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Piercing The Corporate Veil – Winding Up Petition Filed By Alter Ego Held To Be An Abuse Of Process

Introduction


On 19.05.2023, the Court of Appeal in Civil Appeal No. W-02(NCC)(A)-1113-06/2022: Le Apple Boutique Hotel (KLCC) Sdn. Bhd. v. Keen Solution Sdn. Bhd. (which was heard together with Civil Appeal No. W-02(NCC)(A)-1004-06/2022: Le Apple Boutique Hotel Sdn. Bhd. v. Keen Solution Sdn. Bhd.), set aside an Order of the High Court (hereafter “the Winding Up Order”) winding up Le Apple Boutique Hotel (KLCC) Sdn. Bhd. (hereafter “the Company”).


Against the backdrop of a debtor company which, through an undisclosed related company, abused the winding up process in an attempt to deny the Company its fruits of litigation and its day in Court, the Court of Appeal pierced the corporate veil to unravel the motive behind the winding up petition and examined the merits of the winding up petition to determine whether there were just and equitable grounds to wind up the Company.


This Case Update shall highlight some key aspects of the Grounds of Judgment of the Court of Appeal dated 19.05.2023 as reported in Le Apple Boutique Hotel Sdn. Bhd. v. Keen Solution Sdn. Bhd. [2023] MLJU 1729; [2023] MLRAU 178; and [2023] 1 LNS 1543.



Material Background Facts


(a) Company Initiated Suit 832 against PGCG Assets


The Company carries out various businesses, which include the business of hotel operations. For the purposes of developing and operating a hotel at No. 160, Jalan Ampang (hereafter “the Demised Premises”), the Company and PGCG Assets Holdings Sdn. Bhd. (hereafter “PGCG Assets”) entered into a tenancy agreement (hereafter “the Tenancy Agreement”).


When a landlord-tenant dispute arose from the Tenancy Agreement, the Company initiated a suit against PGCG Assets vide Kuala Lumpur High Court Civil Suit No. WA-22NCvC-832-12/2020 (hereafter “Suit 832”) to recover RM19,644,322.00 being the costs and expenses incurred by the Company towards conversion of the Demised Property into a hotel and RM1,650,000.00 being the refund of deposits paid by the Company to PGCG Assets.


In the above regard, the Company successfully obtained a Summary Judgment in part against PGCG Assets for the refund of deposits in the sum of RM1,650,000.00 whilst the Company’s claim for the remaining RM19,644,322.00 is scheduled for Full Trial in 2024. This decision is reported in Le Apple Boutique Hotel (KLCC) Sdn. Bhd. v. PGCG Assets Holdings Sdn. Bhd. [2021] 11 MLJ 268 and was subsequently affirmed by the Court of Appeal.


(b) Petitioner Filed Winding Up Petition against Company


Following the pronouncement of the High Court’s decision, PGCG Assets sought an ad-interim stay of execution of the aforesaid Summary Judgment, stay of which was refused by the High Court in Suit 832. Shortly thereafter (i.e. less than ten (10) days from the High Court’s refusal of stay), Keen Solution Sdn. Bhd. (hereafter “the Petitioner”), a forty-five-percent (45%) shareholder of the Company, filed a Winding Up Petition against the Company (hereafter “the Winding Up Petition”).



High Court's Grounds for Granting the Winding Up Order


The Kuala Lumpur High Court allowed the Winding Up Petition and granted the Winding Up Order on, amongst others, the following grounds:-


(a) the Winding Up Petition was bona fide and therefore there was no necessity to pierce the corporate veil to identify linked between the Petitioner and PGCG Assets;


(b) it was just and equitable to wind up the Company because:-


  1. there existed an oral joint venture agreement between the shareholders of the Company i.e. the Petitioner and Le Apple Boutique Hotel Sdn. Bhd. (hereafter “the Company’s Majority Shareholder”);

  2. the Company ceased its sole purpose and business of hotel operations; and

  3. there was a breakdown of confidence and trust within the management of the Company.


Court of Appeal's Grounds for Settling Aside the Winding Up Order


In the Instant Appeal, the Court of Appeal set aside the Winding Up Order, grounds of which may, for clarity, be divided into two (2) broad headings hereinbelow:-


(a) ‘Mala Fide’ Ulterior Motive behind the Winding Up Petition


From the outset, the Court of Appeal remarked that “the factum and existence of Suit 832 are certainly revealing of the true nature and the ulterior motive behind the Petition”.


Winding Up Petition Filed to Stifle Company’s Claim against Landlord vide Suit 832


In the Instant Appeal, the Court of Appeal sought to comprehend the “self-harming petition” filed by the Petitioner against the Company. The peculiarity here is this – as a shareholder of the Company, the Petitioner naturally stood to gain if the Company is successful in Suit 832. However, by filing the Winding Up Petition, the Petitioner was willing to forgo the prospect of gaining almost RM20,000,000.00 and instead, set out to ‘save’ the Landlord from its potential further exposure vide Suit 832 by seeking to wind up the Company. This led the Court of Appeal to consider “the burning question” – “what was so compelling to the Petitioner, that it would ‘sacrifice’ its own interest for the sake of ‘saving’ PGCG”.


Petitioner and PGCG Assets are Related Companies


By piercing the corporate veil, the Court of Appeal made several findings of fact towards the issue that the Petitioner and PGCG Assets are related companies for the reason that it could not be mere coincidence that:- (i) the Petitioner and PGCG Assets share identical business and registered addresses; (ii) the Petitioner’s majority shareholder (i.e. Chai Sook Tieng) is also a Director and shareholder of PGCG Assets; (iii) the Petitioner’s majority shareholder is the wife of a Director of PGCG Assets; and (iv) PGCG Assets’ group of companies derived its rental income from the Petitioner.


Piercing of Corporate Veil


Having uncovered the link between the Petitioner and PGCG Assets, the true intent and purpose of the Winding Up Petition instantly became crystal clear. In the event the Company succeeded in Suit 832, monies paid by PGCG Assets to the Company (before which was which were collectively held by the Petitioner and PGCG Assets) “would have to be shared” between the Petitioner and the Company’s Majority Shareholder. On the other hand, if the Company is wound up and hence unable to continue its pursuit of Suit 832, PGCG Assets collectively with the Petitioner would unlawfully retain the monies in full.


The Court of Appeal’s observation in this respect is reproduced herein – “it is astoundingly plain to see that it would be in the Petitioner’s and PGCG’s interest to keep LABHSB from gaining any shares in the monies the Petitioner and PGCG collectively held as related companies. In the simplest sense, although the Petitioner might gain from suit 832 vide its 45% shareholding in LABHKLCC, in actuality the Petitioner and PGCG (as a collective) would have to relinquish and lose 55% of their collective interest in the monies to LABHSB (due to LABHSB’s shareholding in LABHKLCC).


Conclusion


In the above circumstances, the Court of Appeal held that the Winding Up Petition was an abuse of process for the Petitioner to achieve the collateral purpose of stifling Suit 832 initiated by the Company against PGCG Assets, an undisclosed related company of the Petitioner. The Court of Appeal also found that this was “the real and actual mala fide ulterior motive incentivising the Petitioner’s ‘self-harming’ Petition”. To this end, the Court of Appeal added, “If not for this mala fide design, there is simply no rhyme, reason, or logic in the Petitioner’s self-harming Petition.”


(b) No Just and Equitable Grounds to Wind Up the Company


For completeness, the Court of Appeal went on to consider whether there were just and equitable grounds to wind up the Company.


No Oral Joint Venture between Petitioner and Company’s Majority Shareholder


The Petitioner contended that there existed an oral joint venture agreement between the Petitioner and the Company’s Majority Shareholder and following the breakdown of trust and confidence between parties, it was just and equitable to wind up the Company.


In the Instant Appeal, the Court of Appeal set aside the High Court’s findings and held that there was no oral joint venture agreement between the Petitioner and the Company’s Majority Shareholder because:- (i) there was no cogent evidence in support thereof; and (b) most importantly, the Company was incorporated two (2) years before the alleged oral joint venture agreement, which points to the fact that the Company could not have been incorporated for the sole purpose of the alleged oral joint venture (as alleged by the Petitioner).


Company Remained a Going Concern


The Court of Appeal also found that the Company remained a going concern because:- (i) according to the Company’s Articles and Memorandum of Association (which incorporated the Third Schedule of the Companies Act 1965), seeking Court Orders which may directly or indirectly benefit the Company is part and parcel of the Company’s business; (ii) the Company has potential to generate monies from litigation; and (iii) most importantly, “it would be unconscionable for the Court to strictly assume that a company is ‘not in business’ when a company is embroiled in litigation (which is directly related to a company’s interest in businesses which it undertook). Just because commercial trade is stultified or stagnated due to litigation cannot automatically mean that the company is no longer in business”.


Winding Up is a Drastic Measure of Last Resort


Bearing in mind the long-standing principle that winding up petitions are drastic measures of last resort, the Petitioner’s conduct in not pursuing alternative measures which are less drastic (e.g. oppression action whilst seeing Suit 832 through to its conclusion) pointed to the fact that the Winding Up Petition was not bona fide.


Conclusion


In the above circumstances, the Court of Appeal held that it was not just and equitable to wind up the Company.



Key Takeaways


  • Winding up petitions which are filed for collateral purposes constitute an abuse of process. Here, the Court of Appeal found that there was an abuse of process after piercing the corporate veil as it became clear that the Winding Up Petition was filed to stifle Suit 832.


  • In the absence of a joint venture agreement, Courts ought to be slow to imply the existence of any oral joint venture especially when such implication is at odds with the express provisions of a company’s Memorandum & Articles Association.


  • The business of a company is to be deduced from the Articles and Memorandum of Association. In cases where the Third Schedule of the Companies Act 1965 has been incorporated in the Articles and Memorandum of Association, the nature and business of the company would include procuring a Court Order for the benefit of the company.

The Petitioner has since applied for leave to appeal to the Federal Court, which is pending Hearing.


This article is authored by Soh Lip Shan, an Associate of Messrs. Kuruvilla, Yeoh & Benjamin.


For more information, please feel free to contact Edward Kuruvilla at edward@kyblegal.com or visit his Profile at www.kyblegal.com/edward


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KYB Case Update - Piercing the Corporate Veil – Winding Up Petition Filed By Alter Ego Hel
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