Piercing the Corporate Veil

Juristic persons (including companies and close corporations) are seen as one entity in total control of their assets. These juristic persons constitute a separate legal entity which is apart from those who control its day-to-day operations. All actions done for and on behalf of the company are actions seen to be performed by the company itself. They have a legal personality and, therefore, may acquire rights and obligations including ownership. The inception of a company forms a legal barrier between the shareholders and directors in their personal capacities and the debts and wrongful actions of the company. This concept is commonly referred to as the corporate veil.

This is affirmed by section 19 (1) of the Companies Act 71 of 2008, which confirms the principle of a company’s separate personality. Companies, however, may not perform acts which are inherently human in nature such as marriage or occupying land and are, further, incapable of performing acts beyond that stated in their Memorandum of Incorporation. In other respects, a company shares many characteristics with a natural person. They may sue or be sued in their own name, and debts and liabilities of the company fall exclusively within the name of the company.

With the above in mind, if individuals who control the company act in bad faith, gross misconduct or to benefit themselves, what is the recourse within the legal system? The Courts may “Pierce the Corporate Veil” which in Amlin (SA) Pty Ltd v Van Kooij[1] is to open the curtains of the corporate entity to see for itself what is contained inside. The focus will shift from the entity itself to those who control the actions of the company. This allows for persons to be held personally liable for those actions of the company.

The veil is not only pierced in instances of gross misconduct on behalf of the directors but may also be done in the instances when the company is used as an alter ego on behalf of the shareholders. This occurs when the shareholders control the actions of the directors and influence their behaviours. The company is essentially used as a puppet to perform actions on behalf of the shareholders/directors, while escaping personal liability that would ordinarily follow for said actions.

Further, holding companies[2] and their subsidiaries are treated as separate legal entities. These holding companies may use their subsidiaries to conduct business on their behalf. When piercing the veil, the subsidiaries and their holding companies can be treated as one legal entity.

Piercing the veil is not to be confused with the concept of lifting the veil. The two are the same in nature but differ in effect. When courts lift the veil, they are merely ascertaining who the directors and shareholders of the company are. This process does not disregard the separate legal personality of the company nor make the liabilities of the company the concern of the shareholders or directors of the company in their personal capacities.

What is the process of piercing the veil and what do the courts take into account when piercing the veil in our common law? There are no set circumstances as to when courts will pierce the veil. The Supreme Court of Appeal in Hulse-Reutter v Godde,[3] stated that the circumstances to be considered when deciding when the veil may be pierced are far from a closed list.

The Appellate Division presided over the case of Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd,[4] which decided on the principles of piercing the veil as follows:

• The courts should not lightly disregard the separate personality of the company but should strive to uplift it. To hold otherwise would undermine the principle of a separate legal personality.
• The court has no general discretion to simply disregard a company’s separate legal personality whenever it considers it just to do so.
• There are no set characteristics or features of a case which can be set in stone when deciding when to pierce the veil. It must be decided on a case-by-case basis.
• In cases of fraud or dishonesty, the courts would balance the need to preserve the separate legal identity against policy which favours piercing the corporate veil.
• The entire company does not come into disrepute, but it is merely the individuals and their actions which come into scrutiny.
• If there are alternative remedies to piercing the veil, these alone do not exclude the court from piercing the veil.

The Companies Amendment Act 16 of 2024 pushes for more accountability on the behalf of directors specifically amending section 162 of the Companies Act 71 of 2008 which now allows for companies to institute an application for a director to be declared delinquent up to 60 months after they have left the service of the company (whereas it was previously 24 months.

Piercing the veil is not a simple exercise and may oftentimes be convoluted due to the ability of natural persons to hide behind these corporate personalities and therefore camouflaging their actions. It is therefore important to comprehensively outline the factors in favour of piercing the corporate veil in an application to the court and to note that granting such a remedy still remains an extreme remedy in the case of “unconscionable abuse of the juristic personality” as stated in section 20(9) of the Companies Act.

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither 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 and should not be construed as legal advice.