MRL2601 questions and answers

Learning unit 1: Legal personality and lifting of the veil • When does a company acquire legal personality? Once a company is incorporated and a certificate of incorporation is issued, • With reference to case law explain the meaning and effects of separate legal personality Salomon v Salomon & Co Ltd: • The estate of the company is assessed apart from the estates of individual shareholders or members, therefore the debts of the company are the company’s debts and separate from those of its shareholders or members. They enjoy limited liability; • The profits of the company belong to the company and not its shareholders and only after the company has declared a dividend may the shareholders claim that dividend; • The assets of the company are its exclusive property and the shareholders have no proportionate proprietary rights therein; and • No one is qualified by virtue of his or her shareholding to act on behalf of the company. Only those who are appointed as representatives of the company in accordance with the articles (which has been replaced by the Memorandum of Incorporation) can bind the company. • Do different branches or divisions of companies have separate legal personality from one another? The branches or divisions of a company are part of the company itself and do not have their own separate legal existence (ABSA Bank Ltd v Blignaut and Another and Four Similar Cases 1996 (4) SA 100 (O)). Lifting of the corporate veil • What does lifting the corporate veil entail? What is the purpose and under what circumstances can it occur? In certain cases the courts have disregarded the separate legal personality of a company in order to recognise the substance or practical realities of a situation rather than the form. ‘Piercing the corporate veil’ refers to those exceptional circumstances where the court ignores the separate legal existence of the company and treats the shareholders as if they were the owners of the assets and had conducted the business of the company in their personal capacities OR attributes certain rights or obligations of the shareholders to the company. 2 Examples of questions on this learning unit from previous examinations: • Explain the advantages attached to legal personality. Refer to relevant case law. (6) Refer to the benefits as enumerated in Salomon v Salomon & Co Ltd • Under which circumstances may the courts lift the corporate veil and ignore the separate legal personality of a company? Refer to relevant case law. (6) There are no hard and fast rules regarding the lifting of the corporate veil. Botha v Van Niekerk-case: The seller must have suffered an “unconscionable injustice” before the court could lift the veil. Cape Pacific-case: The court confirmed that it has no general discretion simply to disregard a company’s separate legal personality. The separate legal personality of a company should not be easily ignored. However, circumstances do exist for example fraud, dishonesty or other improper conduct where it would be justifiable to pierce the corporate veil. Botha v Van Niekerk was too rigid. The court indicated that it would adopt a more flexible approach namely of taking all the facts of each case into consideration when determining if the veil should be pierced. A balance must be struck between the need to persevere the separate legal identity of the company against policy considerations in favour of piercing the corporate veil. The veil could also be pierced in relation to a specific transaction. Hülse-Reutter:-case: Agreed that court has no general discretion simply to disregard a company’s separate legal personality. The corporate veil would only be lifted if there was evidence of misuse or abuse of the distinction between the company and those who control it and this has enabled those who control the company to gain an unfair advantage. Therefore a dual test was introduced: by adding the element of unfair advantage. The court further confirmed that much depended on a close analysis of the facts of each case and considerations of policy. Ex parte Gore NO: An unconscionable abuse is not as onerous to prove as a gross abuse. The remedy in s 20(9) can be available if a corporation is used as a sham or device. Section 20(9) is not available as a remedy of last resort only. Mention could also have been made to Bargaining Council for the Furniture Manufacturing Industry KZN and UKD Marketing CC & others and Mohlotsane v Mobile Telephone Network (Pty) Ltd (available under additional resources on myUnisa) Die Dros (Pty) Ltd-case: Where fraud, dishonesty and other improper conduct is present, the need to preserve the separate legal personality of a company must be balanced against policy considerations favouring piercing the corporate veil. Le’Bergo Fashions CC -case: 3 The Court will pierce the corporate veil where a natural person, who is subject to a restraint of trade uses a close corporation or a company to front to engage in the activity that is prohibited by the agreement The Companies Act 2008: Disregarding the separate legal personality of a company Section 20(9) of the Companies Act 71 of 2008: The Companies Act 71 of 2008 follows the example of the Close Corporations Act by codifying the general principle of piercing the corporate veil. Section 20(9) of the Companies Act 71 of 2008 provides that if a court finds that the incorporation of a company or any act by or use of a company constitutes an unconscionable abuse of its juristic personality, the court may declare that the company will be deemed not to be a juristic person in respect of rights, liabilities and obligations relating to the abuse. The wording of the section is a combination of section 65 of the Close Corporations Act and the judgment in Botha v Van Niekerk. It ignores the view expressed in Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd that described the test in Botha v van Niekerk as too rigid. John operated a fast food establishment in Durban under a franchise agreement with McTucky’s CC. In terms of the agreement, John is not allowed to operate a similar business in the Durban area within three years after the end of the agreement. John does not renew the franchise agreement when its term ends, but continues to operate a fast food restaurant from the same premises that he previously occupied. McTucky’s CC wants to institute an action against John for breach of the original franchise agreement. John’s defence is that the new business is owned by a newly incorporated corporation MacFries CC, which is not a party to the original agreement. John is the sole member of MacFries CC. Discuss the possibility that the court may lift the corporate veil in these circumstances. Refer to relevant case law in your answer. (5) Piercing the corporate veil is dealt with under Section 65 of the Close Corporations Act. In exceptional circumstances the courts have lifted or pierced the corporate veil to recognize the substance or practical realities of a situation rather than the form. Piercing the corporate veil means holding persons inside the close corporation personally responsible Refer to cases: Le’Bergo Fashions CC v Lee and another: The court may under these circumstances pierce the corporate veil. The Court will pierce the corporate veil where a natural person, who is subject to a restraint of trade uses a close corporation or a company to front to engage in the activity that is prohibited by the agreement. Die Dros (Pty) Ltd and another v Telefon Beverages CC and others: Where fraud, dishonesty and other improper conduct is present, the need to preserve the separate legal personality of a company must be balanced against policy considerations favouring piercing the corporate veil. You could also have referred to the following cases: Botha v Van Niekerk 1983 (3) SA 513 (W): Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd 1995 (4) SA 790: Hülse-Reutter: Ex parte Gore NO: Bargaining Council for the Furniture Manufacturing Industry KZN and 4 UKD Marketing CC & others and Mohlotsane v Mobile Telephone Network (Pty) Ltd (
Activity 1 In 2005 Pat and Tracy Morgan established NetMedia (Pty) Ltd that offered internetbased news, until June 2011 when the company was liquidated as a result of its inability to pay its creditors. During the winding-up of the company, the liquidator discovered that Mr and Mrs Morgan, the only shareholders and directors of NetMedia (Pty) Ltd, had made a loan of R10 million to the company as a start-up cash injection. This loan was secured by a mortgage bond over the immovable property owned by NetMedia. The liquidator argued that there was no real distinction in law between the Morgans and NetMedia (Pty) Ltd and consequently the proceeds of the sale of the company’s assets must be utilized to settle all debts owed by the company to its other ordinary creditors. Mr and Mrs Morgan believed that NetMedia (Pty) Ltd’s separate legal identity entitled them to have their secured claim against the company settled first and vowed to take their fight to the highest court. Advise both parties with regard to their respective positions