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Piercing of the Corporate Veil

From the time of its inception, a company is legally separate from its members. This principle is described as the corporate veil. However, a court may, in exceptional circumstances, ‘pierce’ or ‘lift’ the corporate veil and hold the directors and/ or members personally liable for debts of the company.

Piercing the corporate veil refers to those exceptional circumstances where the court ignores the separate legal existence of the company and treats the members as if they were the owners of the assets and had conducted the business of the company in their personal capacities or attributes certain rights or obligations of the company to the members. Moreover, and as echoed in Cape Pacific v Lubner Controlling Investments (Pty) Ltd, exceptional circumstances refer to when a company has been legitimately established and is legitimately operated, but is misused or abused in order to perpetuate a fraud, or for dishonest or improper purposes.

The court commented in Airport Cold Storage (Pty) Ltd v Ebrahim and Others, while companies generally enjoy extensive protection against personal liability, ‘such protection is not absolute as the court has the power, in certain exceptional circumstances, to ‘pierce’ or ‘lift’ or ‘pull aside’ the corporate veil and to hold the directors and others personally liable for the debts of the company. Piercing the veil is an exceptional procedure, a drastic remedy and courts do not easily resort to it. As stated in Hülse Reutter v Gödde, piercing the veil is a remedy of last resort (where no other remedy is available). This can be done where corporate personality has been abused by those in control of the company, to the detriment or disadvantage of others (where the company is a façade concealing the true state of affairs).

Further, section 20(9) of the Companies Act 71 of 2008 (“the Act”), provides the statutory basis for piercing the corporate veil, requiring an unconscionable abuse of the company’s juristic personality as a separate entity. The court in terms of the said section may declare that the company is to be deemed not to be a juristic person and make any further order the court considers appropriate.

In the case of Ex Parte Gore NNO, Binns-Ward J based his decision on section 20(9) of the Act in that the actions by a main holding company constituted ‘unconscionable abuse’ of the juristic personalities of the subsidiary companies. The court held that it was clear that the directors disregarded the separate corporate personalities of the companies that formed part of the group. The court, further, held that the group of companies were in fact a sham. The court pierced the corporate veil by stating that the separate legal existence of the subsidiary companies as a single entity had to be ignored and that the main holding company had to be considered to be as if it were the only company. This is because there was widespread irregularity in the manner in which the business activities were conducted, and it was established that the affairs of the group were conducted in a manner that constituted no distinguishable corporate identity between the various constituent companies in the group.

Therefore, the court will not lightly pierce the corporate veil but will do so where fraud, dishonesty or improper conduct or abuse of corporate personality has taken place.

Written by Chloe Scholtz

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.

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