A trite principle in our law is that a company has separate legal personality distinct from the shareholders. Similarly, a close corporation has separate legal personality from its members. Several consequences flow from this principle, most notably 'limited liability' which is further expounded in section 2(3) of the Close Corporation Act, 69 of 1984 as follows: "members of a corporation shall not merely by reason of their membership be liable for the liabilities or obligations of the corporation".
However, this concept of separate legal personality is often abused, and as a result, the common law and legislation have recognised certain exceptional circumstances where courts may look beyond the separate legal personality of a company and impose personal liability directly on particular persons. This is known as 'piercing the corporate veil' which aims to ensure that the concepts of separate legal personality and limited liability are used for their proper purposes.
This article will consider the Supreme Court of Appeal's ("SCA") judgment in Crous v Wynberg Boys High School and Others which dealt with an appeal against an order of the Gauteng Division of the High Court, Pretoria. The crisp issue on appeal was whether a member of a close corporation was automatically liable for the debts of the close corporation by virtue of his membership, when there had been a gross abuse of the close corporation's separate juristic personality, despite that member's lack knowledge or participation in this abuse.
Background facts
Wynberg Boys High School instituted an urgent application in the High Court in which it sought the winding-up of a travel agency called Eastco Travel CC. The school alleged that it had fallen victim to a fraudulent business scheme conducted by Ms Fourie (the majority member of the close corporation) when buying flight tickets for its students to the United States of America. According to the school, this scheme involved the close corporation offering heavily discounted flights on major airlines subject to an upfront payment or a substantial deposit.
However, once the flight tickets were purchased, Ms Fourie would then cancel the reservation and misappropriate the refund given by the airline. As a result, the school suffered a loss of R638880.00 which it sought to recover directly from Ms Fourie, as well as her father Mr Crous (the other member of the close corporation), by seeking an order to disregard the separate juristic personality of the close corporation in order to hold these two members jointly and severally liable.
The primary dispute which arose in the motion proceedings before the High Court concerned the liability of Mr Crous, who contended that he had merely assisted his daughter financially with the start up of the travel agency, but thereafter he had no involvement in its management nor did he receive any financial benefits from it. Mr Crous argued that he had no knowledge of any wrongdoing and, accordingly, he could not be held personally liable just because of his membership and it's corresponding fiduciary duties.
These arguments were disputed by the school who based Mr Crous' liability on section 65 of the Close Corporation Act which reads as follows: "Whenever a Court on application by an interested person, or in any proceedings in which a corporation is involved, finds that the incorporation of, or any act by or on behalf of, or any use of, that corporation, constitutes a gross abuse of the juristic personality of the corporation as a separate entity, the Court may declare that the corporation is to be deemed not to be a juristic person in respect of such rights, obligations or liabilities of the corporation, or of such member or members thereof, or of such other person or persons, as are specified in the declaration, and the Court may give such further order or orders as it may deem fit in order to give effect to such declaration".
The High Court ultimately found in favour of the school and issued an order for the provisional winding-up of the close corporation. The High Court held that both Ms Fourie and Mr Crous had 'unconscionably abused' the juristic personality of Eastco Travel CC, and as such, the Court disregarded the close corporation's juristic personality and held both members jointly and severally liable to pay the school R638880.00 together with the costs of the application.
The matter before the SCA
When this matter proceeded to the SCA on appeal, the SCA referred to Part VIII of the Close Corporations Act (ss 63, 64 and 65) which outlines exceptions to the default position in section 2(3) regarding the liability of members and other persons for the debts of a close corporation. The SCA noted that mere membership in a close corporation is not sufficient to impute personal liability in terms of section 65. Instead, the jurisdictional trigger for personal liability under section 65 required conduct which amounted to a 'gross abuse of the juristic personality of the close corporation'.
The SCA accordingly disagreed with the High Court's judgment that mere membership in a close corporation is sufficient to establish personal liability under section 65. The SCA reasoned that a member (or another other person) must have actually contributed to the impugned conduct in order to incur personal liability. The SCA further disagreed with the High Court's finding that members were under a fiduciary duty to ensure that the affairs of the close corporation were managed in a manner that is not detrimental to members of the public. These fiduciary duties, the SCA held, are owed to the close corporation not to external parties. The SCA accordingly upheld Mr Crous' appeal and replaced the High Court's order with an order dismissing the school's claim against Mr Crous with costs. Ms Fourie remained personally liable to the school.
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