Court of Appeal lifts corporate veil in “self-harming” petition

The Court of Appeal in the case of Le Apple Boutique Hotel Sdn Bhd v Keen Solution Sdn Bhd [2023] 7 AMR 947 allowed two appeals (“Appeals”) which were filed against the decision of the learned judicial commissioner (“JC”) at the High Court in allowing a company known as Le Apple Boutique Hotel (KLCC) Sdn Bhd (“LABHKLCC”) to be wound up on just and equitable grounds.
The Court of Appeal found, among others, that the learned JC erred in refusing to lift the corporate veil and in finding that the winding up petition was bona fide without any ulterior motive.
Background facts
The petitioner, Keen Solution Sdn Bhd (“Petitioner”), and Le Apple Boutique Hotel Sdn Bhd (“LABHSB”) are shareholders of LABHKLCC. The Petitioner holds 45% of the shareholdings in LABHKLCC while LABHSB holds the remaining 55%.
LABHKLCC had entered into an agreement with a company known as PGCG Assets Holdings Sdn Bhd (“PGCG”) for the purposes of developing and operating a hotel in Ampang (“Agreement”). It will be seen that PGCG is in fact the Petitioner’s related company.
The Agreement became the subject of a legal suit between PGCG and LABHKLCC in 2020 (“Legal Suit”). In this regard, LABHKLCC sued PGCG for a total of RM19.6 million as capital expenditure it had expended towards the hotel in Ampang. Out of this amount claimed, LABHKLCC succeeded in obtaining a summary judgment for the sum of RM1.65 million. LABHKLCC’s claim for the remaining sum in the Legal Suit was slated to go on full trial.
PGCG applied unsuccessfully to the High Court for an ad-interim stay of the summary judgment. Less than 10 days after the dismissal of the said application, the Petitioner filed a winding up petition against LABHKLCC on the basis of an alleged lapsing of LABHKLCC’s purpose / business as well as an alleged breakdown of trust and confidence in management.
The learned JC allowed the winding up petition on, among others, the following grounds: 
  1. the winding up petition was a bona fide petition and thus, there was no necessity to pierce the corporate veil to identify the alter egos at play behind the Petitioner and PGCG; 

  2. there was an oral joint venture agreement entered into between LABHSB and the Petitioner to operate a hotel (being LABHKLCC) sometime in 2013. Since LABHKLCC’s business has ceased, the sole purpose of the joint venture agreement which was to operate the LABHKLCC hotel can longer be met and on that basis, it is just and equitable for LABHKLCC to be wound up; 

  3. it was just and equitable for LABHKLCC to be wound up as there had been a breakdown of confidence and trust within the management as the Petitioner was allegedly kept out of LABHKLCC’s affairs, business and management. 
The Court of Appeal’s decision
The Court of Appeal was faced with the following three issues: 
  1. First, whether the learned JC was right in refusing to lift the corporate veil and finding that the winding up petition was a bona fide petition without any ulterior motive (“First Issue”); 

  2. Second, whether the learned JC was right in deliberating on matters which were live issues in the Legal Suit (as his grounds to allow the winding up petition) (“Second Issue”); and 

  3. Third, whether the learned JC was right in making the following findings:
  1. that a joint venture agreement exists between the Petitioner and LABHSB to operate the LABHKLCC hotel; 

  2. that LABHKLCC’s business had ceased; and 

  3. that there had been a breakdown of management of LABHKLCC (“Third Issue”). 
First Issue
On the First Issue, the Court of Appeal held that the learned JC had erred in refusing to lift the corporate veil, and in finding that the winding up petition was a bona fide one without any ulterior motive. The Court of Appeal was of the view that the learned JC failed to appreciate the sheer bafflement of the Petitioner’s self-harming winding up petition which would lead to the Petitioner’s loss of approximately RM20 million in damages. In arriving at this conclusion, the Court of Appeal took cognisance of the matters set out below.
First, as a shareholder of LABHKLCC, the Petitioner definitely stood to gain some measure of financial gain anytime and every time that LABHKLCC stood to earn monies. Consequently, in the event that LABHKLCC was wound up, the Petitioner through its shareholding in LABHKLCC would also sustain losses as the Legal Suit would have been scuttled and stymied. On the other hand, PGCG would have been “saved” from the potential liability of approximately RM20 million that the High Court in the Legal Suit might order against PGCG.
Second, it was obvious that the Petitioner was willing to self-harm itself for the sake of PGCG as any monies paid by PGCG to LABHKLCC would have to be shared between the Petitioner and LABHSB in the proportion of their shareholdings of 45% and 55% in LABHKLCC respectively. If PGCG were to lose the Legal Suit, the monies PGCG had to pay to LABHKLCC would no longer be held by PGCG and the Petitioner (as related companies), but instead be diluted due to LABHSB’s majority shareholding in LABHKLCC.
Third, the winding up petition would allow the Petitioner and PGCG to effectively prevent LABHKLCC from continuing with the Legal Suit, hence denying LABHKLCC from having its day in court as well as to recover the RM20 million.
Fourth, there are facts and documents which explicitly show the link between the Petitioner and PGCG. In this regard: 
  1. the Petitioner and PGCG share identical business and registered addresses; 

  2. the majority shareholder of the Petitioner is also a director and shareholder of PGCG; 

  3. the Petitioner’s majority shareholder is the wife of PGCG’s director; and 

  4. PGCG’s parent company, PGCG Inc, explicitly confirmed in its filing to the Securities Exchange Commission of the United States that its group of companies derive rental from the Petitioner. 
Fifth, the real and actual mala fide ulterior motive incentivising the Petitioner’s “self-harming” winding up petition was to prevent LABHSB from gaining any share of the RM20 million claimed by LABHKLCC in the Legal Suit. In this respect, although the Petitioner might gain from the Legal Suit vide its 45% shareholding in LABHKLCC, the Petitioner and PGCG would have to relinquish and lose 55% of their collective interest in the RM20 million due to LABHSB’s majority shareholding in LABHKLCC.
Sixth, the Petitioner had deliberately concealed the fact that it had, in an unrelated Industrial Court matter involving LABHKLCC, appointed a solicitor who is also acting for and is a director of PGCG Inc (PGCG’s holding company) to defend LABHKLCC. It is suspicious that the Petitioner would seek legal services from a solicitor who is in direct conflict of interest with LABHKLCC (albeit for an unrelated industrial court matter). It appears that the Petitioner is deliberately trying to place PGCG in the driver’s seat of LABHKLCC’s proverbial legal manoeuvring.
The Court of Appeal also referred to, among others, the case of Re Bellador Silk Ltd [1965] 1 All ER 667 where Plowman J held that “A petition which is launched not with the genuine object of obtaining the relief claimed, but with the objection of exerting pressure in order to achieve a collateral purpose is, in my judgment, an abuse of the process of the court…”.
For the reasons stated above, the Court of Appeal answered the First Issue in the negative.
Second Issue
On the Second Issue, the Court of Appeal was of the view that it was improper for the learned JC to decide on the winding up petition by making his own examination and conclusion as to the evidence and merits of the legitimacy of LABHKLCC’s claims against PGCG in the Legal Suit. The merits of the Legal Suit should not have been an issue in determining the justiciability or equitability of the winding up petition. Hence, the Court of Appeal also answer the Second Issue in the negative.
Third Issue
The Court of Appeal answered the Third Issue in the negative, based on among others, the matters set out below.
First, it was plainly wrong for the learned JC to presume that there was an oral joint venture agreement as it was admitted by both parties that no written joint venture agreement was ever entered into. There was also no cogent evidence to infer the existence of an oral joint venture agreement.
Second, in line with the Federal Court’s reasoning in the case of Rinota Construction v Mascon Rinota [2018] 1 MLJ 141, the absence of any joint venture agreement or any shareholders’ agreement between the Petitioner and LABHSB meant that the relationship between the parties shall be that of shareholders who are bound by LABHKLCC’s memorandum and articles of association (“M&A”). As such, the purpose and business of LABHKLCC must necessarily be examined based on LABHKLCC’s M&A. It was therefore wrong for the Hight Court to assume that the purposed and business of LABHKLCC had ceased just because it no longer operated the hotel.
Third, the learned JC had misdirected himself in not appreciating the true nature and business of LABHKLCC as per its M&A. In this regard, the learned JC was of the view that the initiation of the Legal Suit cannot be deemed as LABHKLCC’s business as a hotel operator. The learned JC in so holding, failed to appreciate that LABHKLCC’s M&A stipulated that the conduct of seeking for an order which may directly or indirectly benefit LABHKLCC’s business is part and parcel of LABHKLCC’s business.
Fourth, the Court of Appeal referred to the Federal Court’s decision in Tan Keen Keong @ Tan Kean Keong v Tan Eng Hong Paper & Stationery Sdn Bhd & Ors (and Other Appeals) [2021] 3 MLJ 914 and held that a winding up petition is a drastic measure of last resort which should only be moved when all other avenues have already been exhausted. The Court of Appeal took cognisance of the fact that the Petitioner did not hesitate to directly pursue the winding up petition amidst other available remedies. In particular, there is no evidence to show that the Petitioner had sought remedy in oppression for the purposes of safeguarding its interest as a minority shareholder.
Fifth, contrary to the Petitioner’s allegation, it is clear that the Petitioner has considerable involvement and power in the affairs and management of LABHKLCC in light of the following facts: 
  1. the Petitioner’s director in LABHKLCC was present and voted in the last board of directors meeting that took place on 7 December 2021; 

  2. the Petitioner’s director in LABHKLCC was also actively involved and in control of LABHKLCC’s legal proceedings in the Industrial Court matter; and 

  3. the Petitioner was free to conspicuously appoint a firm which is in a position of grave conflict of interest with LABHKLCC (albeit for the other industrial court matter) to represent LABHKLCC in the industrial court matter. 
While it is now clear that the Courts may lift the corporate veil of the petitioner of a “self-harming” winding up petition, it is unclear whether the Courts must now lift the corporate veil in each and every case where the factual matrix suggests that the winding up petition may be “self-harming”.
Arguably, a “self-harming” winding up petition may be necessary in certain cases. For instance, if there is an irretrievable breakdown in the relationship of the members of a quasi-partnership company, one or more of its members may wish to file a petition to have the company wound up on just and equitable grounds. However, if the said company is still income generating, it is arguable that any winding up petition filed by the member(s) could also be deemed as “self-harming”. In such cases, it may not be fair for the winding up petition to be dismissed, hence forcing the petitioner to continue as “partners” with the other members of the company just because the petitioner can gain more financially if the company is allowed to continue to exist.
Case Note by Janice Ooi (Partner) of the Restructuring and Insolvency Practice of Skrine.

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