Piercing the corporate veil – a clarion call for certainty Quarter 1 2022

By DHAHINI NAIDU, ZOLANI L DHLAMINI AND KIRSHIA PILLAY, Published in Company Law

Lord Chancellor Baron Thurlow, a lawyer and politician, in the eighteenth century pondered "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?''

It is trite that when an entity is incorporated it establishes its own juristic personality separate from its directors. This position was reemphasised in City Capital SA Property Holdings Limited v Chavonnes Badenhorst St Clair Cooper NO and Others (85/2077) [2017] ZASCA 177:

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''it is trite that a company is a legal entity distinct from its shareholders. It has rights and liabilities of its own, separate from those of its shareholders. Its property is its own and not that of its shareholders. This follows from the separate legal existence with which a company is by statute endowed.''

The corporate veil protects directors from being held liable for any liabilities, debts, or other obligations that a company may incur in the ordinary course of business. This protection is essential as it assists business owners from, amongst other things, having to surrender their personal assets to discharge the debts of a company or settle its loans.

However, in certain circumstances, a court may take the view that the directors should be held personally liable and thus 'pierce the corporate veil.' The metaphor to 'pierce the corporate veil' between companies and its members refers to the justification by our courts to disregard the distinct legal personality of a corporate entity.

In Dadoo Ltd v. Krugersdorp Municipal Council 1920 AD 530, the court held that:

"This conception of the existence of a company as a separate entity distinct from its shareholders is no merely artificial and technical thing. It is a matter of substance; … Cases may arise concerning the existence or attributes which in the nature of things cannot be associated with a purely legal persona. And then it may be necessary to look behind the company and to pay regard to the personality of the shareholders, who compose it."

In addition, in Knoop NO and Others v Birkenstock Properties (Pty) Ltd and Others (7095/2008) [2009] ZAFSHC 67 (4 June 2009) the court held that:

''The corporate veil may be pierced where there is proof of fraud or dishonesty or other improper conduct in the establishment or the use of the company or the conduct of its affairs.''

Furthermore, Hülse-Reütter v Godde 2001 (4) SA 1336 (SCA) stated:

"as a matter of principle … there must at least be some misuse or abuse of the distinction between the corporate entity and those who control it which results in an unfair advantage being afforded to the latter."

In our law, there are two approaches to piercing the corporate veil, namely:

  1. The common law doctrine; and
  2. Section 20(9), which codified the common law, read with s7 of the Companies Act 71 of 2008.

Section 20(9) of the Act states:

'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 –

  1. 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
  2. make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a).'

The effect of this section is that any interested party could bring an application to court if any use or act on or behalf of the company constitutes unconscionable abuse. The section's shortcomings lie in failing to specifically define essential terms, such as what constitutes 'unconscionable abuse' nor is there conclusive guidance on the circumstances constituting 'unconscionable abuse.' This is the crux of the legal wrestling our courts have engaged in due to the ambiguity and legal uncertainty in this area of our law.

The court in Ex Parte: Gore NO and Others (18127/2012) [2013] ZAWCHC 21, is aligned with this view and stated that:

''the language of s20(9) is cast in very wide terms, indicative of an appreciation by the lawgiver that the provision might find application in widely varying factual circumstances.''

In the Gore case the holding company was King Financial Holdings Limited (KH), which was in liquidation. The liquidators of 41 companies that had formed part of a group of companies were the applicants in the matter. The group of companies was referred to as 'the King Group'. The three King Brothers held a majority of KH shares and were directors of KH and most of its subsidiaries, which empowered them to implement control over the King Group.

The said brothers had 'treated all their companies as one'. As a result of the fraudulent and disordered management of the activities of the group, the liquidators of the principal companies were unable to classify the corporate entities against which creditors had claims.

The court had to determine if in the circumstances it ought to pierce the corporate veil and ignore the various subsidiary companies separate juristic personalities, so that the assets of the subsidiaries could be considered as the assets of the holding company for purposes of creditors' claims.

The court seems to have determined that there was an 'unconscionable abuse' by the King brothers, the ultimate controllers of the juristic personalities of the subsidiaries as separate entities that resulted in the case being brought within the ambit of s20(9).

In the Oxford English Dictionary, 'unconscionable' is defined as 'showing no regard for conscience, unreasonably excessive, egregious, blatant, unscrupulous.'

Gore NO held that:

''the 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'…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.''

The danger with such extensive powers by the courts is that, while common law provides varied remedies to piercing the veil and to consider the merits of each case, s20(9) has no alternative remedies. In other words, the section provides that a court may grant relief to pierce the veil notwithstanding that an applicant has failed to make a case for it.

Conflicting opinions and treatment of 'unconscionable abuse' have resulted in varying thresholds and criteria adopted by the courts. By failing to definitively interpret 'unconscionable abuse' and in the absence of stringent principles or requirements, the gates are open to an inconsistent application of this doctrine.

Consequently, the aforesaid section has inadvertently created further ambiguity in an area of law that sorely needs codified thresholds and clear circumstances of abuse.

Naidu is a Director, Dhlamini an Associate and Pillay a Candidate Attorney with Fairbridges Wertheim Becker.