Legal Articles

Upon the registration of a private company, it assumes its own distinct legal personality, separate from its shareholders who in most cases are its Directors. What this means in simple terms is that the company can now enter into contracts, sue and be sued in its own capacity. The clearest expression of this principle was held in the landmark case of Salomon v Salomon [1897] A.C. 22. However, the Courts have presided over cases whereby the separate legal personality of a company has been abused to commit fraud, dishonesty and improper conduct.

It is important to emphasise at this stage that, owing to the fact that it is a principle of our law that a private company assumes distinct legal personality (juristic person) upon registration and therefore is able to enter into contracts in its own capacity, the Courts have no general discretion to disregard this distinct legal personality. However, where the facts of each particular case, judicial judgment as well as considerations of policy require that the distinction between the company and those who control it (shareholders / directors) be disregarded, the Courts have a discretion to do so. Therefore, it is not a given that when a Plaintiff is under the supposition that his loss is as a direct result of fraudulent, improper or dishonest conduct by the owners of the company, the Courts will ‘pierce the veil,’ the Court will treat each case on its own merits.

In the cases of Lategan and Another NNO v Boyes and Another 1980 (4) SA 191 (T) and Botha v Van Niekerk En ‘n Ander 1983 (3) SA 513 (W) it was confirmed that the Courts are indeed prepared to pierce the corporate veil where improper, dishonest or fraudulent conduct is evident, whilst in Cape Pacific v Lubner Controlling Investments (Pty) Ltd and Others 1995 (4) SA 790 (A) the Court chose a more flexible approach to justify piercing the corporate veil. This confirms that each matter is treated on its own merits.

In the case of Orkin Bros Ltd v Bell and Others 1921 TPD 92 the Defendants were held personally liable as they acquired goods on credit whilst fully aware that the company had no means / resources to honour the payment obligations. Similarly, in Knoop NO and Others v Birkenstock Properties (Pty) Ltd and Other (Unreported case no 7095/2008), the Court held that;

“The corporate veil may be pierced where there is proof of dishonesty, improper conduct or fraud in the establishment or the use of the company or the conduct of its affairs and in this regard, it may be convenient to consider whether the transactions complained of were part of a “cloak”, “device” or a “sham.”

The Companies Act Amendment Act 3 of 2011 inserted subsection 9 into the Companies Act 71 of 2008. It reads as follows;

20 (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).

Despite a private company having separate legal personality with capacity to be sued, to sue and enter into contracts on its own, the Courts are prepared to disregard distinct legal personality where judicial judgment, facts of the matter and policy considerations require that the corporate veil be pierced. Riding on the separate legal personality of a company to commit fraud, dishonesty and improper conduct is not without repercussions.

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