Piercing the corporate veil and your remedies
24 Oct 2019
An important legal principle exists that few stakeholders consider or understand and allows for shareholders and directors who use the company structure to hide their fraudulent or dishonest activity to be held personally accountable for their actions.
The benefit of the company structure is that it provides for the limitation of liability of the participants in the business. However, this exclusion of liability of participants inside the business is not an absolute right. There are certain circumstances which makes it possible to separate between the legal personality of the company and that of its directors and shareholders. This separation may be done in two ways: either in terms of the common law principle known as “piercing” or “lifting” the corporate veil or by means of the provisions of section 20(9) of the Companies Act No. 71 of 2008 (“Companies Act”).
In accordance with our common law, in Dadoo Ltd and other v Krugersdorp Municipal Council it was held that: “This conception of the existence of a company as a separate entity distinct from its shareholders is no merely artificial and technical thing. It is a matter of substance; … Cases may arise concerning the existence or attributes which in the nature of things cannot be associated with a purely legal persona. And then it may be necessary to look behind the company and to pay regard to the personality of the shareholders, who compose it.”
In Cape Pacific v Lubner Controlling Investments (Pty) Ltd and others the concept of piercing the corporate veil was explained as disregarding the division between a company and the person who controls it and then attributing liability to the person who misused the principle of a separate legal personality. However, it should be borne in mind that to preserve the integrity of the principle of legal personality, the Courts are of the persuasion that they will only lift the corporate veil in exceptional circumstances where no alternative remedy exists.
Should piercing the corporate veil by means of common law then fail, there exist the provision of section 20(9) of the Companies Act. Section 20(9) provides that if a Court finds that the incorporation of a company, any use of a company, or any act by or on behalf of the company, constitute an unconscionable abuse of its juristic personality, the Court may declare that the company is to be deemed not to be a juristic person in respects of any rights, liabilities and obligations relating to the abuse.
The provision of section 20(9) ignores the view expressed in the Cape Pacific case as there is no indication that section 20(9) has to be regarded as a remedy of last resort, meaning that the remedy is available to applicants despite the existence of other legal remedies.
It is important then to be reminded that your actions as a director and shareholder aren’t consequences free and that you may not always receive the protection afforded by the company structure.
- CIPC Guideline for Corporate Compliance Programme: Managing the risk of corruption
- The South African King IV Report on Corporate Governance: Themes and variations
- Delinquent directors and the shareholder – Director conundrum