Fraudulent Acts to Defraud Creditors – The piercing of corporate veil

Fraudulent Acts to Defraud Creditors – The piercing of corporate veil

By Choong Kwai Fatt, PhD, Advocate and Solicitor, High Court of Malaya*


The fundamental bedrock of the company law trite principle being a ‘separate legal entity’ with distinctive corporate entity of the company and the shareholders is protected and upheld by the Court at all times. The corporate veil would be lifted or even purged in very exceptional circumstances to attribute legal liabilities to the defraud parties who are mainly the directors and shareholders, to give justice, provide equity and pin down unlawful acts abusing corporate personalities.


The incorporation of a company to engage in fraudulent acts to defraud creditors is an exception to the protection of the corporate veil. The unconscionable conduct and abuse of a corporate personality by the directors or shareholders warrant the court’s intervention to look behind and pierce the corporate veil.

Fraudulent acts

A fraudulent act refers to an action with affirmative ill-will intention to deceive creditors for personal monetary gain. The allegation of a fraudulent act or fraud must be specially pleaded in the legal pursuit, supported by documentary evidence and witness affidavits to establish the wilful intent leading to the various activities carried out to defraud the victims for monetary benefits.


In Lazarus Estates Ltd v Beasley [1956] 1 All ER 341 (CA), the landlord attempted to increase rental with false and fraudulent claims on various repairs and maintenance that have purportedly been carried out as stated in the declaration to justify the rental increase. The tenants however failed to object within the statutory time permitted of 28 days which resulted in the claims to be deemed conclusively correct. The legal consequence would result in the rental increase which could not be disputed.


The landlord purportedly argued before the Court of Appeal that the stated declaration was conclusive evidence and could not be challenged in civil courts at all. Even if it was false and fraudulent, the landlord could still recover and keep the increased rental despite it having been obtained by fraud. In essence, the landlord would profit from the fraud action as the declaration was not objected to within the statutory time which resulted in it to be conclusively correct and the tenants were without remedy.

In its majority decision, the Court of Appeal rejected entirely of such contention to be the rule of law. It remains the trite fundamental law that the Court cannot condone any fraudulent act and allow judgment to be entered.


In deciding the case which hinged on fraudulent actions, Lord Denning LJ totally rejected such an ill-founded contention. The Court of Appeal held that the fraudulent acts are a nullity in every aspect once they are proven to be false and duplicitous. Fraud unravels everything. The Court would not assist the perpetrator nor allow the declaration to be valid. Once fraud is proved, it vitiates judgement, contract and every transaction leading to its outcome. It is a nullity and void.


Lord Denning LJ, in making his leading concluding remarks on p 345 said:

Likewise, at the Court of Appeal of this case, Parker LJ echoed on the same line as Denning LJ in making the majority decision that his lordship too could not accept the contention of the landlord at any rate in its widest form. His lordship was of the opinion that the tenant could avail of the fraud as a defence to challenge the validity when sued for the increase in rent even if there was a lapse of 28 days to object the declaration.


Parker LJ held on p 351:

In the upshot, the true legal principle would be once proven, fraud nullifies every action and decision. One cannot be allowed to enrich oneself from one’s fraudulent conducts. This is the trite principle.

Corporate personalities

A company is a legal person whose, upon incorporation, is able to transact in business, to acquire and own properties, to sue and be sued in its company capacity. It is a separate and distinct person from its shareholders, members or even the directors of the company. This is the golden doctrine enshrined in a ‘separate legal entity’ or at times known as corporate personality.


Lord Halsbury LC in the landmark House of Lords decision of Salomon v A Salomon & Co Ltd (1897) AC 22 explained the doctrine of separate legal entity in clear terms as follows:

The inability of a company to settle any commercial liabilities transacted would not implicate the shareholders as there subsists a ‘veil’ between the company and its members that separate them for the purposes of liability. This fundamental doctrine of corporate personalities is to facilitate and promote the conduct of business using a company with limited liability to spearhead the economic growth of the country, allowing business to flourish with known limited liability up to the paid-up capital contribution.


Having said that, the business remain is required to be conducted honestly and truthfully with total transparency. The Court has concurrently laid down an equally important legal principle that if a company’s separate legal personality is being abused for the purpose of wrongdoing or unlawful reasons, the court is justified in piercing the corporate personality of the company. Applying the ratio decidendi of Lord Denning in Lazarus v Beasley [1956] 1 All ER 341 (CA), ‘where there is fraud, the fraud unravels everything.’ The company is a nullity.


Lord Davey, in the same House of Lords’ decision of Salomon v A Salomon & Co Ltd (1897) AC 22, carefully framed up that the fraudulent acts would be the exception to corporate personalities in the following unequivocal terms:

The legal consequence of an unlawful purpose, a fraud or a fraudulent act allows the Court to attribute liability to the perpetrator. Thus, once the corporate veil is pierced, the defaulted shareholders or the directors must be jointly and severally held liable and accountable for damages.


Lord Halsbury (Lord Chancellor) echoed the same proposition of law that the doctrine of corporate personality would not insulate the shareholders or

the directors from hiding behind the veil on the fraudulent act. His lordship held:

In summary, the finding of fraud is fundamental and core essentially able to destroy the substratum of corporate personality. The piercing of the corporate veil allows the liabilities to be jointly and severally liable by the defaulting parties, which include the directors or shareholders of the company.

Piercing the corporate veil

Fraudulent acts to defraud creditors involve dishonesty culminating in a finding of fraud. They evade the legal liability through corporate personality with the aim to frustrate its enforcement.


Shareholders or directors who operate limited companies under the Companies Act 2016 (CA 2016) should not be allowed to take unconscionable advantage of the people with whom they do business. The company’s business is to be conducted honestly and with integrity. The supremacy of honesty in business must be given primacy. The abuse of the company being utilised as a vehicle for dishonest conduct or fraud must be condemned.


The Court would intervene and pierce the corporate veil in situations where a person is under an existing legal obligation or liability which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The object is to deprive the controller or its company of the advantage of both which would otherwise have been obtained by the company’s separate distinct legal personality. The company is interposed to frustrate the enforcement of the right or to defeat the legal right.


In Gurbachan Singh Bagawan Singh & Ors v Vellasamy Pennusamy & Other Appeals [2015] 1 CLJ 719, the Federal Court held that it will not hesitate to lift the corporate veil if a company was incorporated for fraudulent purposes. Richard Malanjum FCJ held on p 757:

In Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor [1997] 1 CLJ 529, the Federal Court acknowledged the basic principle of the fundamental attribute of corporate personality, i.e. the company is a legal entity distinct from its shareholders, be there individual or corporate bodies. The Federal Court equally highlighted that where facts and circumstances pointed that the corporate personality is being used to evade the contractual obligations or duties, the Court would deviate from the strict rule of the separate legal entity of the company.


Choong Siew Fai CJ opined on p 543:

Real life applications

In Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & Ors [2021] 4 CLJ 821, the individual, Ong (D1) being a major shareholder and the managing director of the appellant company Perfect Selection Sdn Bhd (‘PSSB’) (D3), was awarded a contract to do earth works related to a shopping mall by the main contractor. He had purportedly incorporated a new company, PS Bina Sdn Bhd, (‘PS Bina’) (D2) to evade commercial liability.


The new company, ‘PS Bina’ obtained the contract from the appellant company, ‘PSSB’ which, in turn, had immediately contracted it to the plaintiff company, knowing perfectly well that the plaintiff would not be paid for the work carried out, which is in relation to ‘empty bore works’ (EBW) amounting to RM7.46 million.


The subcontractor company (‘PSSB’) deliberately subcontracting the works to its newly incorporated company, ‘PS Bina’ rather than awarding it directly to the plaintiff company was an attempt to intentionally evade a legal obligation to pay for the EBW works. Upon the plaintiff having completed the EBW works, the shareholding and directorship of the new company, ‘PS Bina’ was transferred to two foreign nationals, who are a construction worker of Bangladeshi origin and a local person of Chinese origin.


Having both the appellant and the co-directors and shareholders of ‘PS Bina’ to be completely replaced by these two new foreign persons was conclusive evidence to show evasion of liability for the debt that the new company, ‘PS Bina’ had incurred in relation to the EBW.

Final orchestra

The development of events continued to reveal that all the directors and shareholders of ‘PS Bina’ resigned suddenly on 17.10.2014 upon the completion of the EBW works in July 2014. In Keller (M) Sdn Bhd v Ong Leong Chiou & Anor [2017] 1 LNS 1302, the High Court held that this final perfect storm clearly concluded that the entire action was an attempt to evade liability, more so since the new shareholders are foreign individuals, being a Bangladeshi construction worker and a local who has no knowledge or comprehension whatsoever of the company’s financial situations which are laden with liabilities.


Lee Swee Seng J wisely remarked on p 36:

The High Court linked the final acts of disposing off the new company, ‘PS Bina’ (D2) in its entirety coupled with the sudden resignation of all its directors to the conclusion that the incorporation of ‘PS Bina’ from the outset is a sham with fraudulent intent to avoid liability, as well as to shelter the existing subcontract company, ‘PSSB’ (D3) from any legal suit and protect its good track records, substantial assets and funding.


The authenticity of the incorporation of the new company, ‘PS Bina’ (D2) to award the contract to the plaintiff company would not be vouched by the incidence of events.


There was clear indication of evasion of liability for the debts ‘PS Bina’ (D2) had incurred in relation to the EBW. The High Court was not convinced by the explanation of the managing director (D1) that ‘PS Bina’ was created as a buffer to absorb losses. Taking the various actions and the final departure from the disposal of ‘PS Bina’ (D2), the High Court concluded that the managing director, Ong (D1), the subcontractor company, ‘PSSB’ (D3) and the new company, ‘PS Bina’ (D2) have acted fraudulently to evade the legal obligation to pay for the EBW.


Lee Swee Seng J concluded on p 37:

Jointly and severally liable

The High Court found that the three shareholders and directors in ‘PS Bina’ had concurrently resigned in a sudden yet planned manner and transferred their shareholding to two foreign nationals who are unconnected persons which leads to irresistible conclusion that Ong and the two companies commonly controlled by him had defrauded the plaintiff in relation to EBW works.


The High Court held that in relation to ‘PS Bina’ having contracted directly with the plaintiff, it was liable to the plaintiff for the EBW. However, he allowed a counterclaim for rectification works. This is not in dispute. The liability for breach of contract was therefore established. This means that the breach of contract and quantum of the debt is not an issue. The primary basis for the appeal is in law in relation to the finding of a joint and several liability against Ong and ‘PSSB’. ‘PS Bina’ was a creation utilised by Ong to practise fraud on the plaintiff. The Court had pierced the corporate shield and attributed the liabilities against Ong, ‘PSSB’ and ‘PS Bina’.


The findings of fraud warranted the court in the allocation of liabilities. The two companies, ‘PS Bina’ and ‘PSSB’ were utilised by the managing director to enable the debt due to the plaintiff to be evaded by ‘PSSB’ which enjoyed the profits of the project.


The Federal Court agreed in totality with the endorsement of the Court of Appeal and the findings of the High Court. The appellant, being the managing director of both the existing company and the new company, and the majority shareholders are jointly liable for the debt incurred in favour of the plaintiff.


The newly incorporated company, ‘PS Bina’ was a mere façade and sham utilised by the managing director to shield the existing company, ‘PSSB’ from a suit in contract for non- payment of the EBW work carried out by the plaintiff.


Nallini Pathmanathan FCJ elaborated on p 850:

The factual matrix revealed that the operation of the two companies interchangeably is controlled by the same individual to defraud and evade liabilities due to the plaintiff. A perusal of the claim discloses that the corporate personalities of ‘PSSB’ and ‘PS Bina’ were utilised by Ong to induce and defraud the plaintiff into carrying out the EBW, knowing full well that there would be no payment forthcoming to it from ‘PS Bina’.


The Federal Court affirmed the decisions of the Court of Appeal and the High Court that the individual and the two companies were jointly and severally liable to the respondent. The Federal Court emphasised the established legal principle that prevails on the piercing of corporate veil. Upon the establishment of the fraudulent act, liability can devolve on more than one party to the dispute. It is not necessarily attributed solely to the individual alone despite his being the ‘alter-ego’ of the unlawful acts.

The appellant attempted to argue that upon ‘piercing’ the corporate veil, any liability should only be visited on Ong, as all three entities are one and the same. ‘PSSB’ should not be implicated on the liabilities. The Federal Court entirely outright rejected to such contention of single attribution of liabilities to only the individual as it found no legal basis for such a proposition in law.


The conclusion that all liabilities should devolve on one party who is the ‘alter-ego’ is an incorrect understanding of the law. The true and only proposition of law would be once the corporate veil is pierced, liability may well devolve jointly and severally on more than one entity, depending on the factual matrix of the case.


Nallini Pathmanathan FCJ in delivering the leading decision remarked wisely in clear term on p 856:

The Federal Court concurred with the High Court findings that the new company, ‘PS Bina’ was incorporated with the intention to evade the legal obligation to pay for EBW works through the imposition of ‘PS Bina’ to evade such liability.


The Federal Court concluded that ‘PS Bina’ was a mere façade and sham utilised by the managing director to shield ‘PSSB’ from having to pay for the EBW works. The object and sole purpose of ‘PS Bina’ is to protect ‘PSSB’ from a suit in contract for non-payment for the EBW works.


The Federal Court equally found that the piercing of the corporate veil of ‘PS Bina’ is correct in law as it is for the purpose of depriving the managing director and its agent ‘PSSB’ of the advantage they would otherwise have obtained by the utilisation of ‘PS Bina’’s separate legal personality. Both the managing director and PSSB were equally liable to the debt due to the plaintiff.


Nallini Pathmananthan FCJ explained the rationale on p 847:

The Federal Court upheld the decision of the Court of Appeal, in the same manner the Court of Appeal endorsed the High Court’s decision. The systematic, full and thorough finding of the High Court in establishing fraud and allowing the Court to hold the managing director, Ong, ‘PS Bina’ and ‘PSSB’ jointly and severally liable to the plaintiff on the liability in relation to EBW works is unassailable. The corporate personalities of ‘PS Bina’ is pierced off.

Company secretary at risk

Unlike the then Companies Act 1965, a company secretary in the CA 2016 regime is acknowledged as a practising professional holding a practising certificate mandatory by SSM. The company secretary has to be technically competent, skillful and experienced in company law matters. Being an officer of the company, as clearly stated in s 2 of CA 2016, the company secretary needs to act and most importantly to be seen to act with integrity, honesty and truthfulness in discharging the work and duties that conform to acting in the best interest of the company. The best interest of the company is distinct from personal interest and may not be the best interest of the directors or even the shareholders.


The company secretary has the compelling duties to advise the board of directors on the likelihood of any infringement of unlawful acts that may result in the veil of the company being pierced, which remains an exception to the doctrine of corporate personalities.


The orchestra of a scheme to ride on corporate personality with the formation of a new company to enter into contract to avoid liabilities, thereafter disposing the company with the complete resignation of its directors require the assistance and participation of the company secretary to lodge a report and update the register of shareholders and directors. This may draw adverse inference which inferred that the company secretary is negligent in discharging his duties or at worst ‘abetting or assisting’ in the unlawful acts in which the company secretary must refrain from participating.


In the upshot, the year 2022 is challenging and demanding; more so for the company secretary in discharging his duties. His acting without regards for the interest of the company is putting him at risk!


The doctrine of separate legal entity is fundamental to ease the conduct of a business with limited liability. It has the effect of containing the risks which every businessman has to take. However, it would not imply that personal immunity through the corporate personality can be employed for unlawful purposes.


The directors or shareholders or any other companies would remain liable for the loss suffered and liability committed by the company once liability for fraud engineered by these individuals through corporate personality is established. The perpetrator could not hide behind the corporate shield to avoid liability. Once the fraud is pleaded and proved, the Court would pierce the corporate veil and attribute legal liability and hold the defaulters to be jointly and severally liable to the victim.

*Dr. Choong Kwai Fatt is a practicing advocate & solicitor of the High Court of Malaya.


Note: The deliberation on “Fraudulent Acts to Defraud Creditors – The piercing of corporate veil” is the writer’s own opinion and conclusion.

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