Piercing the Corporate Veil Flashcards
What is piercing the corporate veil?
There are exceptions to the principle of separate legal personality. When the corporate veil is pierced, the protection afforded to the shareholders and directors of a company is removed, and the substance of the company is examined, rather than the form in which it has been cast [Amlin].
What are two examples of the abuse of separate legal personality?
a) used by a director to evade their fiduciary duty
b) used to overcome a contractual duty
Elaborate more on SLP being a) used by a director to evade their fiduciary duty
- A director will not be permitted to evade the fiduciary duties they owe to a company by interposing some other company between themself and the company of which they are a director, so as to make it appear that it is that other company and not themself who is in fact entering into the transaction in question [Robinson v Randfontein].
Elaborate more on SLP being b) used to overcome a contractual duty
- Where a company has been used to overcome a contractual duty, courts have pierced the corporate veil. This is used to prevent a person bound in their personal capacity, from escaping the consequences of that binding agreement by using a company [Gilford Motor].
- This applies even where the company was already in existence [Le’Bergo Fashions].
What is the difference between piercing and lifting the veil?
When a court pierces the veil, it treats the liabilities of the company as those of its shareholders or directors, and disregards the corporate personality of the company. On the other hand, when it lifts the veil, it merely takes into account who the company’s shareholders or directors are.
What was held in Daimler v Continental Tyre?
There was a need to ascertain whether the shareholders of a company resided in England or Germany. The two countries were at war, and the one company owed money to the other company, which although registered in England, was run by persons living in Germany. Hence, it was held that they were an enemy company, and the payment could not go ahead.
What was held in Dadoo v Krugersdorp?
A registered company is a legal persona distinct from the members who compose it. It was not necessary to lift the veil in this instance, because it involved the ownership of the company, and not the ‘nationality’ of its shareholders (who were Asiatic, in contravention of the Act).
Provide a case summary of Cape Pacific v Lubner
A company (LCI - Children Trust - Findon shares) used to enjoy the benefits of a Clifton flat. Lubner became a non-resident when he moved overseas. He transferred the shares in the flat to another company (GLI - of which he was the sole shareholder) so as to avoid a claim to the shares from the appellant (CP). Lubner was in material control of both of these companies at all times.
Should the court disregard the separate legal personality of the two separate companies?
Lubner at all times personally exercised control over the Findon shares (the Clifton flat) as if they belonged to him personally. He also owned the other company. Hence, in transferring the shares from one company to another, Lubner was merely deriving his ownership of the flat from his right hand, and not his left. He did so fraudulently, because he was aware of the valid claim by the appellant to have the shares delivered. Therefore, the veil can be lifted and the shares must be transferred to the appellant.
What did Cape Pacific v Lubner find with respect to lifting the corporate veil?
- there is no closed list of instances when the corporate veil may be pierced
- it is not necessary for a company to be founded in deceit before its corporate personality may be disregarded
- our courts should not lightly disregard a company’s separate legal personality
- a court does not have general discretion to decide when to do so, it must be specifically pleaded
- this is a factual question though, and there are no set categories
- a balance must be struck between the need to uphold SLP, and the public policy reasons for piercing the veil
- the existence of another remedy does not negate the piercing of the corporate veil. It is not a remedy of last resort
What is the position concerning veil piercing with respect to company groups?
A holding company is a separate legal entity from its subsidiary. However, when the corporate veil is pierced, the court treats the group as a single entity as opposed to a collection of different corporate entities. This is vary rare though, and courts cannot freely disregard SLP merely because it considers that justice so requires [Macademia Finance].
Even if a subsidiary company has one shareholder, it does not make it an agent for the principal company. To determine this question, six factors need to be considered:
- were the profits treated as those of the holding company?
- were the persons conducting business appointed by the holding company?
- was the holding company the head and brain of the trading venture?
- did the holding company govern the venture?
- were the profits made by the skill and direction of the holding company?
- was the holding company in effectual and constant control?
Which section of the Companies Act deals with veil piercing?
Section 20(9)
What does Section 20(9) deal with?
a) application or proceedings - One may apply for the court not to see a company as a juristic person.
b) interested person - The interest must be limited to financial or monetary interest.
c) incorporation, use or act by/on behald of the company - As in the common law, unconscionable abuse of the juristic personality of a company may occur on the incorporation of the company, as a result of the use of the company as a legal entity, or as a result of any act by, or on behalf of, the company.
d) unconscionable abuse - No definition, so the principles developed in the context of s65 of the Close Corporations Act, and at common law generally, may serve as useful guidelines in this regard.
e) deemed not to be a juristic person - A company will cease to have SLP.
f) rights, obligations or liabilities - The court may only declare a company not to be a juristic person in respect of certain rights, obligations or liabilities of the company.
g) further order - A court can make a further order which it considers appropriate in order to give effect to a declaration that a company is not a juristic person.
Which factors should the court consider, according to Airport Cold Storage v Ebrahim?
Some factors that the court considered:
- no proper books of account
- no accounting officer
- voluntarily assumed a debt
Provide a case summary of Ex parte Gore
A holding company disregarded the SLP of all of its subsidiary companies. Now, liquidators sought relief by disregarding the SLP of the subsidiary companies and rendering all of their assets and liabilities those of one entire principal company - ‘the King Group’.
Should the court disregard separate legal personality and lift the corporate veil?
Yes, SLP should be disregarded, because King clearly acted with disregard to the separate legal personality of their subsidiary companies. This was an abuse of the principle of SLP and so, in the interests of fairness and public policy, the corporate veil should be lifted/pierced so as to afford the liquidators appropriate relief.
When will the Companies Act impose liability on directors of a company?
a) acting without authority - A person signing on behalf of the company, when they do not have the authority to do so, will be held personally liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of their actions.
b) reckless trading - A director will be personally liable for reckless, negligent or fraudulent action perpetrated by the company.
c) fraud - A director will be liable should the company deliberately seek to defraud a creditor, employee or shareholder of the company.
d) false or misleading statements - A director will be personally liable for signing, consenting to or authorising the publication of any financial statements that were false or misleading in a material respect, or for a prospectus or written statement.
e) unlawful distributions - Liable for failing to be present at a meeting or for failing to vote against various decisions, such as those relating to the issuing of shares.
f) causing the company to act contrary to the Act or its MoI - Liable for intentionally, fraudulently or due to gross negligence, causing the company to do anything inconsistent with the Act or with the company’s MoI.
g) contravening the Act [s218] - Any person who contravenes the Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.
