Lifting of Corporate Veil – Whether action can be taken against the directors of a company for a company debt.

Chin Chee Keong v Toling Corporation (M) Sdn Bhd [2016] 4 MLRA 180 CA

• The respondent or plaintiff was a former partner in a legal firm known as Messrs Junaidah Mogana & Partners. The legal firm had two partners, namely, the plaintiff and one Junaidah bin Mohd Noh.
• The legal firm, as the customer of RHB Bank Berhad (the “bank”) had two accounts with the bank; a client’s account and an office account.
• The plaintiff was the sole signatory for cheques for both these accounts.
• In 2004, the plaintiff had left the country to further her studies in Japan. She then gave the bank a letter advising the bank that her husband (“Harikrishnan”) had been appointed and given the mandate to sign cheques for both accounts of the firm.
• The Plaintiff also informed the bank that the she authorised the firm’s dispatch clerk (“Mohd Safi”) to encash cheques on behalf of the legal firm.
• While the Plaintiff was away, she had asked her sister (“Devaki”) to retain custody of the cheque books containing cheque leaves pre-signed by by Harikrishnan.
• Thus, all cheques in the firm were filled in by either Umapathy or Harikrishnan and they took instruction from Junaidah or Umapathy.
• The legal firm’s offical rubber stamp remained the same and was under the possession and control of Junaidah.
• In 2006, the plaintiff discovered that unauthorised transactions had been carried out involving both the bank account.
• Thus, the plaintiff instituted a claim founded on negligence against the bank on the grounds that the bank had failed to comply with the mandates given by it to the bank. The bank maintained that it had acted in accordance with the valid mandate.

• The High Court concluded that the Bank had breached the duty of care owed to the plaintiff. Hence, the present appeal by the Bank.

• The Bank had followed the standard procedure when presented with a cash cheque which is essentially to ensure that the cheque has been signed by an authorised signatory in accordance with its mandate.

• A duty of care would be owed by the customer to the bank to ensure that it exercises due care in the drawing of cheques so as to preclude fraud or forgery. The case is not one of forged cheques.
• In this case, the pre-signing of the cheques indicates that the required mandate is accorded to the bank.
• The bank’s duty of care does not extend to detecting internal fraud on part of its customers’ employee.

•  The extraordinary internal system of issuance of cheques adopted by the plaintiff had contributed to the facilitation of internal fraud.
• The legal firm had failed to exercise due care and caution in the drawing and issuance of cheques, failed to put a system in place to safeguard against the acts and ommissions of its employees and partners and failed to monitor transactions from these two accounts separately.
• The legal firm had contributorily negligent in allowing the pre-signing of cheques and the protocol adopted for the issuance of the cheques.
• Hence, negligence cannot be said to have been established against the bank.