South Africa: Piercing The Corporate Veil When Holding Companies Act As Operators

Last Updated: 19 July 2017
Article by Rurik McKaiser and Samantha Bradshaw

Outline: Abstract – What is a corporate veil? – Piercing the Corporate Veil with §20(9) of the New Companies Act – 1. What is 'unconscionable abuse'? – 2. Who may invoke and use §20(9)? – 3. How is §20(9) to be invoked? – 4. What orders may be made under §20(9)? – 5. Does §20(9) override the common law? – 6. Is §20(9) to be used as a remedy of last resort?

Abstract: We attempt to clarify Section 20(9) of the Companies Act through Stephen Malcolm Gore N.O. case

Three brothers each established a trust for the benefit of themselves and their families and each trust was a shareholder in a holding company with more than 40 subsidiaries. This group provided financial services through marketing investments in real estate with little to no regard to the distinction between that company's legal personality and that of its subsidiaries, going so far as to misrepresent its status as a licensed financial service provider on its letterhead. The court even said that the "flow of funds within the Group appears to have been materially determined by the need of the King brothers to sustain their scheme by finding money to pay out existing investors who wished to withdraw their funds." When the Financial Services Board in South Africa investigated the group, they found consistent fraud, misrepresentation, a severe lack of bookkeeping, and that "entire group was operated, in effect, as one entity through the holding company."1

This gave the South African judicial system its first chance to apply a new provision of its updated company law, Section 20(9) of the Companies Act, 2008, which was meant to provide significantly more certainty and indeed visibility to the doctrine of piercing the veil.

----------------------------------------------------------

What is a corporate veil?

The idea of the corporate veil was first codified nearly 30 years ago under the Close Corporations Act (now partially repealed by the 2008 Companies Act) in South Africa, albeit in a much different form that exists today. Today, the directors and shareholders of a company enjoy extensive protection against personal liability for the actions of the entity because the entity enjoys a fictionalized legal personhood. However, such protection is not absolute as the court has the power – in certain exceptional circumstances to pierce or lift or pull aside the corporate veil and to hold the directors and others personally liable for the debt of the company.2

Piercing the Corporate Veil with §20(9) of the New Companies Act

While there are many ways to pierce the corporate veil under both common and statutory law, we will look specifically at §20(9) of the New Companies Act:3

'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).'

What this effectively means is that interested parties can now approach the court, by motion, for an order that the incorporation, use or any act by or on behalf of the company constitutes an unconscionable abuse of juristic personality and to pierce or lift the corporate veil. However, the new statutory basis for piercing the corporate veil also raised new questions.

  1. What is 'unconscionable abuse'?
  2. Who may invoke and use §20(9)?
  3. How is §20(9) to be invoked?
  4. What orders may be made under §20(9)?
  5. Does §20(9) override the common law?
  6. Is §20(9) to be used as a remedy of last resort?4

We look to the case of Stephen Malcolm Gore N.O. and 37 Others N.N.O WC Case Number 18127/2012, the first case to fully contemplate §20(9) to answer these questions.

1. What is 'unconscionable abuse'?

As §20(9) does not define 'unconscionable abuse', we must look to case law for guidance.

In the Stephen Malcolm Gore case summarized in the beginning of this article, the court stated that "term 'unconscionable abuse of the juristic personality of a company' postulates conduct in relation to the formation and use of companies diverse enough to cover all the descriptive terms like 'sham', 'device', 'stratagem' and the like used in that connection in the earlier cases, and - as the current case illustrates - conceivably much more." The judge went on to list certain actions the King Group had taken that constituted unconscionable abuses such as those that "involved the controllers of the companies treating the group in a way that drew no proper distinction between the separate personalities of the constituent members and in using the investors' funds in a manner inconsistent with what had been represented. The first mentioned category of impropriety, in my view, constituted an unconscionable abuse by the controllers of the juristic personalities of the relevant subsidiary companies as separate entities and brought the case within the ambit of the statutory provision." This means that the subsequent improprieties simply added fuel to the piercing lance of the learned Judge when, in his wisdom, he applied §20(9).

2. Who may invoke §20(9) of the Companies Act?

Section 20(9) permits any 'interested person' to bring an application to court requesting the court to deem a company not to be a juristic person. However, the section also does not define the term 'interested person'.

In TJ Jonck BK t/a Bothaville Vleismark v Du Plessis 1998 (1) SA 971 (O), the court found that term 'interested person' under the Close Corporations Act, was not to be interpreted too restrictively, but at the same time it is not to be interpreted too widely as to include an indirect interest. The court further stated that the interest is limited to a financial or monetary interest. A creditor of a corporation, for instance, would be an interested person.5

In the instance of the King Group, the learned Judge explains his interpretation of 'interested person'.

"I do not think that any mystique should be attached to ['interested person']. The standing of any person to seek a remedy in terms of the provision should be determined on the basis of well-established principle; see Jacobs en 'n Ander v Waks en Andere 1992 (1) SA 521 (A), at 533J-534E, and, of course, if the facts happen to implicate a right in the Bill of Rights, s 38 of the Constitution. There can be no doubting that the applicants have a direct and sufficient interest in the relief sought so as to qualify as 'interested persons' within the meaning of the provision."

Earlier in the judgement, at paragraph 34, the Judge states that "The provision brings about that a remedy can be provided whenever the illegitimate use of the concept of juristic personality adversely affects a third party in a way that reasonably should not be countenanced"

(underlined for emphasis). Thus §20(9) can be evoked by what the Judge's refers to as a third party, further qualified by the explanation that is given to the term interested person, as set out above.

At footnote 36 of the judgement, the Judge makes the following remark, reminding us of the very subtle, yet clear distinction between the remedy that is borne out of the Act, on the one hand, and the manifestation of a consequence within the conduct of the offending party on the other hand "The expression in the statute relates to the conduct giving rise to the remedy, whereas that used in the judgments related to the consequences of the conduct."

3. How is §20(9) to be invoked?

A declaration by the court in terms of §20(9) that a company is deemed not to be a juristic person may be sought by way of application or through action proceedings. The court may also act on its own initiative in deeming a company not to be a juristic person should it find in any proceedings in which a company is involved that there has been an unconscionable abuse of the juristic personality of the company as a separate entity.6

The Judge further states "By expressly establishing its availability simply when the facts of a case justify it, the provision detracts from the notion that the remedy should be regarded as exceptional, or 'drastic'."

In conclusion to this question, note that this case was brought to court in the form of an Application. Section 20 is to be read with section 218 of the Act. Where the Act is contravened, the provisions of section 218 of the Act may serve as a bridge between this heavier onus to pierce the corporate veil and personal liability for damages resulting from contravention of the Act. Legal practitioners may find themselves in a position where they will have to plead these remedies in the alternative to one another in legal process.7

4. Orders that may be made under §20(9)

A court may declare a company not to be a juristic person in respect of certain rights, obligations or liabilities 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. A court does not have the power to intervene under §20(9) where the unconscionable abuse is not in respect of any such right, obligation or liability.

In declaring that a company is deemed not to be a juristic person, a court is given a wide discretion by §20(9) of the Act to make any further orders that it considers appropriate to give effect to such declaration.8

At paragraph 34, the learned Judge confirms the very wide ambit of §20(9) (b):

"The unqualified availability of the remedy in terms of the statutory provision also militates against an approach that it should be granted only in the absence of any alternative remedy. Paragraph (b) of the subsection affords the court the very widest of powers to grant consequential relief. An order made in terms of paragraph (b) will always have the effect, however, of fixing the right, obligation or liability in issue of the company somewhere else. In the current case the 'right' involved is the property held by the subsidiary companies in the King Group and the obligation or liability is that which any of them might actually have to account to and make payment to the investors."

5. Does §20(9) override the common law?

Where the requirements of §20(9) are not met and the section cannot be relied on, the common law remedy of piercing the veil would probably apply, since the section does not override the common law instances of piercing the corporate veil.9 The principles developed at common law with regard to piercing the corporate veil would certainly serve as useful guidelines in interpreting §20(9) of the Companies Act.10

The learned Judge confirms that

"The introduction of the statutory provision has given rise to some debate on whether the subsection has replaced the common law on piercing the corporate veil. Certainly there is no express intention apparent to that effect, as for example to be seen in s 165(1) of the Act (concerning derivative actions), but, equally, there is no express indication that the intention is not to displace the common law, like that to be found in s 161(2)(b) (concerning remedies available to protect the rights of the holders of securities in companies)."

The Judge further states,

"The statute enjoins that its provisions be construed with appropriate regard to subsections 5(1) and (2) read with s 7 of the Act (including, to the extent appropriate, a consideration of foreign company law). Approaching the interpretation of s 20(9) of the Companies Act in that manner I am unable to identify any discord between it and the approach to piercing the corporate veil evinced in the cases decided before it came into operation."

Thus it can be said that §20(9) is more of a codification of the common law as it has been evolving over the years, particularly since the Salomon case,11 to date.

The Judge in his wisdom comes to the following conclusion. "Having regard to the established predisposition against categorisation in this area of the law and the elusiveness of a convincing definition of the pertinent common law principles, it seems that it would be appropriate to regard s 20(9) of the Companies Act as supplemental to the common law, rather than substitutive." (underlined for emphasis)

6. Is §20(9) to be used as a remedy of last resort?

At common law, the remedy of piercing the veil is to be used only as a last resort according to the Hülse-Reutter case. In Amlin (SA) Pty Ltd v Van Kooij 2008 (2) SA 558 (C) the court stated that "piercing the veil is a rather drastic remedy. For that reason alone, it must be resorted to rather sparingly and indeed as the very last resort in circumstances where justice will not otherwise be done between two litigants."

Judge Binns-Ward confirms in his ruling that the he thinks the court should have wider discretion to pierce the corporate veil under §20(9) in comparison to the common law. The judgement states "The unqualified availability of the remedy in terms of the statutory provision also militates against an approach that it should be granted only in the absence of any alternative remedy."

This remedy is thus NOT one of last resort.

Footnotes

1 Stephen Malcolm Gore N.O. and 37 Others N.N.O WC Case Number 18127/2012

2 Dennis Davis (Ed.) Companies and other Business Structures 2 ed (2011) p 24

3 Act 71 of 2008

4 R Cassim 'Piercing the corporate veil "Unconscionable abuse" under Companies Act 71 of 2008' (2012) De Rebus August 2012

5 R Cassim 'Piercing the corporate veil "Unconscionable abuse" under Companies Act 71 of 2008' (2012) De Rebus August 2012

6 R Cassim 'Piercing the corporate veil "Unconscionable abuse" under Companies Act 71 of 2008' (2012) De Rebus August 2012

7 N Schoeman 'Piercing the corporate veil under the New Companies Act' (2012) De Rebus June 2012

8 R Cassim 'Piercing the corporate veil "Unconscionable abuse" under Companies Act 71 of 2008' (2012) De Rebus August 2012

9 Cassim et al Contemporary Company Law (2011) p 58

10 R Cassim 'Piercing the corporate veil "Unconscionable abuse" under Companies Act 71 of 2008' (2012) De Rebus August 2012

11 Salomon v Salomon & Co Ltd [1897] AC 22

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions