Capital City Property and the Corporate Veil

Important Note: This article is for general information and educational purposes only—not legal advice. It draws on the judgment of the Court of Appeal dated 9 February 2026 in Capital City Property Sdn Bhd v Teh Swee Neo & Anor [2026] MLJU 540.

When Can a Company’s Liability Be Imposed on Another Company?

When a tenant stopped paying rent on 97 commercial units in a mall, the owners took a class action to recover almost RM10 million owed to them. They didn’t stop at the tenant—they also named the mall developer in the suit. The case went through two tiers of courts. The verdict: the High Court made the developer pay; the Court of Appeal said otherwise.

Capital City Property Sdn Bhd (the 2nd Defendant)—a company with a paid‑up capital of RM5 million—had built a shopping centre, Capital City Mall, in Johor Bahru. It sold 97 of the commercial units to a group of buyers under Sale and Purchase Agreements (SPAs). Those same buyers then entered into tenancy agreements (TAs) with CCRM Management Sdn Bhd (the 1st Defendant)—a company with only RM100 in paid‑up capital—to lease their units for a fixed term of two years.

The High Court Pierces the Veil

At the hearing, the unit owners argued that the developer should be held jointly responsible for the unpaid rent. They provided five reasons: the developer had avoided its obligations; there was an abuse of the tenant’s corporate personality; special circumstances existed (the 1st Defendant was viewed as a vehicle to absorb the 2nd Defendant’s liabilities); it was in the interest of justice; and the developer controlled, managed, or directed the tenant.

Their evidence include: the second defendant was incorporated just two days before the official launch of the Mall’s construction; the tenant and developer both have the words “Capital City” in their names, shared a common director, the same registered office, business address, company secretaries and authorised signatories; and, the TAs and SPAs were signed on the same day.

The High Court agreed with the unit owners. It pierced the tenant’s corporate veil and held both companies jointly and severally liable for the unpaid rent. The learned Judicial Commissioner relied on the same five considerations the purchasers had urged. The court also applied the doctrine of estoppel—because the buyers had bought the units in reliance on the rental promise, it would be unjust to let the developer escape liability. On top of that the court found that the 1st Defendant was an empty shell company incorporated to evade the 2nd Defendant’s liability for the rent.

The 1st Defendant did not appeal, so the judgment against it became final. The developer, however, appealed to the Court of Appeal. The case came before the Court of Appeal as Capital City Property Sdn Bhd v Teh Swee Neo & Anor.

The Developer’s Appeal

On appeal, the second defendant (now appellant) contended that the High Court had committed an error of law. It raised several grounds, the most significant of which were:

• The 2nd Defendant had never guaranteed the 1st Defendant’s rent payments to the Plaintiffs.
• Clause 39 of the SPAs expressly stated that the SPAs constituted the entire agreement between the parties and superseded all prior agreements and understandings. It also provided that no variation or amendment would be effective unless made in writing and signed by all parties. The developer argued that these clauses prevented any implied guarantee from arising.
• There was no evidence of actual fraud, equitable fraud, or abuse of the 1st Defendant’s corporate personality to justify piercing the corporate veil and imposing liability on the 2nd Defendant.
• The 1st Defendant was not a nominal or shell company—it actively managed the mall’s retail operations.

The Court of Appeal’s Decision

On 9 February 2026, the Court of Appeal, in a judgment delivered by Justice Wong Kian Kheong, set aside the High Court’s judgment against the developer. The appellate court held that the trial judge had made “a plain error of mixed fact and law, by piercing the 1st Defendant’s corporate veil and imposing the 1st Defendant’s liability on the 2nd Defendant.” In short, the High Court had applied the wrong test—it had relied on factors that, even if factually true, were legally insufficient to justify piercing the veil.

Citing a key principle from SPM Energy Sdn Bhd v Multi‑Discovery Sdn Bhd (2015), the Court of Appeal explained that piercing a corporate veil requires proof of actual fraud or unconscionable conduct. Evasion of obligations, abuse of corporate personality, special circumstances, the “interest of justice,” and control are not, by themselves, enough to justify piercing. If they were, the fundamental principle that each company is a separate legal person—enshrined in Section 20 of the Companies Act 2016—would be undermined.

Lifting vs Piercing

The Court of Appeal drew a distinction that is often overlooked. Lifting the corporate veil means looking behind a company’s separate personality to understand the true facts, without imposing liability on anyone else. Piercing the veil goes a step further: it imposes a company’s liability on another person or entity. Because the case was about piercing, a stricter test applied.

When Can a Court Pierce a Company’s Corporate Veil?

The central question is this: when can a court use its discretionary power to pierce one company’s corporate veil and impose its liability on another? The Court of Appeal held that to do so, the party seeking the order must prove one of two things:

1. Actual fraud – a dishonest, wilful act to cheat someone of a known existing right. The court quoted PJTV Denson (M) Sdn Bhd v Roxy (M) Sdn Bhd [1980], which said “if the designed object of a transfer is to cheat a man of a known existing right, that is fraudulent.”
2. Equitable or constructive fraud – unconscionable conduct that falls short of actual fraud but is nevertheless so unfair that equity will not permit it to stand. The court referred to Rasiah Munusamy v Lim Tan & Sons Sdn Bhd [1985], which described it as “unmeritorious and unconscionable conduct,” and to Takako Sakao v Ng Pek Yuen [2009], where the Federal Court explained that equitable fraud does not require proof of an intention to deceive.

Only if one of these two exceptions is proved can the court pierce the corporate veil. In this case, the purchasers had not pleaded either actual fraud or equitable fraud in their Statement of Claim, nor had they adduced evidence to support either exception. The Court of Appeal therefore concluded that the High Court had no legal basis to pierce the 1st Defendant’s corporate veil and impose liability on the 2nd Defendant.

Further Grounds That Reinforced the Decision

The purchasers’ failure to plead and prove fraud was the fundamental reason the veil could not be pierced. The Court of Appeal, however, went on to give several additional reasons that reinforced its conclusion.

• The tenant was not a shell company. The Court of Appeal found that the 1st Defendant was a genuine operating company. There was documentary evidence that it had organised events and promotions at the mall and actively managed the retail operations. A nominal or shell company, the court observed, would not have conducted such activities. This finding undermined the purchasers’ argument that the tenant was merely a vehicle created to absorb liabilities.
• The developer had lawfully arranged its corporate affairs. Following ARL Associates and the English case of Adams v Cape Industries, the court recognised that a corporate group may legitimately structure itself so that one entity builds and sells, while another rents and manages. This is not, by itself, evidence of wrongdoing. The arrangement did not involve any illegality, and it did not deprive anyone of their existing rights.
• The parol evidence rule. The Sale and Purchase Agreements contained an entire‑agreement clause. Clause 39 of the SPAs stated that the written contract was the whole agreement between the parties and superseded any prior understandings. It also required any variation to be in writing and signed by all parties. Because of these clauses, the court could not imply that the developer had guaranteed the tenant’s rent. Sections 91 and 92 of the Evidence Act 1950—the parol evidence rule—reinforced this conclusion: extrinsic evidence could not be used to add terms to a written contract that was expressed to be complete.
• The doctrine of estoppel. The High Court had wrongly applied the doctrine of estoppel. The purchasers argued that they had bought the units in reliance on the rental promise, and that it would be unjust to let the developer escape liability. The Court of Appeal disagreed. Once the two fraud‑based exceptions were not proved, estoppel could not be used to achieve the same result. To hold otherwise would allow the corporate veil to be pierced too easily, bypassing the strict protections that company law provides.

Practical Takeaways

1. Piercing the corporate veil is exceptional, not routine. A court will not impose one company’s liability on another simply because the two are related, share directors, or appear to act as a single group. The party seeking to pierce the veil must prove actual fraud or equitable (unconscionable) conduct. Control, evasion, and the “interest of justice” are not enough on their own.
2. A corporate group has a right to arrange its affairs to manage risk. It is lawful for one company to build and sell, and another to rent and manage, as long as the structure is not illegal and does not deprive anyone of existing rights. This is a legitimate business decision, not evidence of wrongdoing.
3. Entire‑agreement clauses are powerful shields. If your contract says it is the whole agreement and cannot be varied except in writing, courts will enforce that. A party cannot later argue that an unwritten promise—such as a parent‑company guarantee—was part of the deal.
4. Estoppel cannot replace the need to prove fraud. Even if a party relied on a representation, estoppel alone is not a ground for piercing the corporate veil. If the fraud exceptions are not proved, estoppel cannot be used to achieve the same result.
5. Plead and prove your case precisely. A party who wishes to pierce the veil must specifically plead actual fraud or equitable fraud in its statement of claim and adduce evidence to support it. A failure to do so is fatal.
6. Document your corporate structure and its commercial rationale. The Court of Appeal placed weight on evidence that the tenant was a genuine operating company—it ran events, managed the mall, and was not a shell. Being able to demonstrate the business substance of each entity helps protect the corporate structure.

A Closing Thought

The unit purchasers won a judgment against the tenant. That judgment had value, and it could be enforced. What they could not do was reach the developer, because the law draws a firm line between one company’s debts and another’s. Capital City Property reaffirms that line.

Piercing the corporate veil is not an equitable remedy to be deployed whenever a result feels unfair. It is a precise legal tool, available only when there is proof of dishonesty or truly unconscionable conduct. Control, common directors, shared offices—these are features of countless legitimate corporate structures, and they do not, without more, justify ignoring a company’s separate legal personality.

For directors, in‑house counsel, and anyone who sets up or advises on corporate structures, the message from the Court of Appeal is clear: you may lawfully arrange your affairs to manage risk, provided you do not cross the line into illegality or deprive anyone of their existing rights. The veil is real, and it will be pierced only when the evidence compels it.

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