THE NEW COMPANIES ACT: PIERCING THE CORPORATE VEIL

For the first time in South African company law, the remedy known as 'piercing the corporate veil' has been incorporated into our company legislation.  Until the enactment of the Companies Act 2008, this remedy only existed under common law. 

What is meant by the phrase 'piercing the corporate veil'?

A company's separate legal personality is often referred to as a 'veil', which separates the company from its shareholders.  The phrase 'piercing the corporate veil' is used when a court disregards the company's separate legal personality, and treats the company's shareholders as the owners of the company's assets, who conduct the company's business in their personal capacities.

Section 20(9)

The 'piercing of the corporate veil' statutory provision is contained in section 20(9) of the Companies Act, and provides that:

'(9)  If, on application by an interested person or in any proceedings in which a company is involved, a court finds that the incorporation of the company, any use of the company, or any act by or on behalf of the company, constitutes an unconscionable abuse of the juristic personality of the company as a separate entity, the court may—

(a)        declare that the company is to be deemed not to be a juristic person in respect of any right, obligation or liability of the company or of a shareholder of the company or, in the case of a non-profit company, a member of the company, or of another person specified in the declaration; and

(b)        make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a).'

This provision raises several questions, for example, who is an 'interested person', and what is 'unconscionable abuse'?  These terms have not been defined in the Companies Act 2008, and it has been suggested that they may be interpreted with reference to the Close Corporations Act (which contains a similar provision) and the judgments handed down in terms thereof. 

Unconscionable Abuse

When considering the judgments handed down under the Close Corporations Act, it should be noted that it refers to 'gross abuse' as opposed to 'unconscionable abuse'.

In the following cases, the court held that there was a 'gross abuse' of the close corporation, and the members should be held jointly and severally liable for the debts of the close corporation:

Haygro Catering BK v Van der Merwe – the name of the close corporation, including the abbreviation 'CC', had not been displayed anywhere at the     corporation's business premises or on its documentation;

TJ Jonck BK h/a Bothaville Vleismark v Du Plessis NO – the sole member loaned an amount to the close corporation despite knowing that it was insolvent, and thereafter registered a notarial bond in his favour over the corporation's movable assets.  When the corporation was unable to repay the loan, the   member perfected the notarial bond and took possession of the movable assets.  The member used the assets to continue trading under a new name.  This in effect meant that the close corporation was an empty shell with nothing for its creditors to attach;

Airport Cold Storage (Pty) Ltd v Ebrahim – in this case the court considered the fact that the close corporation formed part of a conglomerate of family  businesses that had all been run without much regard to their separate legal personality; the corporation did not keep proper books of account, and no accounting officer had been appointed; and the corporation voluntarily assumed a debt owing by the family business.  The court remarked that when it suited the     members, they ignored the separate legal personality of the corporation, and therefore could not now rely on it.

Interested Person

In the TJ Jonck BK h/a Bothaville Vleismark case, the court held that the term 'interested person' should not be interpreted too widely to include any indirect interest.  Furthermore, an interest must be limited to a financial or monetary interest.  For example, a creditor will be regarded as an interested person.

Conclusion

Section 20(9) gives a court the general authority to pierce the corporate veil, but there are clearly uncertainties surrounding its application.  It will be up to our courts to give some substance to this provision and in particular, to interpret the meaning of 'unconscionable abuse' and interested person'.