in this essay one is required to discuss whether section 163 (4) of the Companies Act, No 71 of 2008 codified the common law approach in piercing the corporate veil i.e. to what extent did the 2008 Act brought some certainty regarding to the grounds in which the courts will disregard the juristic existence of a company. To achieve this I’m going to first explore the position of common law in this field of law.
As a point of departure, the company is equal in law to a natural person. This is one of the cornerstones of South African company law, and has been since 1897 handed down in the Salomon case namely that a company is a legal entity distinct from its shareholders. It allows a company to perform juristic acts in its own name, as well as to sue and to be sued. Further, members and directors enjoy protection against personal liability. The corporate veil is a fundamental aspect of a company law and is a protective stratagem for those who exist behind it .
Although this fundamental rule has a considerable influence in company law, it cannot be absolute and, as such, according to the case of Lock harts ltd v Excalibur Holdings ltd it can be saved for certain exceptions (where the courts may disregard the separate legal personality of the company)
Herron CJ in Commissioner of Land Tax v Theosophical Foundation described lifting of the corporate veil as an ‘esoteric’ label, stating further that authorities in which the veil of incorporation has been lifted have not been of such consistency that any principle can be adduced. This was also affirmed by Hope and Meagher JJA in the case of Briggs v James Hardie . One can therefore say that, because veil piercing is an exception to the rule of separate legal personality and not the rule itself, it is probably rationale to say that a court must be careful to permit veil piercing only in egregious cases and not whenever it considers it just to do so .
It is important to note than when the courts pierce the corporate veil, they would be doing so only to determine the rights, liabilities and obligations of the parties in the instance before it and, for all other purposes, the company’s separate existence and personality remains unaffected .
Trite law that the disregarding of the separate personality of the company is not to be done casually, as stated in Cape Pacific Ltd “It is undoubtedly a salutary principle that our courts should not lightly disregard a company’s separate personality, but should strive to give effect to and uphold it”
In the 1980 case, Lategan v Boyes the court gave a judicial affirmation of the veil piercing doctrine and said that there is no doubt that our courts would brush aside the veil of corporate identity time and again where fraudulent use is made of the fiction of legal personality . In addition to this the case of Amlin said that fraud, dishonesty or improper conduct could provide grounds for piercing the corporate veil. The court went further to say that veil could also be lifted where there is a façade i.e. where the company is a mere façade concealing the true state of affairs
In Clarkson Co v Zhelka the court ruled out that if a company is formed for the express purpose of doing a wrongful or unlawful act, or, if when formed, those in control expressly direct a wrongful thing to be done, the individuals as well as the company are responsible to those to whom liability is legally owed.
The case of Robinson v Randfontein illustrates that abuse of legal personality by directors to circumvent their fiduciary duties for personal aggrandisement can as well be a further instance of piercing the corporate veil.
More to the above, piercing can be accepted where the personality of the company is being used to avoid contractual obligations this was enunciated in the case of Gilford Motor Company .
Deciphering when the courts will and will not pierce the corporate veil seems to be the most confused issue surrounding the doctrine, mostly because there seems to be very little consistency in the application of this doctrine by the Courts.
In Lategan v Boyes , Loux J stated that fraud is the essential requirement for piercing the corporate veil and that a fraud committed by the company need always be present before the courts can pierce the veil. This was jettisoned in Botha v van Niekerk , where Flemming J stated that the statement in Lategan regarding fraud was incorrect. Flemming J formulated a test for veil piercing which was somewhat wider than the categorisation approach. The court held that there could be personal liability if it could be proved that the applicant had suffered an unconscionable injustice
More so the Cape Pacific case Smallberg J rejected the notion in Botha v Van Niekerk . The former case discarded by holding that the unconscionable injustice test is too rigid and that the needy of more flexible approach is necessary, under which the facts of each case ultimately determines the outcome .
In Hulse-Reutter & Others v Godde it was argued that the courts should pierce the veil in instances of improper or fraudulent conduct. The court departed from the Cape Pacific case without expressly stating so, and seemed to have reintroduced the requirement of unfair advantage into the test in determining whether or not to pierce the veil. Cape Pacific expressly avoided holding that there must always be an unfair advantage before the court can pierce the veil, as this requirement was regarded as being too rigid. This was, however, laid down as a requirement in Botha v van Niekerk. It is therefore very straining to conciliate Cape Pacific and Hulse-Reutter.
It is apparent from the above that although the courts have increasingly tried to define the approaches as to when the veil can be pierced, one of the intrinsic flaws to the veil piercing doctrine is that there is no clear standard as to when the courts will pierce the corporate veil. It is noteworthy, in this regard, that the veil piercing doctrine is highly fact specific. The successes of some cases over others vary only in degree and not in kind . Thus, this area of law can be regarded as being unpredictable, random and ambiguous. This is evident in Gilford Motors and Die Dros cases. In the Die Dros case, the court would not uphold the restraint of trade based on a lack of evidence, whilst the court in Gilford Motors did.
Furthermore, inconsistency of courts on the availability of other remedies readily available rather than piercing is somewhat a transparent illustration again on how unprecedented and unpredictable of this realm of law. In Cape Pacific , Smalberg JA stated in obiter that “I see no reason why piercing of the corporate veil should necessarily be precluded if another remedy exists” whereas Amlin case is however, of the view that the courts can only pierce the veil when there are no other remedies available to the plaintiff simply because “opening the curtains” is rather a drastic remedy .
I now turn to consider whether the 2008 Companies Act s163 (4) cured the concerns raised regarding the circumstances in which the court will pierce the veil under common law.
Section 163(4) (2008), (hereinafter referred to as “section” for the sake of brevity), tries to codify the common law approach with the hope that this will bring certainty to the doctrine which is clearly in a desultory state. However the section doesn’t pre-empt the applicability of the common law.
While the section attempts to solidify the common law it has been argued that it sets a less strict standard compared to Cape Pacific case.
From this section it is clear that certain requirements must be met before the courts used it, one of which is that there must be proof that there was unconscionable abuse of the concept of the company. The underlined term is not defined anyway in the Act and this is probably the most controversial aspect of this section. It is therefore submitted that as this section does not preclude the common law application, the courts are to be guided by the common law cases in construing what constitutes unconscionable abuse. In addition, the controversy has been further exacerbated whereby the courts were given general discretion to exercise the right to pierce where it deems fit to do so. Inasmuch as this discretion is concerned, it is my humble submission to say that one can ask whether justice lies within the hands of judges alone. Clarity is still veiled in obscurity. More to this, the existence of other remedies readily available was not promulgated. For that reason piercing the veil can be deployed without considering other remedies.
It is noteworthy from the above paragraph that the section escalates the unpredictable nature of when will the courts pierce the corporate veil as the courts will still be forced to use the common law.
As a consequence of the aforementioned legislative deficiency, it therefore brings me to the conclusion that the section did not fully salvage this area of law.