Snaid & Morris

The Sacrosanct Nature of The Separate Corporate Identity of a Juristic Entity

It is trite law in South Africa and many other jurisdictions that a corporate entity holds a separate and defined identity separate and different to that of its directors/shareholders/members. The juristic entity lives in that it is born, it has its infancy stage, its adolescence, its teenage years, its maturity and then its eventual demise.

It is trite law in South Africa and many other jurisdictions that a corporate entity holds a defined identity separate and different to that of its directors/shareholders/members. The juristic entity lives in that it is born, it has its infancy stage, its adolescence, its teenage years, its maturity and then its eventual demise. It is however upon the demise of the corporate entity that one normally finds the reason for the court to pierce the proverbial corporate veil, although piercing or setting aside of the corporate veil is not merely a remedy for atrocities upon demise.

As the separate juristic identity of an incorporated being is sacrosanct, our courts and the courts in many other jurisdictions will not easily set aside the corporate veil or in other words, pierce the corporate veil. This stems from the 1856 case of the Royal British Bank vs Turquand which was accepted in South African law in the case of Leg & Co. The Royal British Bank case, more commonly known as the Turquand rule, states clearly and emphasises that a court will not simply pierce the corporate veil unless, of course, some unconscionable act has been done in the name of the company. Put differently, should a juristic being or company be used to defraud creditors or for any other ill-gotten gain, the court will then set it aside. The current Companies Act has codified this common law principle in Section 20, subsection 9 of the Act, which states as follows:

*“20(9) If, on application by an interested person or in any proceedings in which a company is involved, the court finds that the incorporation of the company, any use 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 – (a) declare that 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, in the case of a non-profit company, a member of the company, or of another person specified in the declaration; and (b) make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a).” *

The question now comes into play as to what is an unconscionable abuse of the juristic personality of the company as a separate entity and also has Section 20 (9) of the Companies Act of 2008 replaced the old common law basis for piercing the corporate veil. Further question then arose as to whether this replacement was a replacement in totality or whether it was complimentary to the common law.

In the matter of Ex Parte Gore and others in this matter the learned Binns-Ward J enunciated at paragraph 34 to 35 at pages 399 to 400, the following:

(34) “The newly introduced statutory provision affords a firm, albeit very flexibly defined, basis for the remedy, which will inevitably operate, I think, to erode the foundation of the philosophy that piercing the corporate veil should be approached with an priori diffidence. By expressly establishing its availability simply when the facts of a case justify it, the provision detracts from the notion that the remedy should be regarded as exceptional, or drastic. This much seems to be underscored by the choice of the words ‘unconscionable abuse’ in preference to the term ‘gross abuse’ employed in the equivalent provision of the Close Corporations Act, the latter term having a more extreme connotation than the former. The term ‘unconscionable abuse of the juristic personality of a company’ postulates conduct, in relation to the formation and use of companies, diverse enough to cover all the descriptive terms like ‘sham’, ‘device’, ‘strategem’ and the like used in that connection in the earlier cases, and – as the current case illustrates – conceivably much more. The provision brings about that a remedy can be provided whenever the illegitimate use of the concept of juristic personality adversely affects a third party in a way that reasonably should not be countenanced. Having regard to the established predisposition against categorisation in this area of the law and the elusiveness of a convincing definition of the pertinent common-law principles, it seems that it should be appropriate to regard s20(9) of the Companies Act as supplemental to the common law, rather than substantive. The unqualified availability of the remedy in terms of the statutory provision also militates against an approach that it should be granted only in the absence of any alternative remedy. Paragraph (b) of the subsection affords the court the very widest powers to grant consequential relief. An order made in terms of para (b) will always have the effect, however, of fixing the right, obligation or liability in issue of the company somewhere else. In the current case the ‘right’ involved is the property held by the subsidiary companies in the King Group, and the obligation or liability is that which any of them might actually have to account to and make payment to the investors. (35) Relief in terms of s20(9) of the Companies Act may be granted on application by any ‘interested person’, or mero motu in any proceedings in which a company is involved. The term ‘interested person’ is not defined. I do not think that any mystique should be attached to it. The standing of any person to seek a remedy in terms of the provision should be determined on the basis of ‘well-established principle’: see Jacobs en ‘n Ander v Waks en Andere 1992 (1)SA 521(A) at 533J – 534E; and, of course, if the facts happen to implicate a right in the Bill of Rights, s 38 of the Constitution. There can be no doubting that the applicants have a direct and sufficient interest in the relief sought, so as to qualify as ‘interested persons’ within the meaning of the provision.”

As evident, the courts in South Africa still maintain the separate juristic nature of an incorporated being as sacrosanct. However, the veil will be set aside or pierced, for want of a better term, when the juristic entity is used for an unconscionable act such as to defraud creditors or for a purpose other than that for which it was intended and its use has resulted in innocent parties being adversely affected. The question as to whether such lifting or piercing would be in totality is one that would be decided on a case-to-case basis. I submit that, notwithstanding the current regulatory framework, our case law indicates that our courts will be hesitant to completely disregard the corporate nature of a juristic being, should they be able to remedy the abuse by merely setting it aside but for only the matter at hand. However, if the abuse is of a completely delinquent or unconscionable nature, then it is submitted that based on the current case law, as referred to above, that has been received by the Supreme Court of Appeal in the case of City Capital SA Property Holdings Limited vs Varnus Badenhorst, Sinclair Cooper and others, where the Supreme Court of Appeal approved the findings of Binns-Ward in Ex Parte Gore as stated above. Therefore, it has resulted that in such instances and where the company has been nothing more than a sham, the courts will set aside that juristic entity and hold the natural beings – being director/shareholder/member – personally liable for the actions of the company as if the company never existed.

The question now arises as to what this entails. Once a director/shareholder/member is held personally liable for the actions of the company, it would be akin to a deed of suretyship in simplistic terms. The director/shareholder/member cannot claim that they are immune from prosecution or liability as the actions were the actions of the juristic being. Once the juristic identity has been set aside or pierced, that juristic entity would no longer, in theory, exist and all its actions would be the direct actions of the natural patrimonial estates of the director/shareholder/member. However, the question remains as to whether a creditor or an affected party may attach both the juristic being and the directors, shareholders, and/or members in an action or proceeding once the corporate veil has been pierced or set aside. I submit this is still to be decided on a case-by-case basis, and that future jurisprudence will surely put this argument to bed. It is, however, submitted that in most cases, the company and its shareholders would be liable jointly and severally.