LEGAL UPDATE
Piercing the Corporate Veil
Using cases from the Hong Kong context, Ted Tyler and Dennis Hie discuss circumstances in which
courts look behind the separate legal personality of a company to find liability on the part of its individual
members
The Concept of Separate Personality
Upon incorporation under the Companies Ordinance (Cap
32) a company is a separate legal entity, separate and different
from the members of the company. This is the concept of
separate personality. This separateness is often overlooked in
the Hong Kong context of family controlled companies. The
controllers of such companies often do not understand the
distinction between the company’s assets and their own assets.
There is no doubt that the concept of separate personality
together with that of limited liability can be abused. In
exceptional cases, both under the Companies Ordinance and at
common law, a court may “pierce the corporate veil”, or look
behind the separate personality of the company, and make the
officers or members of the company personally liable.
Recent Hong Kong Cases
There have been several cases of piercing the veil in the
criminal law context in recent years in Hong Kong arising
out of university academics abusing the rental allowance
scheme. The employee must not own the flat which he/she
rents and for which he/she is subsidised. Attempts have been
made to avoid this rule by interposing a company as the owner/
landlord, which company is controlled by the employee
directly or through nominees. This was the situation in
HKSAR v Leung Yat-ming & anor [1999] 2 HKLRD 402,
CA, where the court pierced the corporate veil.
There is no single test for when the court should pierce
the veil. In the Leung case Mayo JA said: “It is apparent
from Creasey v Breachwood Motors Ltd [1993] BCLC 480
that where the justice of the case requires it, it is permissible
to go behind the veil, particularly where, as in the present
case, it is a cloak for deception”.
Unfortunately, Mayo JA seemed to be unaware that
Creasey had subsequently been held by the Court of Appeal
in England in Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447
to be “unsustainable” and not “authoritative”. Moreover
the Hong Kong Court of Appeal itself had earlier in China
Ocean Shipping Co v Mitrans Shipping Co Ltd [1995] 3
HKC 123 rejected Creasey as establishing a broad “justice
of the case” test. There is no “justice of the case” test,
though using a company as a cloak for deception (to use
Mayo JA’s words) may be one ground for piercing the veil.
Fraud is certainly a ground for piercing the veil in a criminal
context (see Secretary for Justice v Lee Chau-ping & anor
[2001] 1 HKLRD 49).
Groups of Companies
The piercing the veil issue has often arisen in the context of
groups of companies. Here again special Hong Kong
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The Hong Kong
ACCOUNTANT
MAY 2002
LEGAL UPDATE
characteristics may be relevant. It is common within Hong
Kong groups for assets to be shunted around different companies
in a group and, in particular, out of one subsidiary or associated
company when that company is in danger of insolvency.
The most blatant example of such conduct in recent years
actually happened in Australia in the “waterfront dispute”
of 1998. There the Patrick Stevedores group had earlier
restructured the group in such a way that the companies
employing dockside workers had no assets and were unable
to pay the employees’ entitlements when most of them were
sacked in the 1998 waterfront dispute (see (1999) 11 Aus Jo
of Corp Law 27 (Noakes)). The Corporations Law was
subsequently amended to make directors personally liable
for unpaid employee entitlements in similar situations (see
(2001) Aus Bus Law Rev 124 (Noakes)).
There was a time in the 1970s under the influence of the
late Lord Denning where in some cases parent companies
were made responsible for the liabilities of their subsidiaries,
or all the companies in a group were treated as a single
group (ie the concept of a single economic entity) (see DHN
Food Distributors Ltd v Tower Hamlets London Borough
Council [1976] 3 All ER 462 CA). But this had subsequently
been rejected in Woolfson v Strathclyde Regional Council
(1979) 38 P&CR 521 HL, in favour of the “façade” test.
That is, the veil will only be pierced where special
circumstances exist indicating that the veil of separate
corporate personality is a mere façade concealing the true
facts.
A similar result was arrived at in BIS Consultants Ltd v
Dao Heng Bank [1989] 1 HKLR 446, an interesting case
where both plaintiff and defendant were each seeking in
effect to pierce the veil of the other. Deputy High Court
Judge Cruden held that, on the evidence before him, he was
not satisfied that there was a sufficient relationship between
the parties to allow him to pierce the corporate veil. (The
decision was reversed by the Court of Appeal on different
grounds; see [1989] 2 HKLR 172.)
More recent cases in Hong Kong in the context of separate
companies for separate ships (see China Ocean Shipping
Co v Mitrans Shipping Co Ltd [1995] 3 HKC 123) or separate
development projects (see Maxgood International Ltd v
Charter Victory International Ltd and Chau Chi Chung
(2001) HCt unrep Action No 12017 of 1997) have confirmed
the separateness of various companies within a group.
Similarly in England the separateness of companies in a
group, in the absence of special factors, has been confirmed
(see Adams v Cape Industries plc [1990] Ch 433 CA; Ord v
Belhaven Pubs Ltd [1998] 2 BCLC 447 CA; and Yukong
Line Ltd of Korea v Rendsburg Investments Corp of Liberia
& ors (No 2) [1998] 4 All ER 82).
The Yue Tai Plywood & Timber Case
In Yue Tai Plywood & Timber Co Ltd v Far East Wagner
Construction Ltd & anor [2001] 2 HKLRD 446, on an RHC
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O14 appeal, Recorder Leong SC felt compelled to ignore
the separateness of two companies. In that case the plaintiff
had supplied goods over a period to the first defendant. The
first defendant and the second defendant company shared
the same place of business and the same registered office.
Mr Wong Kai Kwong was the principal person behind both
defendant companies. He was one of two directors, a
shareholder of the first defendant and one of three directors
and controlling shareholder of the second defendant.
Mr Ho, the person who dealt with the first defendant on
behalf of the plaintiff, dealt with Mr Wong and claimed
that he (Mr Ho) and others acting on behalf of the plaintiff
treated the first and second defendants as one common entity.
When the first defendant failed to pay for the purchases,
the second defendant gave the plaintiff three post-dated
cheques signed by Mr Wong. When the first cheque was
dishonoured, three new post-dated cheques were issued to
the plaintiff by the second defendant. These cheques were
also later dishonoured.
The plaintiff claimed against the second defendant for
the money due and sought summary judgment under RHC
O14. The second defendant opposed the application claiming
that it had an arguable and credible defence based on two
grounds: first, that there was no privity of contract between
it and the plaintiff and secondly, that there was no
consideration given by the plaintiff for the cheques.
The master gave unconditional leave to defend and the
plaintiff appealed. Recorder Leong SC allowed the appeal
and made an order for summary judgment. On the privity
point the recorder said:
…In support of its claim that there was no contractual
relationship between the plaintiff and the second defendant,
Mr Pong, for the respondent emphasised that the orders and
receipts were all between the plaintiff and the first defendant
and that the goods were delivered to the first defendant’s
building site. He stressed that the first and second defendants
are separate and distinct entities in law and that there had
been no working or contractual link between the plaintiff
and the second defendant.
Mr Ho on affirmation and Mr Sham (counsel for the
plaintiff) in his submissions said that the plaintiff had
throughout drawn no distinction between the first and second
defendants. Mr Sham also pointed to the various conversations
and the meeting with Mr Wong Kai Kwong when Mr Wong
had made no distinction between the two defendants.
I am satisfied that, although the first and second defendants
are obviously separate and distinct legal entities, there was
a deliberate and obvious blurring of the edges in the operation
of these transactions. Indeed the second defendant has taken
no steps to deny or contradict the plaintiff’s case that
Mr Wong, Ms Chan and others were operating the
defendants as a combined operation...
The Hong Kong
ACCOUNTANT 69
LEGAL UPDATE
Having regard to the evidence I draw the irresistible
inference that the first and second defendants are inexorably
linked and that it would be unduly artificial to pretend that
the two companies and their common directors and
shareholders were unaware of each other’s business activities
(at p 450).
No authorities on piercing the veil were referred to in
the judgment. The recorder could have achieved the same
result by the finding of consideration (by way of detriment
to the plaintiff in accepting the replacement cheques and
consenting to delay presentation and forbearance in respect
of the first defendant’s debt) and the Bills of Exchange
Ordinance s 28 point (that it is sufficient if a drawee has
once given value for the cheque, regardless of whether the
drawer was the recipient of the value). It is not apparent on
what test for piercing the veil (if the case is really an
example of that) the learned recorder was relying. The
reference to “deliberate” blurring suggests “the cloak for
deception” ground referred to by Mayo JA in Leung’s case
(above) (in other cases words like “façade” and “sham”
have been used).
Perhaps the case is not a piercing the veil case at all.
Often other concepts get intermingled with the piercing the
veil concept. In some textbooks agency between companies
appears as an example of piercing the veil, but it clearly is
not. If company P is held liable for the acts of its agent,
company A, that is not an example of piercing the veil of
company A but of the general liability of principals for the
acts of their agents. In Recorder Leong’s references above
to “the defendants as a combined operation” (the defendants
being “inexorably linked” with the two companies and their
common directors and shareholders being aware of each
other”s activities) the recorder may have been basing this
part of the decision on a finding that the two defendants
were in fact both parties to the contracts with the plaintiff,
in which case, again, it is not a piercing the veil case.
It should, however, be noted that in the Yukong case
(above) the court rejected the argument that the third
defendant could be treated as a party to the charter party
between the plaintiff and first defendant by reliance on the
conduct of the third defendant subsequent to the making of
the charter party. In the Yue Tai case it appears that the
conduct relied on by the recorder occurred both before and
after the making of the contract.
Other Examples
Issues of separate personality and piercing the corporate
veil arise in a variety of contexts. One extremely practical
context which has arisen in several jurisdictions in recent
years is that of committal for failure to pay a judgment debt.
The Hua Chiao Commercial Bank Case
A recent Hong Kong example of this is Hua Chiao
Commercial Bank Ltd v Alpha Plus International
Development Ltd [2001] 2 HKC 54. In the course of an
The Hong Kong
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ACCOUNTANT
examination under RHC O 48 of Mr Fu, a director and
controlling shareholder of the defendant judgment debtor
company, it was discovered that Mr Fu controlled other
companies, one of which owed the defendant company more
than enough to satisfy the judgment debt. RHC O 48 allows
for the examination of an officer of a corporate debtor. The
plaintiff sought to have Mr Fu committed pursuant to RHC
O 49B r 1B(3). This rule, while referring to an examination
conducted under O 48, does not extend the liability of the
judgment debtor to officers of corporate judgment debtors,
as O 48 itself does.
The claim failed primarily on two grounds. First, that,
in this context, assets of a judgment debtor meant assets
instantly or currently available to the debtor, which was
not the position in the present case where claims would
have to be made against the other companies. Secondly, to
commit a director of a judgment debtor company, the
criminal standard of proof applied and it was not satisfied
in the circumstances of the case. On the piercing the
corporate veil point raised by the plaintiff, the master held
that it was conceptually difficult to apply RHC O 49B to
commit directors of corporate entities. Referring to Salomon
v A Salomon Ltd [1897] AC 22 HL, the classic case on the
separate personality of a company, the master was not, on
the evidence available, prepared to pierce the corporate
veil of the judgment debtor defendant company.
Committal of Directors
Sometimes directors may be committed for contempt
where their company has disobeyed a court order. Unlike
RHC O 49B r 1B(3), most committal rules under RHC
expressly permit an order to be made against a director of
the corporate body who has disobeyed a court order. In those
circumstances directors are under a positive duty to ensure
to the best of their ability that the court order is complied
with (see Nicholas Pappadis & anor v Chan Shing-sheung
Barry [1989] 2 HKLR 511; SA Development Ltd v Wing
Hang Bank Ltd & ors [1997] HKLRD 167 CA.)
An example of this potential liability is Concorde
Construction Co Ltd v Colgan Co Ltd & anor (No. 2) [1984]
HKC 253, where the application was for the committal of
two directors of the defendant company when the company
failed to obey an order of the court. The two directors,
James Tien and Michael Tien, were also directors of the
defendant company’s parent company, Manhattan Garments
Ltd. It was claimed by the applicant that, as such, the
directors were in a position to cause Manhattan to make
the necessary advance to the defendant in order to satisfy
the court order (the defendant company itself was unable to
carry out the order because it did not have the necessary
funds to do so) and that the court should lift the veil of the
defendant company to reveal the directors’ position. But
Rhind J held that, even if he did lift the veil, it would not
help the applicant because the directors, as directors of
Manhattan, had to consider the best interests of that company.
These best interests were to not make an advance to the
MAY 2002
LEGAL UPDATE
defendant company, which was unlikely to be ever able to
repay any loan.
Recent Hong Kong cases of applications for committal
of directors include Re Texgar Ltd [2001] 1 HKLRD D2;
Aqua-Leisure Industries Inc & anor v Aqua Splash Ltd [2001]
1 HKLRD D3; and Excel Noble Development Ltd & ors v
Wah Nam Group Ltd & ors (2001) CA unrep CACV 910/
2000 (judgment handed down 29 May 2001).
Commentary
One can understand the desire of a judge to pierce the
veil in appropriate circumstances and not to be (to use the
words of Recorder Leong in the Yue Tai case) “unduly
artificial” in maintaining the separate personality of
associated companies. That wording is reminiscent of that
of the majority in Harold Holdsworth & Co (Wakefield)
Ltd v Laddies [1955] 1 All ER 725 HL. There it was held
that to claim the separate legal personality of the subsidiary
was, in the circumstances of that case, too technical an
argument where a “mercantile” contract like that of the
subject matter of the case (the managing director’s contract)
was concerned.
But the courts have moved on since 1955. Just like
Recorder Leong stressed Mr Wong’s not making any
distinction between the defendant companies, so too did the
Deputy High Court Judge in Creasey (above) where he said
(at pp 492-493) that Mr Ford and Mr Seaman (owners of
the Breachwood group of companies) deliberately ignored
the separate personalities of the two companies concerned,
Welwyn and Motors. He then used this as “the most
important factor” for piercing the veil.
But, as we have seen in Ord v Belhaven Pubs Ltd, the
English Court of Appeal expressly disapproved Creasey and
held that in the absence of any impropriety, sham or
concealment it would be wrong in the circumstances of that
case (a group restructuring one) to pierce the corporate veil.
Moreover, in Typhoon 8 Research Ltd v Seapower
Resources International Ltd & anor (2001) DCt unreported
DCCJ 5911/2001, Judge Andrew Cheung refused to pierce
the corporate veil in circumstances not dissimilar from those
in the Yue Tai case. In the Typhoon case the plaintiff, having
been forced to give up its tenancy (which had been granted
by the second defendant without the consent of the second
defendant’s mortgagee) when the mortgagee enforced the
mortgage, sought to recover the deposit it had paid to the
second defendant (now insolvent) from the first defendant,
the ultimate holding company of the Seapower group. The
second defendant was merely the property holding company
of the group. Various floors of the Silver Fortune Plaza in
Central were held by various Seapower subsidiaries. The
second defendant held the 21st floor, the greater part of
which was the subject matter of the tenancy to the plaintiff.
The negotiations for the letting had been made by senior
MAY 2002
staff of the Seapower group employed by the first defendant,
not by any director or staff of the second defendant. In the
negotiations the matter of a guarantee from the first defendant
to cover the return of the deposit had been discussed. The
person negotiating for the plaintiff knew only of the first
defendant and alleged that the chief financial officer of the
first defendant had said that no guarantee was necessary
because the deposit was the “real liability” of the first
defendant. This was not reflected in the terms of the tenancy
granted by the second defendant to the plaintiff. The
subsequent conduct of the first defendant in handling all
tenancy matters did not, according to the judge, alter the
position; the first defendant was simply acting as agent for
the second defendant in these matters.
This was nothing surprising or strange in the commercial
world, particularly in a group company situation. The second
defendant, even though a mere property holding company,
was still a company in its own right, a separate legal entity
in the eyes of the law. It was no less a separate entity
because it held a single property and did no other business.
It was no less a separate legal entity because it was but one
company in a group comprising many. When the second
defendant transacted business (in this case, for example,
letting the premises) it transacted as principal, not as agent
of the first defendant.
Nothing in the evidence contradicted that. The
circumstances of the letting were how the commercial world
works and the judge saw no need for the court to interfere
by imposing an agency relationship where the circumstances
did not justify it and where, on the evidence, none was
intended. The circumstances under which the court was
prepared to pierce the corporate veil or equate the company
with an individual or another legal entity were reasonably
well defined and none existed in the case before it.
The Typhoon case judgment is fully and well reasoned.
The Yue Tai decision may be right, but it would have been
helpful for future reference if it had been more fully reasoned
with, perhaps, some citation of the relevant cases. Several
of the main company law texts begin their piercing the veil
discussion with a section headed “Interpretation”, dealing
with instances where the interpretation of a statutory
provision or some commercial documents results in the
controller of a company being liable for or having the benefit
of the company’s transaction. These cases are not really
examples of piercing the veil but of interpretation of wording
of the legislation or document.
Yue Tai may be an interpretation example. It may be a
fraud case. Or it may be a case where the judge, rightly or
wrongly, was not prepared to accept the artificiality of the
concept of separate legal personality. We simply do not
know. HKA
Professor Ted Tyler and Mr Dennis Hie
School of Law, City University of Hong Kong
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ACCOUNTANT 71