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Summary of 4 pages for the course Business Entities at wits
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Business Entities Notes 2020Lecture: Juristic Personality
Piercing the Corporate veil
1. Concept Background
This veil protects the directors and shareholders from personal liability. There are
economic reasons for this, including: it would be impractical to expose directors for
financial decisions made on behalf of the company – as directors would be bogged
down by hoards of potential litigation proceedings brought against them, further,
people would be unwilling to take up directorship positions.
Courts have, historically, been known to protect the corporate veil.
The protection spoken of above can be lifted (pierced) in certain circumstances to
ensure that the directors do not act recklessly in regard to the decisions made for the
company.
Consider South African current affairs regarding the piercing of the corporate veil: the
Steinhoff case and the PRASA rail incident.
Piercing the corporate veil is a departure from the principle in the Salomon case – where
emphasis on the separation between: the individual capacities of the directors and the
company is emphasised.
2. Case authority on piercing the corporate veil
There must be a misuse of the legal personality of the company resulting in an unfair
advantage being given to the directors – for the veil to be lifted.
The company has been used as an alter-ego/agency by the directors for unscrupulous
purposes. In the normal scenario: the company uses the directors as an agency to
achieve options that are best for the company – not vice-versa.
The same principles that apply to single entity companies, also apply to a grouping of
companies.
In extraordinary circumstances, a court may hold the entire holding group liable – and
not just the specific subsidiary/entity of the larger group liable.
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