The doctrine of the corporate veil suggests that the legal personality of a company and the personalities of its shareholders and directors are separated. The corporate veil is regarded as the general principle in terms of a company’s liability.
It is clear that legal personality of a company can be disregarded in certain circumstances. The legal question in Ferreira v Levin 1996 (1) SA 984 (CC) dealt with the extent to which the interrogations of directors could be used in the liquidation of a company. Judge Ackerman dealt with this question against the backdrop of legal personality (“corporate veil”). The learned Judge concluded that the corporate veil cannot stand in the way of the public interest, but added that while directors may be interrogated, the information can not be used in criminal proceedings.
The corporate veil can be disregarded or pierced in terms of the common law and statutory provisions.
2. Common Law Veil Piercing
2.1. Specific disregard in terms of the Common Law: Directing Minds Principle
The Directing Minds Principle states that when a natural person acts on behalf of a company the intentions and conduct of the natural persons (directing mind) are imputed to the company’s intentions and conduct. In short, the actions of the directing minds are seen as the actions of the company.
2.2. General Piercing of the Corporate Veil in terms of the Common Law.
It was initially debated within the legal community whether the corporate veil could be pierced. However, in Cape Pacific v Lubner Controlling Investments 1995 (4) SA 790 (AD) (“Cape Pacific”) and Huelse-Reuter v Godde 2002 (2) SA 211 (A) (“Huelse-Reuter”), the court emphasised the importance of separate legal personality and that it would only be disregarded in extreme circumstances. Subsequently, courts do not have a general discretion to pierce the corporate veil.
The test used for piecing the corporate veil was formulated in The Shipping Corporation of India Pty Ltd v Evdomon Corporation and Another 1994 (1) SA 550 (A), where the court held that:
“The corporate veil may be pierced where there is proof of fraud, dishonesty or other improper conduct in the establishment or the use of the company or the conduct of its affairs…”
In Cape Pacific, the court stated that even if all the requirements are met, it does not automatically propose that the corporate veil be pierced. The court has to weigh the interests of both concerned parties and consider the policy consideration of whether the requesting party has, at its disposal, another effective remedy.
In Huelse-Reuter, it emerged that it is not merely sufficient to prove that someone’s conduct was improper, fraudulent or dishonest. It must also be proven that the improper and fraudulent conduct was accompanied with abuse of the independent legal personality. The Court further held that an additional requirement must be proved before the veil can be pierced, namely that the plaintiff must satisfy the court that the defendant received an unjustified benefit.
In circumstances where the corporate veil is pierced, it does not suggest that the company’s legal personality is disregarded for all intents and purposes, but will generally be disregarded in specific instances and for a particular period
3. Statutory Veil Piercing in terms of the Companies Act No. 71 of 2008 (“Act”)
Statutory provisions emphasise the fact that the corporate veil is not absolute. Section 20(9) of the Act provides the court with discretion to a certain degree and therefore directors can be held personally liable for various civil and criminal acts performed by the company.
In the recent judgment, Ex parte Gore NO and Other NNO 2013 (2) SA 437 (WC),it was held that section 20(9) of the Act is the statutory remedy for piercing the corporate veil. The court pinioned that there was an “unconscionable abuse” of the corporate veil and therefore section 20(9) of the Act was applicable. The court noted that the common law does not provide for a closed list of circumstances in which the court will pierce the corporate veil. The court further held that section 20(9) of the Act will not override, but rather supplement the common law. The statutory remedy appears to provide fewer restraints than the common law remedy, which may only be used in exceptional circumstances.
In terms of section 20(6) of the Act, shareholders can institute an action against any person who intentionally, fraudulently or through gross negligence disregarded provisions of the Act or the memorandum of incorporation of the company.
Section 77(3) of the Act makes provision for certain circumstances where directors of a company can be held liable by the company for any actions that were carried out by the company. Section 88(1) (d) of the Act (section 344 of Companies Act No. 61 of 1973) makes provision for application to a court for the liquidation of a company in circumstances that are just and equitable. This suggests that a court must go behind the corporate veil in order to determine whether there are grounds for liquidation.
Section 218(2) of the Act states that:
“Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention“.
Acts which warrant criminal liability include inter alia, breach of confidence, false statements, reckless conduct and non- compliance. Acts which give rise to civil liability include inter alia, fraudulent or gross negligent acts inconsistent with a restriction in the Act or the company’s memorandum of incorporation.
There are obvious benefits attributed to having a separate independent legal personality, however it must be stressed that notwithstanding the aforesaid, natural persons controlling the company may be held personally liable for damages or loss caused by the company. The importance of the Act’s provisions relating to piercing the corporate veil must be emphasised in terms of fairness, improvement of corporate management and providing additional legal measures.