1. Breach of settlement agreement — Action against director for personal liability — Application to pierce the corporate veil. (Para 3 , 5 )
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2024 MarsdenLR 337
HIGH COURT (KUALA LUMPUR)
ATAN MUSTAFFA YUSSOF AHMAD, J
CBM Bhd – Plaintiff
Versus
Lyanna bt Mohd Johan & Anor – Defendant
GUAMAN NO WA-22NCC-755-10/2023
Important Points
To pierce the corporate veil and hold a director personally liable for a company's contractual breach, the plaintiff must establish privity of contract or provide precise pleadings demonstrating the company was a facade used for fraud or illegitimate purposes.
Subject
Company Law - Corporate Liability
Act Referred
Companies Act 2016: S.540(1)
Headnote
(A) Companies Act 2016 - Section 540 - Piercing the corporate veil - Action against a director for breach of a settlement agreement entered into by a company - Director executing an agreement on behalf of a company does so as an agent and incurs no personal liability (Para 4) - Doctrine of piercing the corporate veil is an exceptional remedy reserved for cases where the corporate entity is used as a facade to perpetrate fraud, evade legal obligations, or conceal true ownership (Para 6) - Privity of contract is essential; the mere act of signing on behalf of a corporation does not establish personal privity or liability for breaches (Para 7).
(B) Pleadings - Striking out - Action is unsustainable if it is frivolous, vexatious, or lacks a reasonable cause of action (Para 1) - High threshold for 'alter ego' or 'agent of controller' claims requiring concrete evidence and precise pleadings demonstrating the company was a mere facade for fraudulent activities (Para 9) - A striking out application is not premature even if the pleading stage is not closed, provided the Statement of Claim is clearly deficient on its face (Para 15, 16).
Facts of the case:
The Plaintiff brought an action against a company and its director for breaches of a Settlement and Non-Disclosure Agreement. The agreement was entered into between the Plaintiff and the company, with the director signing on behalf of the company. The Plaintiff sought to hold the director personally liable by piercing the corporate veil, alleging fraudulent misrepresentations and asserting that the director acted as the company's alter ego.
Findings of Court:
The Plaintiff failed to sufficiently plead the basis to pierce the corporate veil. There was no direct privity of contract between the Plaintiff and the director, and the pleadings lacked the necessary particulars to establish that the company was used as a facade for fraudulent purposes.
Issues: Whether the action against the director was sustainable given the lack of privity of contract and the insufficiency of the pleadings regarding the piercing of the corporate veil.
Ratio Decidendi: The court held that a director signing on behalf of a company does not incur personal liability. Piercing the corporate veil requires stringent criteria and precise pleadings demonstrating the corporate form was abused for illegitimate purposes. In the absence of such pleadings and privity of contract, the action is unsustainable and should be struck out.
Result: Application to strike out the action against the First Defendant allowed.
(B) Pleadings - Striking out - Action is unsustainable if it is frivolous, vexatious, or lacks a reasonable cause of action (Para 1) - High threshold for 'alter ego' or 'agent of controller' claims requiring concrete evidence and precise pleadings demonstrating the company was a mere facade for fraudulent activities (Para 9) - A striking out application is not premature even if the pleading stage is not closed, provided the Statement of Claim is clearly deficient on its face (Para 15, 16).
Facts of the case:
The Plaintiff brought an action against a company and its director for breaches of a Settlement and Non-Disclosure Agreement. The agreement was entered into between the Plaintiff and the company, with the director signing on behalf of the company. The Plaintiff sought to hold the director personally liable by piercing the corporate veil, alleging fraudulent misrepresentations and asserting that the director acted as the company's alter ego.
Findings of Court:
The Plaintiff failed to sufficiently plead the basis to pierce the corporate veil. There was no direct privity of contract between the Plaintiff and the director, and the pleadings lacked the necessary particulars to establish that the company was used as a facade for fraudulent purposes.
Issues: Whether the action against the director was sustainable given the lack of privity of contract and the insufficiency of the pleadings regarding the piercing of the corporate veil.
Ratio Decidendi: The court held that a director signing on behalf of a company does not incur personal liability. Piercing the corporate veil requires stringent criteria and precise pleadings demonstrating the corporate form was abused for illegitimate purposes. In the absence of such pleadings and privity of contract, the action is unsustainable and should be struck out.
Result: Application to strike out the action against the First Defendant allowed.
Legal Category Hierarchy
Advocates:
Arif Azmi (Sabrina Arif & Co) for the plaintiff.
Chen Hui Ken (Jec Siose & Co) for the first defendant.
Arif Azmi (Sabrina Arif & Co) for the plaintiff.
Chen Hui Ken (Jec Siose & Co) for the first defendant.
Table of Contents
2. Plaintiff contends fraudulent misrepresentations and 'alter ego' status justify piercing the corporate veil; First Defendant argues lack of privity and insufficient pleadings. (Para 5 , 11 , 14 )
3. The corporate veil is only pierced in exceptional circumstances where a company is a facade for fraud; execution of a contract as a director does not create personal liability. (Para 6 , 7 , 9 )
4. To pierce the corporate veil, a plaintiff must specifically plead concrete facts demonstrating the company was a facade for fraud, beyond mere lack of privity. (Para 2 , 8 , 9 , 10 )
5. Application to strike out the action against the first defendant is allowed. (Para 1 , 16 )
6. Under what circumstances can the corporate veil be pierced?
The doctrine is an exceptional principle reserved for circumstances where the separation of the corporate entity from its controllers is misused to perpetrate fraud, evade legal obligations, or conceal true ownership, essentially when the corporate form is abused as a facade for illegitimate purposes. (Para 6 )
7. Does a director's signature on a company agreement create personal liability or privity of contract?
No. A director executing an agreement on behalf of a company does so as an agent of that company and incurs no personal liability; such an act does not establish privity of contract for the director personally. (Para 4 , 7 )
8. What is the pleading threshold for claims based on the 'alter ego' or 'facade' doctrine?
There is a high threshold requiring concrete evidence and precise pleadings that unambiguously demonstrate the company was a mere facade for the controller's alleged fraudulent activities. (Para 9 )
9. Can a striking-out application be considered premature if the plaintiff has not yet filed a Reply or amended their Statement of Claim?
No. A defendant is entitled to apply to strike out a Statement of Claim based on flaws apparent on its face. The claim must stand or fall on the adequacy of existing pleadings without relying on subsequent refinements. (Para 15 , 16 )
Atan Mustaffa Yussof Ahmad J:
BROAD GROUNDS OF DECISION
(Enclosure 6)
[1]Enclosure 6 is allowed. The First Defendant has successfully demonstrated that the Plaintiff’s action against her is unsustainable and, accordingly, should be struck out. The Plaintiff’s action against the First Defendant is frivolous and/or vexatious as well as lacking any reasonable cause of action.
Lack of pleadings on piercing the corporate veil
[2]In weighing the respective submissions of the parties, I conclude that the Plaintiff has failed to sufficiently plead the basis to pierce the corporate veil of the Second Defendant so as to hold the First Defendant, Lyanna binti Mohd Johan, personally liable.
[3]The Plaintiff’s claim arises from the Settlement and Non-Disclosure Agreement dated 19.05.2023 (“Settlement Agreement”). It is not disputed that this Settlement Agreement was entered into only between the Plaintiff, CBM Berhad, and the Second Defendant, VCAE Sdn Bhd. Nowhere in the terms of the said agreement was any obligation imposed on the First Defendant personally. Rather, the contractual responsibilities lie solely with the Plaintiff and the Second Defendant.
[4]It is settled law that a director executing an agreement on behalf of a company does so only as an agent of that company, and so incurs no personal liability. The legal principles in Salomon v Salomon Yee Weng Kai v Yam Kong Seng & Anor Ahmad Rizal bin Umar v Klee Property Development Sdn Bhd & Anor Abdul Manaf Mohd Ghouse v Nusantara Timur
[5]Realising the constraint in suing the First Defendant pursuant to the Setlement Agreement for lack of privity, the Plaintiff seeks to lift the corporate veil against the First Defendant “for making fraudulent misrepresentations” and hold her personally liable for the alleged breaches of the Settlement Agreement purportedly committed by the Second Defendant. The crux of the Plaintiff’s argument is predicated on the assertion that the First Defendant, through her singular role and representation, engaged in deceptive practices that induced the Plaintiff into entering the said agreement, thus warranting the lifting of the corporate veil.
[6]The doctrine of lifting or piercing the corporate veil is an exceptional and cautiously applied principle, reserved for circumstances where the separation of the corporate entity from its controllers is misused to perpetrate fraud, evade legal obligations, or conceal true ownership. It is well-established jurisprudence that the corporate veil can only be pierced under special circumstances where it can be shown that the company is being used as a facade to conceal the true facts of the matter, essentially when the corporate form is abused for illegitimate purposes.
[7]It is important to note the fundamental legal principle of privity of contract in the context of lifting the corporate veil, as highlighted in the case of Ahmad Rizal bin Umar v Klee Property Development Sdn Bhd, which requires a direct contractual relationship for the imposition of liability on a third party to the contract. The mere act of a director signing an agreement on behalf of a corporation does not establish such privity for the director personally. Therefore, this does not automatically render the director liable for any alleged breaches of the said agreement.
[8]There is also a notable absence of any specific pleading by the Plaintiff that directly implicates the First Defendant in fraudulent trading or any deceitful conduct that would necessitate lifting the corporate veil under Section 540(1)Companies Act 2016Perman Sdn Bhd & Ors v European Commodities Sdn Bhd & Anor Azhar bin Harun v Dato’ Muthukumar a/l Ayarpadde & Ors
[9]Critically, the Plaintiff’s reliance on the concept of the First Defendant being the ‘alter ego’ and/or ‘agent of controller’ of the Second Defendant is insufficiently substantiated within its pleadings. The jurisprudence mandates a high threshold for such a claim, necessitating concrete evidence and precise pleadings th
