Piercing the Corporate Veil – What is it and when can it happen?

3D printingIntroduction

In order to explore the practical application of the piercing of the corporate veil, we need to unpack the nature of the surrounding environment – the company, first.

A company can be described as a juristic person that enjoys a separate legal personality, from its members, that has been incorporated in terms of the Companies Act No. 71 of 2008 as amended (the “Act”). A foreign company and a trust, irrespective of whether it was established in the Republic of South Africa or not may also be a juristic person.

According to section 19 of the Act, a company enjoys separate legal personality in that a company has all of the legal powers and capacity that an individual has, except for marriage of course. A result thereof is limited liability for the incorporators, shareholders and directors of such a company as the debt and liabilities incurred belong to the company in question (and not its members).

 

Piercing the corporate veil

Piercing the corporate veil was a remedy available at common law. The aim thereof was to provide a mechanism to remedy the abuse of separate legal personality by companies. The implications associated with piercing the corporate veil was that the shield of separate legal personality created between a company and its incorporators, shareholders and directors would be ignored and the incorporators, shareholders and directors would be treated as if they had conducted the business of the company in their personal capacity, or certain rights or obligations of the company would be directly attributed to them. In Hulse Reutter v Godde 2001 (4) SA 1336 SCA, piercing the corporate veil was described to be an exceptional remedy. The common law remedy was codified by the Act and is now provided for in section 20(9).

Section 20(9) of the Act states that, should it be found that the incorporation of a company, any use of the company or any act by or on behalf of the company, amounts to an unconscionable abuse of separate legal personality, a court may declare that a company is deemed not to be a separate legal personality in terms of any right, obligation or liability of the company.

The Act is silent on what constitutes unconscionable abuse of separate legal personality. We therefore look to case law to provide guidance. In Cape Pacific v Lubner Controlling Investments (Pty) Ltd 1995 (4) SA 790, it was stated that a court may pierce the veil when a company has been misused in order to perpetuate fraud or for a dishonest or improper purpose. The case of Amlin SA (Pty) Ltd v Van Kooij 2008 (2) SA 558 (C) argues in analogy with the abovementioned case in that it held that there is no general discretion to pierce the veil and the court will do so where fraud, dishonesty or improper conduct or abuse of corporate personality exists.

While section 20(9) puts its focus on a company that has abused its status of being a separate legal personality, section 218(2) of the Act provides a remedy to persons who have suffered loss or damage as a result of a person contravening the Act. The Act therefore imposes personal liability to a person in the case of contravention of the Act. Section 218 therefore extends liability to natural persons under the Act.

 

Conclusion

Piercing the corporate veil is a remedy that exists for the abuse of the autonomy of separate legal personality that comes with incorporating a company. Separate personality is however not absolute as it can be ignored in the event that unconscionable abuse of juristic personality is found. It must, however, be noted that piercing the corporate veil is described as an exceptional remedy and must therefore be used as a remedy of last resort.

 

Contact an expert at SchoemanLaw for all your commercial legal needs.

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