MORE than sixty years ago in 1956, what seemed to be an ordinary landlord-tenant dispute took a turn to be one where the most celebrated English judge of the 20th century left an indelible mark, yet again.
The landlords in that case owned a block of flats. They let flat No 13 to one Mr. Beasley. He died and his widow remained in the flat as a statutory tenant. In October 1954, the landlords desired to increase the rent as allowed under the law. They served three documents each dated 9 October 1954, one of which was a declaration in which they declared: (i) that the conditions justifying an increase were fulfilled (namely, that the premises were in good repair and reasonably fit for occupation), and (ii) that they had done work of repair so as to qualify them for an increase.
The tenant did not pay the increase of rent. The landlords therefore commenced an action to recover it from her.
The tenant alleged that the declaration was false and fraudulent in that the repairs for the benefit of the flats had never been carried out. The trial judge, however, held that since she did not challenge the declaration within the time stipulated under the law, she could not challenge it in the court then. The tenant appealed to the Court of Appeal.
That most celebrated English judge, Lord Denning, was then a Lord Justice (LJ) of the Court of Appeal. His Lordship said:
“Can the declaration be challenged on the ground that it was false and fraudulent? It can clearly be challenged in the criminal court …. The landlords argued before us that the declaration could not be challenged in the civil courts at all, even though it was false and fraudulent, and that the landlords can recover and keep the increased rent even though it was obtained by fraud.
“If this argument is correct, the landlords would profit greatly from their fraud…. I cannot accede to this argument for a moment. No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud.”
His Lordship then said:
“Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved it vitiates judgments, contracts and all transactions whatsoever.” (See Lazarus Estates Ltd v Beasley  1 All ER 341, 345)
Many lawyers regard Lord Denning as the greatest judge of the last century. His judgments, which were “models of simple English which ordinary people understood”, were much celebrated and won him the accolades unmatched in the history of the English judiciary.
The above judgment was just one of his many judgments where he was prepared to use the law for its true purpose in the interests of fairness and justice. It was a judgment with a tremendous feel for ordinary people like the widowed tenant.
His judgment has found renewed relevance of late, with the Federal Court having twice referred to it in recent years. The most recent was in Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & Ors decided almost a year ago.
In that case, the relevant facts can be summed up as follows: Company A, the main contractor, contracted the substructural works to Company B who in turn subcontracted it out to Company C, who in turn subcontracted the works out to the plaintiff.
The plaintiff was the entity that carried out the actual works. It claimed for nonpayment of work done in the sum of RM7.46 million.
The trial High Court judge found fraud to have been perpetrated. That in itself warranted the allocation of liability to the perpetrators of the fraud, independently of the doctrine of piercing the corporate veil. The finding of fraud involved the appellant, one Tony Ong as well as the two companies which he controlled, Company B and Company C.
The two companies were ‘utilised’ by Tony Ong to enable the sum due to the plaintiff to be evaded by Company B. Company C was utilised as a ‘sham’ company interposed between Company B and the plaintiff, to ensure that the sum would not be paid to the plaintiff. It was deliberately engineered by Tony Ong.
Company B was the recipient of the benefit gained from the fraud so perpetrated, because it received payment from Company A while being held insulated from the sum due and owing for the works done by the plaintiff. It was in this context that the trial judge ordered that all three of them, Tony Ong and the two companies were jointly and severally liable. The fraud could not have been perpetrated without any one of the three entities.
Tony Ong and each of the companies were accordingly found liable by reason of the fraud, even without the invocation of the doctrine of the piercing of the corporate veil.
It is the bedrock of company law that on incorporation of a company, the corporate entity is clothed with a separate and distinct personality. It is an articifial legal person distinct from its members [Salomon v A Salomon & Co Ltd (1897)].
It is said that there is a ‘veil’ between the company and its members that separates them for purposes of liability, property, capacity, and in relation to acts done or the acquisition of rights. The natural persons or individuals who are behind the company are ignored.
The veil, however, is not entirely inviolable. One of the well-recognised and accepted exceptions to the principle of the separate personality of a company is where the legal entity of a corporate body is utilised for fraudulent, dishonest or unlawful purposes.
In such circumstances the person or persons perpetrating such abuse cannot hide behind the separate corporate personality. The courts will ‘break’ the shell of incorporation, by utilising the doctrine of the ‘lifting or piercing of the corporate veil’. (See the judgment of Nallini FCJ)
The Court of Appeal affirmed and endorsed the careful and thorough findings of the High Court judge in its entirety. So did the Federal Court.
In delivering the judgment of the apex court, Nallini FCJ said:
“As is the case in the United Kingdom, it is an accepted position in law in Malaysia that the court will lift the corporate veil if a company was set up for fraudulent purposes. The ‘fraud unravels all’ principle expounded in Lazarus v Beasley is applied. That is the primary and relevant principle that is applicable in the instant case.”
The principle that ‘fraud unravels all’ (fraus omnia corrumpit), though, cannot be limited to piercing the corporate veil. The principle exists independently of the latter doctrine. Therefore, the court may unravel transactions by reason of fraud independently of the doctrine of piercing the corporate.
In the words of Nallini FCJ:
“[T]he finding of fraud in itself warrants the corporate personalities of the companies being disregarded. In other words, liability was found against Tony Ong and each of the companies by reason of the fraud alone, without the invocation of the doctrine of the piercing of the corporate veil.”
As Lord Denning famously said: “Fraud unravels everything.”
This is the personal opinion of the writer or publication and does not necessarily represent the views of BebasNews