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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accordance with the articles (which has been replaced by the Memorandum of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.
1
,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:
2
,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
3
, 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 internet-
based 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.
You should have advised Pat and Tracy regarding the company’s separate legal
personality. You could have referred to a number of cases dealing with the rights that
companies enjoy including Dadoo Ltd and others v Krugersdorp Municipality Council,
Salomon v Salomon & Co Ltd, Ngcwase v Terblanche etcetera.
The liquidator should be advised regarding the concept of piercing the corporate veil.
You should therefore have referred to section 20(9) of the Companies Act. In
addition you should indicate that the court will not easily pierce the corporate veil. In
this regard you could refer to the case law discussed above (Botha v Van Niekerk,
Cape Pacific, Hülse Reutter etc as discussed above).
Considering the fact that the loan was made and secured long before the company
was liquidated, it will be very difficult to prove that the Morgans had the intention to
defraud creditors when securing the loan.
Activity 2
Read Bargaining Council for the Furniture Manufacturing Industry KZN and UKD
Marketing CC & others.
PLEASE NOTE THAT THIS CASE IS AVAILABLE UNDER ADDITIONAL
RESOURCES ON MYUNISA IF YOU ARE UNABLE TO ACCESS IT IN THE
LIBRARY
Answer the following questions:
a. Who is/are the presiding officer/s in this matter?
Davis JA
b. In what year was this case decided?
2012
c. What kind of enterprise is the first respondent in this matter?
4
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