LIFTING THE CORPORATE VEIL IN INDUSTRIAL DISPUTES

It is trite that a company has an existence that is separate and distinct from its shareholders. This principle first stemmed from the judgment of Lord Halsbury LC in the case of Salomon v. A Salomon & Co Ltd [1897] AC 22 and has been applied strenuously by our Malaysian Courts to ensure that once a company is legally incorporated, it must be treated like any other independent person with its rights and liabilities appropriate to itself.

Malaysian Courts have even gone on to hold that Courts are not open to disregard the corporate veil purely on the ground that it is in the interest of justice to do so. Something more must be shown; such as special circumstances which would include cases where there is either actual fraud at common law or some inequitable or unconscionable conduct amounting to fraud in equity.

As is human nature, this principle is open to abuse. Many cases have come before our Courts challenging the limits of liability of incorporation and inviting our Courts to lift the veil of incorporation.

However, our Courts have held firm to this principle and have held, inter alia, that the corporate veil can be only lifted in exceptional circumstances; and those exceptional circumstances must involve:

a. actual or equitable fraud; and

b. the use of the company whose corporate veil was to be lifted as the means to conceal the true facts behind the facade of the company.

However, this is not the case with industrial disputes, due to the judgment of Salleh Abas FJ in the case of Hotel Jaya Puri Bhd v. National Union of Hotel Bar & Restaurant Worker & Anor [1980] 1 MLJ 109.

"It is true that while the principle that a company is an entity separate from its shareholders and that a subsidiary and its parent or holding company are separate entities having separate existence is well established in company law, in recent years the Court has, in a number of cases, by-passed this principle if not made an inroad into it. The Court seems quite willing to lift "the veil of incorporation" (so the expression goes) when the justice of the case so demands."

The reasoning behind this is one of public policy. The Industrial Relations Act, 1967 is a social justice legislation which seeks to implement the policy of the government in bringing social justice to the people. The Court is mindful of its role under the Act vis-a-vis why the Act was enacted and in particular why the Industrial Court was instituted.

This reasoning was affirmed by the Court of Appeal in Law Kam Loy & Anor –v- Boltex Sdn Bhd & Ors [2005] 3 CLJ 355 wherein it was held as follows: "Accordingly, in industrial law, where the interests of justice so demand, it may, in particular cases be appropriate for the Industrial Court to pierce or to disregard the doctrine of corporate personality."

While the public policy reasoning is sound, can this relaxation to the corporate veil principle be open to abuse, to the detriment of companies instead?

For example, Company A is the holding company of a group of companies and is incorporated in Malaysia. Person B is employed in Company A but subsequently transferred to Company C, a subsidiary of Company A which is based in a foreign country. Person B then signs an employment contract with Company C that is specifically governed by the laws of that foreign country. Person B is subsequently retrenched from Company C due to redundancy and his severance is paid accordingly to the laws of that foreign country which is less than the Employment Act 1955.

Company A can still be sued for breach of the Employment Act 1955 and/or a breach of the Code of Conduct for Industrial Harmony even though Person B’s retrenchment was according to the laws of that foreign country and that foreign country is not governed by the Employment Act 1955 nor is bound by The Code of Conduct for Industrial Harmony that was made between the Ministry of Human Resources and the Malaysian Council of Employers’ Organisations.

All that Person B has to show was that Company A and Company C is one group enterprise which share some similarities. What is worrying however, is the fact that there are no fixed criteria to prove this. The test is subjective and depends on the facts of each and every case.

This creates a problem for big group companies with subsidiaries all over the world, and with subsidiaries acting as holding companies for its further subsidiaries as well. Which company in the corporate structure would be liable? Can the ultimate holding company with no control over the human resources of the employee's company be liable? The answer seems to be "YES". This is extremely prejudicial to the ultimate holding company as that said company had no say over the employee and/or the laws governing that said employee’s employment.

There are of course further problems with this relaxation of the corporate veil principle, such as the jurisdiction of the Industrial Court over the said employee and the attempts to stretch this principle to corporate litigation and Company law.

Therefore, it is my opinion that Salleh Abas FJ in Hotel Jaya Puri, whilst attempting to do justice to public policy, may have inadvertently opened the door to potential abuse to companies and breached the very reason behind the implementation of the corporate veil principle in the first place.