27 July 2022 by , and Corporate & Commercial Alert

The story of the Vrrr Pha (Volkswagen Golf) gone wrong

It is trite in law that a company is a separate juristic entity. This means, among other things, that the debts of the company cannot be regarded as the debts of its shareholders or directors.

This is, however, not cast in stone as seen in the recent High Court judgment regarding Kolisang v Alegrand General Dealers and Auctioneers and Another [2022] ZAGPJHC 431 (Kolisang case).

Background

The salient facts of the Kolisang case are as follows:

  • The second respondent, a director (Director) of the first respondent, Alegrand General Dealers and Auctioneers (Company), sold to the applicant a motor vehicle described as a 2012 Golf GTI. It later transpired that the Director misrepresented the model of motor vehicle which was in fact a 2010 Golf GTI.
  • The applicant cancelled the agreement and returned the motor vehicle. However, the Company refused to refund the purchase price to the applicant.
  • The applicant instituted proceedings in the Magistrate Court to recover the purchase price. Judgment was granted in favour of the applicant as the Company did not defend the legal proceedings.
  • Despite the court order, the Company did not refund the purchase price.
  • The Director resigned from the Company and sold the business. He then contended, among other things, that (i) the sale of business agreement contained an indemnity for any claims and; (ii) the Company (and not him personally) remained liable to refund the purchase price.

The key issue before the court was whether the Director’s misrepresentation amounted to unconscionable conduct entitling the court to pierce the corporate veil.

The pertinent provision in the Kolisang case was section 20(9) of the Companies Act 71 of 2008. This section provides a court with the discretion to ignore the limited liability of a company when there is “unconscionable abuse” of the company’s separate juristic personality.

The court relied on earlier cases in interpreting “unconscionable abuse”. It is wide enough to cover terms such as “sham”, “device”, “stratagem” and the like used in earlier cases. The court in particular cited Ex parte Gore NO and Others NNO (in their capacities as the liquidators of 41 companies comprising King Financial Holdings Ltd (in liquidation) and its subsidiaries). In addition, the remedy may be used “whenever the illegitimate use of the concept of juristic personality adversely affects a third party in a way that reasonably should not be countenanced”.

Unconscionable abuse

In the Kolisang case, the court found that the Director’s conduct set out below, among other things, constituted unconscionable abuse of the Company’s juristic personality:

  • he considered himself the owner of the company;
  • he was reckless, dishonest and did not act in the best interest of the company;
  • he had a careless disregard for the interest of the company as he failed to defend the proceedings in the magistrate court;
  • he failed to notify the purchaser of the business of the legal action against the Company; and
  • he fabricated the sale of business to distance himself from any personal liability.

The court was satisfied that the Director’s conduct (the misrepresentation) was intended and did in fact induce the applicant to purchase the motor vehicle and granted an order in favour of the applicant. While the misrepresentation was reprehensible, it does not appear that the Director conflated himself and the Company to be one and the same. In our view, by selling the business, he actually appreciated the divide between the Company’s legal personality and that of his own because he tried to evade ultimate liability. Failing to ensure that the Company was defended in the proceedings was, in our view, irrelevant as there is no obligation to defend. By not notifying the purchaser of the business of the legal action, he clearly intended to defraud or misrepresent the new acquirer by having the new acquirer assume liability under the claim. But even so, the new acquirer would have their own legal remedies for this conduct (including any breach of the Director’s fiduciary duties). 

It would seem that the court in the Kolisang case was lenient in determining whether the misrepresentation by the Director constituted “unconscionable abuse of the juristic personality” and other appropriate legal remedies could have been sought to compensate the applicant. For instance, in the recent Western Cape High Court decision in Department of Agriculture, Forestry and Fisheries and another v B Xulu and Partners Incorporated and Others [2022] 1 All SA 434 (WCC), the court found that using a company dishonestly and improperly such as appropriating funds of a company for personal affairs constituted unconscionable abuse by its controllers. In this regard the entity is treated in a way that draws no distinction between the separate juristic personality of the entity and those in control of it.

Piercing the corporate veil

The Kolisang case reminds directors serving on boards of companies that the standard to be held liable for the obligations of a company may, in certain facts, be quite low. Furthermore, companies have legal personality and cannot be utilised as alter egos. Failure thereof may result in a court piercing the corporate veil and consequently finding directors personally liable, as if the company did not exist. Further, a resignation by a director cannot be used as a means of evading liability and fiduciary duties must always be observed when acting on behalf of companies.

It will be interesting to see how the Kolisang case will be applied by other courts, if at all, in comparison to earlier judgments. In light of the Kolisang case, extreme caution may need to be followed going forward.

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