does not have any legal right against the 2nd Defendant, of the kind covered by the “evasion principle”. [35] Now, if the mere fact that a director of a company was involved in the business activities of a company warrants the lifting of the corporate veil of the company to hold its directors personally liable for its business liabilities, in almost all cases of a company being sued, all its directors could be named as co-defendants. If the courts do not ‘nip it in the bud’, the effects would be to ‘turn a blind eye’ to the statutory provisions of Sections 20 and 21 of the Companies Act 2016 (as cited in para [19] and [20] above) and allow abuse of court process. If any authority is required, I would humbly reiterate the judgment of the Federal Court in Solid Investments Ltd v. Alcatel Lucent (Malaysia) Sdn Bhd (supra) that forbids the courts from disregarding the corporate veil of a company simply “in the interest of justice” without the other conditions being satisfied. [36] Further, I was constrained to agree with learned counsel for the 2nd Defendant that there was nothing in the Plaintiff’s Letter of Award (issued to the 1st Defendant) which imposes any personal liability or responsibility on the 2nd Defendant. If the Plaintiff had intended to make the 2nd Defendant a guarantor for the 1st Defendant’s performance of the contract under the Letter of Award, the Plaintiff should have insisted on a personal guarantee being signed by the 2nd Defendant simultaneously with the issuance of its Letter of Award to the 1st Defendant. [37] As pleaded in the Plaintiff’s Statement of Claim, the Plaintiff blames its own manager, one Kenny Low, for having influenced its directors to appoint the 1st Defendant as its contractor. The Plaintiff’s plea was that the 2nd Defendant was a friend of the said Kenny Low. With respect, neither the blaming of one’s own staff nor the plea of any friendship would create a legal reason to lift the corporate veil of another company. [38] If the Plaintiff’s intention was to sue the 2nd Defendant for any alleged oral guarantee, that would be a completely different cause of Counsel for the Plaintiff: Choo Meilin. SOLICITORS FOR THE PLAINTIFF: MESSRS CHRISTOPHER YEO & KP CHANG Advocates & Solicitors Unit 9-08 Menara MBMR, No 1 Jalan Syed Putra, 58000 KUALA LUMPUR. Counsel for the Defendants: Leong Chee Weng (Chong Saow Ching with him). SOLICITORS FOR THE DEFENDANTS: MESSRS TUANG, CHU & CO. Advocates & Solicitors A-G-23A, Menara Prima, Jalan PJU 1/39, Dataran Prima, 47301 PETALING JAYA, SELANGOR. CASE(S) REFERRED TO:

Gurbachan Singh s/o Bagawan Singh & Ors V. Vellasamy S/O Pennusamy [2015] 1 CLJ 719.

Solid Investments Ltd V. Alcatel Lucent (Malaysia) Sdn. Bhd. [2014]

Takako Sakao V. Ng Pek Yuen & Anor [2010] 1 CLJ 381.

Ong Leong Chiou & Anor V. Keller (M) Sdn. Bhd. [2021] 4 CLJ 821.

Sections 20 and 21 of the Companies Act 2016.