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Learning unit 1: Legal personality andlifting of the veil
• When does, a company acquire legal personality?
A company acquires legal personality when it is
• incorporated and
• issued with a certificate of incorporation
a) By registration or incorporation in terms of the Companies Act 71 of 2008
b) Through registration in terms of other pieces of legislation
c) By conduct (common law method) and issued with a certificate of
incorporation.
Requirements to acquire legal personality by conduct.
1. The property of the shareholders or members must be kept separate from that
of the legal person.
2. Legal person must have capacity to incur obligations and to have rights.
3. A legal person must be capable of having locus standi to sue in its own name
and to be sued in that name.
• With reference to case law explain the meaning and effects of separate
legal personality
Salomon v Salomon & Co LTD: principle of separate legal personality has different
consequences
Estate:
Estate of a company is separate from that of its shareholders/member’s estate
Debt:
Company debts are separate and are company’s debts, therefore shareholders or
members enjoy limited liability.
Profits:
Only after the company has declared a dividend may the shareholders claim the
dividend, until then the profits are that of the company.
Assets:
Exclusive property. Shareholders = no proportionate, proprietary rights
Conduct:
Appointed representatives (accordance with MOI) – can act on behalf of the
company; being a shareholder does not by default give one the power to bind the
company.
Directors:
Exercise managerial & executive powers
The registration of a company confers legal personality on the new entity and it can
acquire its own rights and duties separate from that of its shareholders or members.
In Salomon v Salomon and Co Ltd, the court held that estate of the company is
assessed apart from the estates of individual shareholders or members.
1. The debts of the company are separate from its shareholders or members.
, 2. Shares in the company entitles shareholders to certain interests in the
company. Profits belong to the company and not shareholders and only after
dividends can they claim that dividend.
3. Company assets are its exclusive property
4. No one is qualified to act on behalf of the company by virtue of being a
shareholder.
5. Only appointed persons as representatives with accordance to articles can
bind the company.
6. The company must seek its own redress when wronged.
7. Companies are bearers of rights and duties in terms of chapter 2 of the
Constitution.
• Do different branches or divisions of companies have separate legal
personality from one another?
ABSA Bank Ltd v Blignaut & another: “The branches or divisions of a company
are part of the company itself and do not have their own separate legal existence.”
Lifting of the corporate veil
• What does lifting the corporate veil entail? What is the purpose and under
what circumstances can it occur?
Lifting the corporate veil / piercing the corporate veil:
• Only in exceptional circumstances the court ignores the separate legal
existence of a company.
• The shareholders / members of the company:
• becomes the owners of the assetss
• any business conducted will be seen as done in their personal
• certain rights / obligations will be attributed onto them
The courts disregard the separate legal personality of a company, in certain cases,
to recognise the element / practical truths of the situation rather that the form and
holding the persons inside the company personal responsible.
Lifting the corporate veil entails removing the principle or limitation of separate legal
personality s 20(9). This is done to avoid the abuse of the principle of separate legal
personality. Lifting of corporate veil is done in cases where fraud is involved or
company is used to hide or defend a legal crime. If acts of crime are committed in
the name of the company, the courts can pierce the corporate veil and held directors
and others personally liable.
Examples of questions on this learning unit from previous examinations:
• Explain the advantages attached to legal personality. Refer to relevant
case law. Salomon case
Salomon v Salomon & Co LTD:
Separate existence (The individualities of the members / shareholders is not
attributed to the legal entity) (Can sue in its own name but also be sued in that
name). Characteristics of the members cannot be attributed to the legal entity.
,Perpetual existence (change of members does not affect the company in its
capacity as a legal entity)
Cannot act in its own name (appointed representatives (natural) act in the name of
the company)
Entity is a legal subject and have all the rights of a legal subject. Rights
includes:
• Good name & fame and Reputation, – Dhlomo v Natal Newspapers (Pty) Ltd
• Privacy – Financial Mail (Pty) Ltd v Sage Holdings Ltd
• Identity – Universiteit van Pretoria v Tommie Meyer Films
• Equality – Manang & Associates (Pty) Ltd v City Manager, City of Cape
Town & another
• Being the owner of assets
• Liable debts / obligations
• Profits / losses – property of the company
Company is bound & entitled to: Bill of Rights in terms of S8(2) Constitution
‘Piercing’ or ‘Lifting’ the corporate veil
Legal personality is not absolute and can be ignored (by ‘piercing’ or ‘lifting’ the
corporate veil) under certain circumstances.
Before the codification of the principle of disregard of a company’s separate
existence by the Companies Act of 2008, this matter was regulated by the common
law and referred to as “lifting” or “piercing” the corporate veil. The courts used it
to place limitations on the principle of separate legal personality in order to avoid
abuse.
‘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.
There are no hard and fast rules regarding the lifting of the corporate veil.
Under which circumstances may the courts lift the corporate veil and ignore
the separate legal personality of a company? Refer to relevant case law. In
case of fraud, dishonesty, improper conduct or company is used to hide or
defend a crime. Die Dros case.
Circumstances:
Courts: Will only pierce the corporate veil in exceptional cases where there
is no alternative remedy available and by piercing the veil will prevent an injustice:
Die Dros (Pty) Ltd and another v Telefon Beverages CC:
Balance the need to preserve the separate legal entity against policy considerations
but preferring piercing the corporate veil when:
• Fraud
• Dishonesty
• Other improper conduct(s) are present
Le’Bergo Fashions CC v Lee and another:
Restraint of trade – natural person subject to its limitations uses a close corporation /
company as a front face to indulge in activities that is against the restraint; piercing
the corporate veil will give effect to the restraint.
, Cape Pacific v Lubner Controlling Investements (Pty) Ltd and others:
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.
When the court disregard the separate legal personality of a company the court
should recognise the element / practical truths of the situation rather than the form:
The court indicated it will take a more flexible approach because the “Botha’s-case
was too rigid: take the facts of each case into considerations when deciding to lift the
corporate veil.
Botha v van Niekerk & another:
Test: determine whether or not to lift the corporate veil only when unconscionable
injustice would result should the corporate veil be lifted. The seller must have
suffered an “unconscionable injustice” before the court could lift the veil.
Hülse-Reutter v Gödde:
• 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.
Court:
• Depends on close analysis of the facts of each case + consideration
of policy
• No general discretion (lift the corporate veil/discard the companies
separate legal personality)
• Lifting the veil only when there’s evidence of misuse / abuse – giving
those who control the company an unfair advantage
= dual test: adding unfair advantage
o 20(9) Companies Act: Court finds: Act / incorporation of a company
constitutes to unconscionable abuse: Declare company not to be a juristic
person in respect of • Rights • Liabilities • Obligations - relating to the abuse
o Ex parte Gore NO
• Requirements: Unconscionable abuse (S20(9) Companies Act) less severe
than gross abuse (S65 Close Corporations Act)
Should include: a sham / a device
• S20(9) Companies Act:
• Not regarded as remedy of last resort
• Does not have power: nullifying the processes of the common-law principle:
piercing of the corporate veil
• The Companies Act 71 of 2008 follows the example of the Close Corporations
Act by codifying the general principle of piercing the corporate veil.
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