Nowhere to run or hide: Directors can be held personally liable for employee dismissals

31 Mar 2023

Most directors conduct business behind the protective veil of limited liability offered by the separate corporate identities of companies. Directors innocently believe that this protection applies no matter the circumstances.

However, what happens if directors abuse this protection by, for example, not following correct labour practices, and subsequently seek to disguise their conduct by relying on the separate juristic personality of the company to shield themselves from any personal harm or liability? Would this pass the acid test in Court? It is not always the case that directors may hide behind the corporate veil, which may indeed be pierced in particular circumstances.

In the recent Labour Court matter of Moloney and others v 3D Design Close Corporation t/a Muga Design and others [2023] (LC) (“Moloney”), the trial of which was conducted by our very own Tasso Anestidis, the Labour Court was faced with this very scenario: in which instances may a Court justify the piercing of the corporate veil to hold the directors of a company personally liable for the acts of the company.

Lifting the corporate veil entails a Court ignoring the distinction between the company and the natural person behind it and stripping the protective covering of the limited liability presented by the company structure, with the aim of preventing the abuse of the corporate personality by directors and shareholders of the company. To this end, the Court will hold the person/s who has abused the company’s separate personality liable for the obligations they have tried to evade.

In the Moloney case, the applicants were employed by the first respondent (“Muga Design”). The remaining respondents comprised of the other entities that formed the 3D Group of Companies (“3D Group”). The applicants were summarily dismissed after being informed that Muga Design was undergoing voluntary liquidation. Shortly thereafter, the respondents registered two new entities within the 3D Group and transferred the remaining employees from Muga Design to the newly formed entities along with the functions and operations of Muga Design. The Court found that the closure of Muga Design was merely a stratagem to unlawfully dismiss the applicants, and that the registration of the new entities was a façade.

The Court ultimately pierced the veil and held the two directors of the 3D Group (being two brothers) liable for the dismissals of the applicants. In doing so, the Court relied on, among other things, the fact that the:

1. dismissals of the applicants were clearly automatically unfair, since the ‘liquidation’ of Muga Design was merely for convenience and to the immense detriment of the applicants’ interests and their rights in law;
2. obvious pretense surrounding the apparent liquidation of Muga Design, followed by the immediate registration of the two new entities within the 3D Group; and
3. random selection of employees from Muga Design who were transferred to the two new entities for the performance of continued business activity of Muga Design.

The piercing of the corporate veil is an exceptional procedure, which will be invoked mostly in circumstances where there is fraud and/or other improper conduct in the establishment or the use of the company to conduct nefarious affairs.

In what is considered to be a very rare judgment, the Court awarded the maximum compensation to the applicants (i.e. 24 months’ compensation), but more importantly, pierced the corporate veil. The judgment serves as a stark warning to directors and shareholders that the improper utilisation of the corporate identities of the companies of which they are part as their ‘alter egos’, can be pierced in exceptional circumstances.

Article sourced from Eversheds Sutherland.

See also:

• Piercing the corporate veil
• The corporate veil explained
• Medical boarding – Sorry, no more space for you
• Piercing the corporate veil and your remedies

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)