18 October 2022 by and

Debunking the prospect of piercing the corporate veil

The concept of piercing the corporate veil is often one that provides a sense of trepidation. Traditionally it was difficult and relatively rare to succeed with piercing the veil, but it has become, for good reason, less challenging.

Piercing of the veil by the court is something exceptional, as it strips away the corporate identity of a juristic person and exposes its directors and shareholders to personal liability.

Its purpose is to ensure that a company is not used as a shield to protect abusive directors and shareholders from personal liability.

It usually involves corporate misconduct that unsurprisingly leads to sensationalist news headlines and TV documentaries exploring the directors’ dodgy dealings. The concept of more easily holding unscrupulous directors or shareholders accountable for their unconscionable actions is what legislators envisaged when section 20(9) of the Companies Act 71 of 2008 (Companies Act) was promulgated. The recent unreportable judgment of Lebamang Octavia Kolisang v Alegrand General Dealers and Auctioneers t/a Grand Auctions and Another deals with the considerations a court is tasked with when faced with a section 20(9) application.

Section 20(9)(b) of the Companies Act provides that:

A court may on application by an interested person or in any proceedings in which a company is involved, a 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)”

Facts

The matter involved a misrepresentation surrounding a Golf GTI purchased at an auction. In August 2016, Ms Lebamang Octavia Kolisang (the applicant) purchased a vehicle which at the time was described as, inter alia, a 2012 Golf GTI from Alegrand General Dealers and Auctioneers t/a Grand Auctions (the company). Mr Jassat (the second respondent) represented the company in this transaction. Jassat was also the director, and also found to be the owner, of the company at the time.

The applicant paid the purchase price and took possession of the motor vehicle. Shortly thereafter she discovered that the motor vehicle was actually a 2010 Golf GTI (not 2012). The applicant consequently cancelled the sale agreement, returned the motor vehicle to the company, and sought a refund of the purchase price. The company accepted the cancellation and the return of the vehicle but refused to refund the purchase price. The applicant summarily instituted proceedings against the company. Default judgment was ultimately granted in the applicant’s favour as the company failed to defend its position in court.

While attempting to execute the successful default judgment, the applicant ascertained that the second respondent resigned as director, the registered address and business address of the company were changed, and the company was in the process of deregistration. This made it arduous for the applicant to execute and satisfy the judgment debt against the company. Although the second respondent made submissions regarding the merits of the claim by the applicant against the company, no rescission application was ever instituted or reasons given for the company not having defended itself in the initial proceedings.

It was under these circumstances that the applicant sought to pierce the corporate veil, as permitted under section 20(9)(b) of the Companies Act, and hold the second respondent personally liable for the judgment debt.

The court in this matter focused on two issues: (i) the misrepresentation by the second respondent; and (ii) whether such misrepresentation justified the piercing of the corporate veil.

The court found that the second respondent had misrepresented the facts, and the key issue before the court became whether, as required by section 20(9)(b), that misrepresentation amounted to “unconscionable conduct” by the second respondent as the director and owner of the company.

Understanding section 20(9)

The court firstly outlined the purpose of section 20(9) of the Companies Act. One of the benefits afforded to a company, its directors and owners is that a company entitled to its own juristic personality that is distinct from its shareholders. This means, amongst other things, in the normal course of business, the debts of a company cannot be regarded as the debts of the shareholders or directors.

This notwithstanding, directors are required to act according to their fiduciary, statutory and common law duties. If they do not then, irrespective of the company’s juristic personality, a director can be held personally liable for their actions. It is more difficult to hold a a shareholder/owner liable, and the ability to pierce the corporate veil becomes especially important when trying to hold shareholders accountable for a company’s actions. 

Section 20(9) empowers a court to exercise its statutory duty to pierce the corporate veil to disregard the distinction between the juristic personality and a director’s personality. This disregard deals with setting aside a company’s juristic personality and personally holding a director or shareholder liable. The Companies Act requires an “unconscionable abuse of the juristic personality” to be present when considering whether to pierce the veil.

The court affirmed in the case under discussion that this test has made it much easier for the veil to be pierced than ever before.

Our courts have accepted that fraud and improper use of a company are considered sufficient grounds to pierce the corporate veil, especially as this goes against the interest of a company itself.

In this case, the applicant contended that the purchase of the motor vehicle was caused due to the misrepresentation by the second respondent and that it was deliberate, clearly amounted to fraud, and was unconscionable conduct.

The second respondent admitted that his misrepresentation was the cause of the judgment against the company, but denied that the corporate veil could be pierced.

Ultimately the court was satisfied that the applicant had successfully established that the second respondent’s misrepresentation was material, deliberate, amounted to fraud, was against the best interest of the company, was self-serving and amounted to an unconscionable abuse of the company’s juristic personality. The judge was satisfied that the corporate veil could be pierced in terms of section 20(9)(b) and the second respondent held liable. 

Conclusion

Once again, this should act as a warning to directors and shareholders who believe they can escape liability for misconduct by trying to hide behind a juristic personality. Directors must conduct themselves at all times in a manner that is in the best interest of the company and in line with their fiduciary duties. Shareholders should always ensure, while enjoying their rights as shareholders, that they do not act in a manner detrimental to the company or which gives the appearance that the juristic personality is being abused.

While it can also serve as a warning, section 20(9) is a welcome relief for proper corporate accountability to be upheld.

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