Our law recognises that once incorporated, a company acquires an independent legal personality and existence, separate from its incorporators, shareholders or directors. As such the company acquires its own rights and incurs its own legal obligations. The incorporation of a company therefore gives rise to the so-called corporate veil. The corporate veil falls between the company as a separate entity and its shareholders and directors in such a way that it hides them from the view of outsiders looking at the company. When the veil is pierced, the separate existence of the company falls away and the rights, liabilities or activities of the company are treated as those of its members in their personal capacity.

The court often pierces the corporate veil in an attempt to prevent the abuse of the corporate personality by directors and shareholders of the company. If the corporate personality has been used as a device to either cover fraud or improper conduct, or in instances where it has been used as an "alter ego", and it was not "just and equitable", to have done so, the court would pierce the corporate veil. Personal liability would then be attributed to those who are misusing the principle of the separate corporate personality.

Common law

At common law, as gleaned from past legal judgments, there are no specific guidelines as to when a court would pierce the corporate veil. In the case of Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd and Others 1995 (4) SA 790 (A), the then Appellate Division laid down a few principles relating to the circumstances in which a court would pierce the veil. These principles should not be seen as mandatory as the decision by a court to pierce the veil would depend on the facts of each case.

The court stated that, “as a general principle, where there is fraud, dishonesty or other improper conduct, a balancing approach must be adopted that requires the concept of separate legal personality being weighed against those principles and policies in favour of piercing the veil. In adopting such an approach, a court would be entitled to look to substance rather than form”. The courts should not lightly disregard a company’s separate personality, but should strive to give effect thereto and to uphold it. A court therefore does not have a general discretion to simply disregard a company’s separate legal personality whenever it considers it just to do so.

It should be noted that in the case of Hülse-Reutter and Others v Gödde 2001 (4) SA 1336 (SCA) the Supreme Court of Appeal (SCA) re-iterated the fact that there are no specific guidelines as to when a court would pierce the veil and that these guidelines are far from settled, it would depend on a close analysis of the facts of each case. The court further stated that as a matter of principle, “there has to at least be some misuse or abuse of the distinction between the corporate entity and those who control it, which would result in an unfair advantage being afforded to those who control the corporate entity”.

It is clear from the above that piercing the veil is an exceptional procedure which is to be used as a remedy of last resort. There has to be a compelling reason for a court to ignore the separate legal existence of a company. This was re-iterated in the case of Amlin (SA) Pty Ltd v Van Kooij 2008 (2) 558 (C) where the court stated that “piercing the veil is a drastic remedy. It therefore should be resorted to sparingly and as a measure of last resort, in circumstances where justice will not otherwise be done between two litigants”.

The Companies Act

Section 20 (9) of the Companies Act, No 73 of 2008 states that “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”; and

b) “make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a).”

In terms of the above section “any interested person” may apply to court requesting the court to deem a company not to be a juristic person. There is no specific definition of who an interested person might be. However in the case of TJ Jonck BK h/a Bothaville Vleismark v Du Plessis NO en ‘n Ander 1998 (1) SA 971 (O) the phrase “any interested person” was explained with reference to its meaning in terms of section 65 of the Close Corporations Act.

The court stated that the phrase should not be interpreted too restrictively, but at the same time it should not be interpreted too widely as to include an indirect interest. This interest is limited to a financial or monetary interest”.
The phrase “unconscionable abuse” has also not been defined and there are no guidelines as to what constitutes an unconscionable abuse of the juristic personality of the company as a separate entity.

Unconscionable abuse of the juristic personality of a company may occur in three instances, namely:

a) on the incorporation of the company;
b) as a result of any use of the company as a legal entity; and
c) as a result of any act by, or on behalf of, the company.

It is important to remember that the test for piercing the corporate veil as set out in Section 20(9) of the Act focuses only on the abuse of the juristic personality of the company as a separate entity and on whether the said abuse constitutes unconscionable abuse. It is not a requirement that the abuse has to result in an unfair advantage being afforded to those who control the company, as was laid down in the Hülse-Reutter case.

In instances where the requirement of Section 20(9) cannot be met, then the common law remedy of piercing the corporate veil would probably apply, as Section 20(9) does not override the common law approach of piercing the veil.

Conclusion

Section 20(9) allows for statutory provisions in terms of which it gives courts a general authority to pierce the corporate veil. The phrase “unconscionable abuse” of juristic personality of the company as a separate entity, has not been defined and there are no guidelines in relation thereto. However,  the guidelines set out in the case of Cape Pacific Ltd can be relied upon, when interpreting whether or not the corporate veil should be pierced.

Written by Meegan Henkeman, Schoeman Tshaka Attorneys (Cape Town)

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