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Summary Mercantile Law 292: term 4 notes
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Summary for term 4's work: company groups, close corporations, insolvency and business rescue
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,Table of ContentsCompany Groups: .................................................................................................3
Chapter 13: Winding Up, Dissolution, Deregistration .........................................12
Insolvency and business rescue: .......................................................................................12
Insolvency: ....................................................................................................................................................... 13
Business Rescue: .............................................................................................................................................. 25
Minority Protection: ...........................................................................................31
Close Corporations: ............................................................................................36
,Company Groups:
o Introduction
• A company = a juristic person
• Each company within a group = a juristic person, they separate legal persons, and separate entities
§ Each company in a group = a distinct entity with separate rights to its members / shareholders
• Creditor can only sue the company who owes them but this is not absolute
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 –
(a) 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
(b) make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a).
The Ex Parte Gore case
(disregarding the juristic personality & piercing the corporate veil) s20(9)
confirmed that even though there is a statutory provision for piercing the corporate veil where there is
unconscionable abuse does not mean that common law case principles are ignored
• In the Gore case the applicants were the liquidators of companies part of ‘the King Group’.
• The holding company was King Financial Holdings Limited (KFH), which was also in liquidation.
• The companies in the King Group rendered investment services in a manner that did not maintain any individual
corporate identity between the companies in the group. The liquidators were unable to recognise the individual
corporate entities for which the creditors had claims against.
Question to the court:
Should the corporate veil be pierced the and disregard the separate corporate personality of the subsidiary companies, so that
the subsidiary companies’ assets would be seen as the holding company’s assets for the creditor’s claims.
Court’s findings
The court found that:
• the entire group had operated as one entity through the holding company
• there was no distinction for practical purposes when it came to dealing with funds between the holding and subsidiary
companies.
• the disregard by the owners of the separate corporate entities in the King Group was so much that it led to the fact that
the group was a “sham”
• The court therefore decided that there was an unconscionable abuse of the subsidiary companies as separate legal
entities and juristic personalities bringing the case into the s20(9) ambit.
Court’s decision
• In terms of s 20(9) of the Act, the court declared that the subsidiary companies, except for the holding company, are
deemed not to be juristic persons any longer:
• in respect of any obligation undertaken by these companies to any investors
• The court decided that all of the companies within the group were deemed to be one single entity.
• The separate legal entities existence were ignored and the holding company was treated as the only company in the
group
, Under s 20(9)(b) of the Act:
• a court may declare that a company is deemed not to be a juristic person in respect of any right, obligation or liability of
the company.
• The court in the Gore case stated that an order made in terms of s 20(9)(b) will always be binding in effect that the
right/obligation/liability is fixed elsewhere
• The approach adopted by the court to piercing the corporate veil in company groups
• The Act defines a ‘group of companies’ as meaning a holding company and all its subsidiaries (s1). Each company within
a group of companies is a separate legal entity and has its own separate legal personality with its own rights, duties and
liabilities which remain separate other subsidiary companies.
• A group of companies forms one economic entity but separate identity of each company remains intact. The holding
company is a separate legal entity from its subsidiaries.
• The acts of a holding company are not the acts of its subsidiary companies, or vice versa
Piercing the veil in company groups
The courts have adopted either:
- a liberal approach (DHN Food Distributors Ltd v London Borough of Tower Hamlets)
- or a conservative approach which holds that courts may not disregard the separate legal personality of a company
in a group just because this is just. (Adams and Others v Cape Industries Plc and Another )
• The court pierced the corporate veil in the Gore case using the conservative approach, since it was on the basis that the
group was a sham, and found that caused the group’s activities to fall within the meaning of s20(9): ‘unconscionable
abuse’.
What is ‘unconscionable abuse’?
• The phrase ‘unconscionable abuse’ is not defined in s 20(9)
• The court stipulated that the phrase: ‘unconscionable abuse of the juristic personality of a company’ in s 20(9) shows
conduct relating to the formation and use of companies to be a “sham” or “device”.
• This remedy can be utilised whenever the illegitimate use of juristic personality affects a 3rd party negatively and which
should reasonably not be condoned (at para 34).
Does s 20(9) override the common law?
• s 20(9) does NOT override the common law when piercing the corporate veil
• There are no set categories in the common law as to when the court will pierce the corporate veil (Cape Pacific Ltd v
Lubner)
• s20(9) is therefore supplemental to the common law and not substitutive (at para 34).
Is s 20(9) a remedy of last resort?
• In the common law, piercing the corporate veil is a harsh remedy that should only be used in rare cases as a last resort
(Hülse-Reutter case)
• Reliance can be placed on s20(9) even though other remedies are available.
• Section 20(9) can be used as a remedy when the facts justify its use and so it is not only used as a last resort (par 34)
Who is an interested person under s 20(9)?
• Section 20(9) of the Act permits any ‘interested person’ to bring an application to court requesting the court to deem a
company not to be a juristic person
• s20(9) does not define the term ‘interested person’.
• The qualification of any person as ‘interested persons’ to seek a s20(9) remedy should be determined based on if they
have a direct and sufficient interest in the application.
Conclusion
• The judgment in the Gore case is highly significant not only because it is the first case in which the statutory remedy of
piercing the corporate veil was considered, but also because of the useful and thorough analysis of the authorities on
piercing the corporate veil.
The judgment shows that:
- the corporate veil will be pierced where there is unconscionable abuse of the juristic personality of the
company, even within company groups
- and the remedy will not be regarded as drastic or as a last resort.
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