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  5. MRL2601 - Entrepreneurial Law

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Mrl2601 notes. 100% TRUSTED Answers, guidelines, workings and references.Study unit 1: Legal personality and lifting of the veil Once a company is incorporated, it is a separate legal entity distinct from its members. It can enter into contracts in its own name and sue and be sued. Its members a...

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  • August 2, 2023
  • 40
  • 2023/2024
  • Exam (elaborations)
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, lOMoARcPSD|4201260




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Study unit 1: Legal personality and lifting of the veil
Once a company is incorporated, it is a separate legal entity distinct from its members. It can
enter into contracts in its own name and sue and be sued. Its members are not liable for its
debts and enjoy limited liability.

Separate legal personality:

Salomon v Salomon & Co Ltd:

• The estate of the company is assessed apart from the estates of the individual
members, therefore the debts of the company are the company’s debts and separate
from those of its members;
• The profits of the company belong to the company and not its members and only after
the company has declared a dividend may the members claim that dividend;
• The assets of the company are its exclusive property and the members have no
proportionate proprietary rights therein; and
• No one is qualified by virtue of his or her memberships to act on behalf of the company.
Only those who are appointed as representatives of the company in accordance with
the articles can bind the company.

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)).


QUESTIONS:

• When does a company acquire legal personality?
• With reference to case law explain the meaning and effects of separate legal
personality.

Piercing the corporate veil:

• In certain cases the courts have disregarded the separate legal personality of a
company in order to recognize 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.

• There are no hard and fast rules regarding the lifting of the corporate veil.

Botha v Van Niekerk:

• The seller must have suffered an “unconscionable injustice” before the court could lift
the veil.

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Cape Pacific:

• 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 should also 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:

• 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 used: the element of unfair advantage introduced.
• The court further confirmed that much depended on a close analysis of the facts of each
case, considerations of policy and judicial management.

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 seperate legal personality of a company must be balanced against policy
considerations favouring piercing the corporate veil.

Le’Bergo Fashions CC v Lee and another:

• 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

QUESTION:

Under which circumstances will the separate legal existence of a company be disregarded?
Refer to relevant authority in your answer.


The Companies Act 2008: Piercing the corporate veil

Please note that s 163(4) as discussed in the DVD and study guide has been repealed.
Section 20(9) replaces it.

• The disregard of the separate legal personality of a company is addressed in section
20(9) of the Companies Act 71 of 2008.

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• It follows the example of the Close Corporations Act by codifying the general principle of
piercing the corporate veil.
• This section 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 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.

We do now know what test will be used, but it remains to be seen how the courts will decide
what would constitute an unconscionable abuse and to what extent they will use the existing
case law dealing with the common law rule of piercing the corporate veil.

It therefore seems that there are still no hard and fast rules; no general discretion of the
courts and that the fact of each case will still have to be taken into consideration when
deciding to pierce the corporate veil.

Activity:
John operated a fast food establishment in Durban under a franchise agreement with
McTucky’s Ltd. In terms of the franchise agreement, John is not allowed to operate a similar
business in the Durban area within three years after the end of the franchise 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 Ltd wants to institute an action against John for breach of the restraint of trade in
the original franchise agreement. John’s defence is that the new business is owned by a
newly incorporated company, Macfries (Pty) Ltd, which was not a party to the original
agreement. John is the sole shareholder and director of Macfries (Pty) Ltd.

Discuss the possibility that the courts may lift the corporate veil in these circumstances.



Study unit 2: Types of companies
The types of companies that are provided for in the Companies Act 71 of 2008 are:

1. Non-profit companies (NPC’s) and
2. Profit companies

Profit companies can be divided into:
• Public companies (Ltd)
• Private companies (Pty) Ltd
• Personal liability companies (Inc) and
• State-owned companies (SOC)

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