A. Introduction
On 25 March 2021, the Federal Court of Malaysia in Ong Leong Chiou & Anor v Keller (M) Sdn Bhd clarified that the single economic unit test is applicable to all courts, and not confined to Industrial Court matters only. However, satisfaction of this test alone is insufficient to pierce the corporate veil.
B. The Single Economic Unit Test
While companies within a group of companies are separate legal entities, there are situations when a subsidiary act as an agent of the parent company. The single economic unit test comes into play in such a scenario.
The single economic unit test is usually applied where the relationship between a subsidiary and a parent company is so intertwined that they should be treated as a single entity to reflect the economic and commercial realities of the situation.
For instance, in Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers [1980] 1 MLJ 109, the corporate veil between a restaurant and a hotel was pierced as they were inter-dependent, function as one integral unit in terms of management, and share common senior officers and employees.
In Rusli Luwi v RM Top Holdings Sdn Bhd [2004] 6 CLJ 353, the corporate veil between a subsidiary and its parent company was pierced due to the latter’s shareholding in the former and both companies were managed by members of the same family.
In Forum Petroleum Services v Ranhill International Inc [2015] MLJU 1925, the corporate veil between a subsidiary and a parent company was pierced as the parent company exercised control and managed the financial and operating policies of the subsidiary.
These cases share a common thread, in that they were all heard before the Industrial Court.
C. The Court of Appeal Decision in Law Kam Loy
In Law Kam Loy v Boltex Sdn Bhd [2005] 3 CLJ 355, the Court of Appeal ruled that it is insufficient to pierce the corporate veil between a subsidiary and a parent company purely by applying the single economic unit test.
Nonetheless, the Court of Appeal held that the application of the single economic unit test in Hotel Jaya Puri to pierce the corporate veil was justified as the case concerned with the Industrial Relations Act 1967 and the Industrial Court could pierce the corporate veil where the interests of justice so demand.
Hence, the Court of Appeal seems to suggest that the application of the single economic unit test differs in Industrial Court matters and other cases.
D. The Federal Court’s Decision in Ong Leong Chiou
The Federal Court granted leave in respect of the following leave question:
“Whether the single economic unit test as expounded in Law Kam Loy is confined to Industrial Court matters?”
Upon hearing the appeal proper, the Federal Court ruled that the leave question was academic as the High Court did not utilise the single economic unit test to justify the piercing of the corporate veil. Instead, the High Court pierced the corporate veil based on fraud and equitable fraud.
As the leave question was academic, the Federal Court declined to answer the same. Regardless, the Federal Court made a point that the single economic unit test is applicable in all courts and not confined to Industrial Court matters.
Further, the Federal Court in obiter opined that the single economic unit test alone is insufficient to justify the piercing of the corporate veil. This is in line with what the Court of Appeal held in Law Kam Loy.
E. Conclusion
It is now clear that the single economic unit test is useful only to the extent of aiding the Courts in finding special circumstances that can pierce the corporate veil, which include actual fraud or fraud in equity. This principle is applicable across all courts in Malaysia.
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