Lifting the Corporate Veil

By Nabeela Parker

In South Africa we are fortunate that the law recognizes companies and their incorporators as separate entities. A company enjoys separate legal personality and is responsible for its own legal obligations separate to that of directors and shareholders. The division between the two can be seen as a corporate veil.

By Nabeela Parker

The company structure gives much security and benefit to the shareholders of the Company but in certain cases corrupt and fraudulent directors can take advantage of this benefit. They attempt to use this veil to escape liability for their dishonest dealings.

There is a common law principal used to remedy this. “Piecing the corporate veil” allows shareholders or directors to be held directly liable for their actions. In Cape Pacific v Lubner Controlling Investments (Pty) Ltd and others the courts clarified the notion of “piecing the corporate veil” by eliminating the separation or division of the company and the person who is controlling the company. Thus liability is set on the owner of the company, for taking advantage of the separate legal entity that the company provided. The court explained that to preserve the principal of separate legal personality, the courts will only lift the corporate veil in extraordinary cases where no other remedy exists.

An example of an alternate remedy would be to use the provisions of section 20(9) of the Companies Act no 73 of 2008 which states that “if on application by an interested person or in a proceedings in which a company is involved, a court finds that the incorporation 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, declare 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 of another person specified in the declaration”

In comparison to the perspectives shown in the Cape Pacific case, where courts will only pierce the corporate veil as a last resort, section 20(9) of the Companies Act is readily available as a general remedy.

Directors and shareholders need to guard their actions and keep in mind that the company structure will not always protect them with regard to liability.

Nabeela ParkerSchoemanLaw Inc - www.schoemanlaw.co.za