One of the cornerstones of conducting business and other affairs through a company is the firmly entrenched principle of separate legal personality. Separate legal personality means that the rights and obligations of a company are completely separate from those of its incorporators, shareholders and directors. For example, if a company incurs a debt, the debt is owed solely by the company and the shareholders cannot be held accountable in respect to that debt (unless the shareholders have entered into a surety agreement or other form of security where personal liability follows).
Separate legal personality has been recognised for many years in our common law, and is firmly entrenched in legislation, including our Constitution.
Our Companies Act [71 of 2008] specifically recognises in section 19(2) that:
“A person is not, solely by reason of being an incorporator, shareholder or director of a company, liable for any liabilities or obligations of the company, except to the extent that this Act or the company’s Memorandum of Incorporation provides otherwise.”
It has, however, been recognised that there exists a tension between legal form and the substantive reality of the way companies are run. This is the case particularly in the event that any abuse of the separate legal status is committed by the directors and/or shareholders of a company. It is, therefore, possible that the separate legal personality of a company may be disregarded, which is known and referred to by our courts as “piercing the corporate veil”. The question which arises, however, is when a disregard of this nature can be justified.
Various legislation deals with this issue. For example, section 65 of the Close Corporations Act [69 of 1984] provides as follows:
“Whenever a Court on application by an interested person, or in any proceedings in which a corporation is involved, finds that the incorporation of, or any act by or on behalf of, or any use of, that corporation, constitutes a gross abuse of the juristic personality of the corporation as a separate entity, the Court may declare that the corporation is to be deemed not to be a juristic person in respect of such rights, obligations or liabilities of the corporation, or of such member or members thereof, or of such other person or persons, as are specified in the declaration, and the Court may give such further order or orders as it may deem fit in order to give effect to such declaration.”
Our Companies Act also deals with this issue, with section 20(9) of the Companies Act, 2008 providing as follows:
“If, on application by an interested person or in any proceedings in which a company is involved, a court finds that the incorporation of the company, any use of the company, or any act by or on behalf of the company, constitutes an unconscionable abuse of the juristic personality of the company as a separate entity, the court may – (a) declare that the company is to be deemed not to be a juristic person in respect of any right, obligation or liability of the company or of a shareholder of the company or, in the case of a non-profit company, a member of the company, or of another person specified in the declaration.”
It is therefore noted that in respect to the Close Corporations Act, a gross abuse of juristic personality must be present, and in the case of a company, an unconscionable abuse of juristic personality must be present. The difference between what constitutes a gross abuse or unconscionable abuse is not clear, and may be negligible in practice.
Furthermore, our courts have grappled with this issue over the years, which has resulted in jurisprudence to assist and guide in this regard. Our courts have favoured the use of the principle of the “alter ego” in determining whether there has been an abuse of juristic personality, as noted in the case of Airports Cold Storage (Pty) Ltd v Ebrahim & Others [2008(2) CPD 303].
Our courts have also recognised that the fraudulent use of the company, as well as unconscionable injustice as a result of improper conduct could justify the piercing of the corporate veil [See: Lategan and Another NNO v Boyes and Another 1980 (4) SA 191 (T) and Botha v Van Niekerk En ‘n Ander 1983 (3) SA 513 (W)]. The court in the decision in Cape Pacific v Lubner Controlling Investments (Pty) Ltd and Others [1995 (4) SA 790 (A)], however, opted not to use the requirements of fraud or unconscionable injustice as justification for piercing of the corporate veil, but rather opted to proceed on a flexible and equitable basis.
However, in the later decision of Hülse-Reutter v Gödde [2001 (4) SA 1336 (SCA)], the court held that there must at least be some misuse or abuse of the distinction between the corporate entity and those who control it, which results in an unfair advantage being afforded to the latter. What is interesting to note in this decision was that the court rejected the more flexible approach as per the Cape Pacific v Lubner decision, and reverted to a more formulistic, categorical approach.
To sum up, while piercing of the corporate veil can be successfully effected by the courts in certain circumstances, it must be noted that it is a difficult remedy to enforce, with jurisprudence that has often been inconsistent and contradictory. What is clear is that whatever the circumstances, it should be a remedy of last resort.
The notion of separate legal personality will therefore remain an entrenched and important aspect of our company law, with common law and legislation recognising that veil piercing will only be an option under exceptional circumstances.
It is imperative to determine all of the above, as well as all other available remedies prior to instituting any action in any legal proceedings. Contact us to determine what your best possible solution should be in the event that any “piercing of the corporate veil” action is being considered, or in the event that there has been any abuse of separate legal personality or other company function.