Legal personality

What does lifting the corporate veil entail? What is the purpose and under what circumstances can it
occur? Refer to relevant case law in your answer.

I have set out below a guideline to answering the above question. In answering this question you must
discuss the principle of separate legal personality and the doctrine of piercing the corporate veil, in both
the common law and in section 20(9) of the Companies Act 71 of 2008.

The case of Salomon v Salomon is the pioneer of common law jurisprudence of the principle that a
company has its own legal personality which is a legal fictitious personality that shareholders of a
company are able to rely on to isolate their personal assets from being liquidated by the creditors of the
company.

The principle of separate legal personality also confirms ownership of the assets of the company by the
company instead of the shareholders. The rights that are inseparable with the principle of separate
legal personality must be used for a proper and intended purposes for its legal development which such
development is fully accounted for in the judgment in Salomon v Salomon.

The Court stated in Dadoo Ltd and Others v Krugersdorp Municipal Council that “a registered company
is a legal persona distinct from the members who compose it”.

The separate legal personality of a company is recognised in section 19(1)(a) of the Companies Act
which provides that from the date and time that the incorporation of a company is registered, as stated
in its registration certificate, the company is a juristic person, which exists continuously until its name is
removed from the companies register in accordance with this Act.

A corporate veil is therefore a fictitious legal shield that separates the personality of a company from the
personalities of its founders or members and directors. This legal insulation, as a general rule prevents
any form of liability of the company being imposed on the founders or directors in their personal
capacities.

Smalberger JA in his judgment in the leading common law case of Cape Pacific Ltd v Lubner Controlling
Investments (Pty) Ltd asserts that despite the general rule of separate legal personality, “it is settled law
that a Court in certain circumstances would be justified in in disregarding a company’s separate
personality in order to fix liability elsewhere for what are ostensibly acts of the company and this is
generally referred to as lifting or piercing the corporate veil”. When the veil of a company has been
disregarded by a Court, permission is granted to those seeking remedy to effectively have the ability to
recover their losses against the estate of the natural person that perpetrated the abuse of the corporate
personality of a company.

Note that there is a difference between piercing the veil and lifting the veil. When a court pierces the
veil it treats the liabilities of the company as those of its shareholders and directors and disregards the
legal personality of a company. On the other hand, when the court lifts the veil it simply takes into
account who the company’s shareholders or directors are, and does not necessarily ignore the separate
identity of the company. Courts sometimes refer to the phrases interchangeably but there is a difference
between the two phrases. See further on this distinction your prescribed textbook Contemporary
Company Law pages 46-47.

Other relevant cases dealing with piercing the corporate veil in the common law are Hulse-Reutter v
Godde and Amlin (SA) Pty Ltd v Van Kooij. The approach to piercing the corporate veil under the
common law is discussed in your prescribed textbook Contemporary Company Law on pages 48 to 50.

Section 20(9) of the Companies Act provides for disregarding the separate legal personality recognised
in section 19(1)(a). Section 20(9) provides that if, on application by an interested person or in any
proceedings in which the 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:

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

make any further order the Court considers appropriate to give effect to a declaration contemplated in
paragraph (a).

The provisions of section 20(9) are similar to the provisions of section 65 of the Close Corporations Act.
Larkin anticipated that in future company law will follow suit and develop a statutory provision for
piercing the corporate veil as it has been done with section 20(9) of the Companies Act. In this regard he
stated “the Close Corporation’s Act can, in a very real way, be an excellent crystal ball for company law.

The application of section 20(9) as the codification of the common law principle of piercing the
corporate veil was considered in Ex Parte Gore and Others NNO where the Court referred to the
codification as continuance of common law as opposed to creating its substitute. This position that has
been asserted by the Court suggests as an answer to the question whether is section 20(9) is intended to
outdo the common law on piercing of the corporate veil.

The legal position set out by the Court with regard to the codification of section 20(9) suggests that the
legislative provisions of section 20(9) must be applied in conjunction with established common law. This
is gleaned from the judgment where the Court asserts that “there is no express indication that the
introduction of section 20(9) is intended to displace the common law” and where the Court stated that
“the width of the provisions of section 20(9) appears to broaden the basis upon which the Courts in this
country, and certainly those in England, have hitherto been prepared to grant relief that entails
disregarding corporate personality”.

The general guideline to piercing the corporate veil is summarised in Ex Parte Gore as follows:

1. The mere involvement of the company in a scheme intended to conceal wrongdoing doesn’t
itself justify piercing, the company must actually be used as means to achieve the impropriety;
2. The Court will pierce the veil if the is nexus between the natural person concerned and the
company; and
3. A company can be a façade for such purposes even though not incorporated with deceptive
intent; the pertinent enquiry is whether it is being used as a sham at the time of the relevant
transaction.
Corporate finance
Kgolo Limited is an unlisted public company trading  i n   electronic
equipment. Thabo agreed to be appointed as a director of
the company but subsequently w ithdrew his consent when he learnt of the
poor financial state of the company. After the withdrawal by Thabo
of his consent to be a director of the company, the board of directors
held a meeting to discuss the poor financial state of the company 
Thandeka, the finance director of the company, advises the company that
to regain its financial health Kgolo Limited should issue new shares and
offer these shares to the public.  She advises the board further that the
company should avoid revealing in its prospectus the true financial state of
the company because this may have a negative impact on how
the company  i s perceived by the
public. The board of directors acts on Thandeka's
advice and the prospectus  i s  issued without revealing the true financial
state of the company. The names of all the directors including
Thabo's name, are stated in the prospectus. With reference to the relevant
provisions of the Companies Act 71 of 2008 discuss the relevance of
a prospectus, as well as the legal consequences and im plicat ions  of
the failure of Kgolo Limited to disclose the true financial state of the
company in the issued prospectus.  (15)

A prospectus must accompany an offer to the public. An offer to the public includes an offer of securities
to any section of the public, whether selected as holders of the company’s securities, as clients of the
person issuing the prospectus, as the holders of any particular class of property, or in any other matter,
but does not include an offer made in any of the circumstances in section 96 or a secondary offer
effected through an exchange. In this scenario, Kgolo Limited is an unlisted public company, so the
exceptions do not apply.

Section 104 of the Companies Act refers to securities offered to the public for subscription which is an
offer made on behalf of the company in the primary market. The prospectus must be registered with the
Companies and Intellectual Property Commission and may not be issued more than three months after
the date of its registration.

The prospectus must not contain any untrue statements. In terms of section 95 of the Companies Act
“An untrue statement is regarded to have been included in a prospectus, written statement, or
summary directing a person to either a prospectus or written statement, if it is contained in any report
or memorandum— (a) that appears on the face of the prospectus, written statement, or summary; or
(b) that is incorporated by reference within, or is attached to or accompanies, the prospectus, written
statement or summary. (4) An omission from a prospectus or written statement of any matter that, in
the context, is calculated to mislead by omission constitutes the making of an untrue statement in that
prospectus or written statement, irrespective of whether this Act requires that matter to be included in
the prospectus or written statement.”

In terms of section 77(3) of the Companies Act 71 of 2008 a director can be held personally liable for any
loss suffered by the company signing, consenting or authorising the publication of materially false
financial statements or a prospectus or written statement for the public offer of shares that contains an
untrue statement or a statement to the effect that a person had consented to be a director of the
company, when no such consent had been given despite knowing that the statement was false,
misleading or untrue, as the case may be, but the provisions of section 104(3) apply to limit the liability
of a director in these instances.
Corporate governance:

ABC (Pty) Ltd (‘the company’) has five shareholders, each of whom holds 20% of the voting rights in
the company. All of them are also directors of the company. The Memorandum of Incorporation of
the company has not changed the default position in terms of the Companies Act 71 of 2008
regarding the quorum requirements for a shareholders’ meeting. It has also not changed the default
position regarding the threshold required to pass ordinary resolutions.
The company held a board meeting at which four directors were present. Some of the decisions
taken by the board of directors related to matters that were required to be referred to the
shareholders for approval by an ordinary resolution. Without issuing a notice of a shareholders’
meeting or convening a shareholders’ meeting, the board meeting proceeded to consider the
proposed ordinary resolutions. All the directors who were present at the meeting voted on the
proposed ordinary resolutions in their capacity as shareholders.
Simphiwe, a director and shareholder of the company who was not present at that meeting, objects
to the passing of the ordinary resolutions at the meeting in this manner. He argues that: (i) the voting
on the ordinary resolutions was invalid as no notice of a shareholders’ meeting was properly given;
(ii) the quorum requirements for a shareholders’ meeting were not satisfied; and (iii) the threshold
required for the approval of the ordinary resolutions was not satisfied.
With reference to the relevant provisions of the Companies Act 71 of 2008 and the facts, advise
Simphiwe whether his arguments have any merit and whether the ordinary resolutions were validly
passed at the meeting.

If every shareholder of a company (other than a state-owned company) is also a director of the
company, any matter that is required to be referred by the board to the shareholders for decision may
be dealt with in terms of section 57(4) of the Companies Act 71 of 2008. The effect of this section is that
a matter may be referred by the board to the shareholders without notice or compliance with any
internal formalities. However, this is subject to the Memorandum of Incorporation which may provide
otherwise.

Therefore, since all the shareholders of ABC (Pty) Ltd are directors of the company, section 57(4) of the
Companies Act 71 of 2008 would be applicable, unless the Memorandum of Incorporation provides
otherwise.

Section 57(4) requires the following:

Every person must be present at the board meeting when the matter was referred to them in their
capacity as shareholders.

A sufficient number of persons must be present in their capacity as shareholders to satisfy the quorum
requirements as set out in section 64 of the Companies Act.
A resolution adopted by the shareholders be supported by shareholders holding at least the percentage
of shares required for adopting an ordinary resolution at a properly constituted shareholders’ meeting.

In this case, Simphiwe was not present at the meeting. Therefore, the first proviso is not satisfied
because not every person was present at the board meeting when the matter was referred to them in
their capacity as shareholders.

The default position for a quorum to be satisfied is that at least 25% of all the voting rights that are
entitled to be exercised in respect of at least one matter to be decided at the meeting must be present
before the meeting may start. Since four out of five shareholders were present at the meeting the
quorum requirements for the meeting were satisfied.

The default position for the support of an ordinary resolution is more than 50% of the voting rights
exercised on the resolution.

In conclusion, Simphiwe’s objection is valid because every person was not present at the board meeting
when the matter was referred to them in their capacity as shareholders. Therefore, the ordinary
resolutions were not validly passed.
Corporate capital
Moloi (Pty) Ltd is a company that specialises in designing diamond rings. Mapula, an existing
shareholder and employee of the company wants to purchase more shares in the company. She
however does not have sufficient funds, but she offers to sell her art collection to the company for R1
million. She will then use the money from the sale of her art collection to purchase more shares in
Moloi (Pty) Ltd. Advise Moloi (Pty) Ltd on whether the purchase of Mapula’s art collection would
constitute financial assistance in connection with the purchase of its shares. Refer to relevant case
law where applicable. Assuming the purchase of the art collection is financial assistance, discuss
further the requirements that must be satisfied in terms of the Companies Act 71 of 2008 for this
transaction to be validly executed.  

In terms of section 44 of the Companies Act, the board may authorize the company to provide financial
assistance by way of a loan, guarantee, the provision of security or otherwise to any person for the
purpose of, or in connection with, the subscription of any option, or any securities, issued or to be
issued by the company.

The transaction in the given facts is not a loan, guarantee or security. It may still constitute financial
assistance as the transaction may fall within ambit of ‘…or otherwise to any person for the purpose of,
or in connection with,…’

In order to determine whether financial assistance is given the courts have developed various tests:-

 It must be ascertained whether the intended transaction qualifies as financial assistance. To

determine this, the imporverishment test as formulated in the case of Gradwell (Pty) Ltd v
Rostra Printers Ltd 1959 (4) SA 419 (A) should be relied upon to determine whether or not
financial assistance was provided.
 The impoverishment test considers whether a transaction will have the effect of leaving the
company poorer, and if so, then financial assistance was provided.
 In Lipschitz NO v UDC Bank Ltd 1979 (1) SA 789 (A) the court held that if the company buys an
asset from a person in order to enable that person to buy shares in the company, it will depend
on the facts whether this constitutes financial assistance.
 Factors that have emerged from case law to assist in this regard are whether the company
needs the asset in its normal business and whether the company paid a fair price for it.

It is clear that the business of Moloi (Pty) Ltd is to design diamond rings. Arguably, the company does
not require Mapula’s art collection in its normal business. Arguably the company did not pay a fair price
for it, but this is debatable. The purchase of those assets would arguably constitute financial assistance
in connection with the purchase of its shares and the company would need to comply with section 44 of
the Companies Act 71 of 2008.
Assuming the purchase of the art collection qualifies as financial assistance, the requirements that must
be satisfied in terms of the Companies Act 71 of 2008 for this transaction to be validly executed are as
follows:

 The board must authorize the company to provide financial assistance to any person for the
purchase of any securities of the company.
 The provision of financial assistance must be pursuant to an employee share scheme; or the
provision of financial assistance must be pursuant to a special resolution of the shareholders,
adopted within the previous two years, which approved such assistance either for the specific
recipient or generally for a category of potential recipients, and the specific recipient falls within
that category.
 The board must be satisfied that immediately after providing the financial assistance, the
company would satisfy the solvency and liquidity test and that the terms under which the
financial assistance is proposed to be given are fair and reasonable to the company.
 The board must ensure that any conditions or restrictions regarding the granting of financial
assistance set out in the company’s Memorandum of Incorporation have been satisfied.
Capacity & representation
The Memorandum of Incorporation of Wild Forever (Pty) Ltd states that the company’s business is
restricted to chicken farming. In an effort to expand the company’s business to game farming and
breeding, on behalf of Wild Forever (Pty) Ltd the board of directors of Wild Forever (Pty) Ltd
purchases a buffalo for R50 million from Vince, a game breeder.

1. Discuss with reference to the Companies Act 71 of 2008 and the Memorandum of
Incorporation of Wild Forever (Pty) Ltd, whether the contract for the purchase of the
buffalo from Vince is valid.

2. Marvin, one of the shareholders of Wild Forever (Pty) Ltd, is unhappy about the purchase
of such an expensive buffalo by the company. Assuming that the contract between Wild
Forever (Pty) Ltd and Vince for the purchase of the buffalo is valid, discuss whether
Marvin has any claim for damages in this regard in terms of the Companies Act 71 of
2008.

Question 1

In terms of section 19(1)(b) of the Companies Act a company has the legal capacity and the powers of a
natural person, except to the extent that a juristic person is incapable of exercising any such power, or
the company’s Memorandum of Incorporation provides otherwise.

Therefore, the capacity of a company is no longer limited by its main or ancillary objects or business. A
transaction is not void merely because it is prohibited or restricted in terms of its MOI (see s 20(5)).

The fact that the company is restricted to chicken farming is irrelevant. Therefore, the contract for the
purchase of the buffalo from Vince is valid.

It is important to note that even though the doctrine of constructive notice has partially been abolished
a person is deemed to have knowledge of any ring-fencing provisions in the company’s Memorandum of
Incorporation. This exception applies only if the company’s name includes the letters “RF” and the
Notice of Incorporation contains a prominent statement drawing attention to such provision. Thus if the
company’s name had included the letters “RF” the company would then lack capacity to enter into
contract beyond the scope of its objects. Refer further to section 19(5) of the Companies Act.

Question 2
Even though an ultra vires act is binding on the company, the Companies Act 71 of 2008 has retained
the internal consequences of ultra vires acts. In terms of section 20(1)(b) the issue of capacity may be
raised in proceedings between the company and is shareholders, directors, or prescribed officers or
between the shareholders, directors or prescribed officers of the company.

Section 20(6) of the Companies Act provides that, unless ratified by special resolution (in terms of
section 20(2)) each shareholder has a claim for damages against any person who intentionally,
fraudulently, or due to gross negligence, causes the company to do anything inconsistent with the
Companies Act or a limitation, restriction or qualification on the powers of the company as stated in its
Memorandum of Incorporation.

The purchase of the buffalo is in contravention of the Memorandum of Incorporation of the company. It
has not been ratified by special resolution of the shareholders. Therefore Marvin will have a potential
claim for damages if Marvin can successfully prove that the company intentionally or due to gross
negligence purchased the buffalo from Vince.
Groups of companies
Zodwa recently became one of the directors of Zimali Holdings Ltd, which has several subsidiaries.
As she familiarises herself with the company’s documents and records it becomes clear to her that
business is actually conducted through Zimali Holdings Ltd and that there is generally no regard
given to the distinction between the legal personality of Zimali Holdings and that of its subsidiaries.
Zodwa is concerned that should problems arise later that lead to legal action against any of its
subsidiaries, this disregard of the legal personality of the subsidiaries may result in the piercing of
the corporate veil of the group of companies. She is, however, not sure about this. Zodwa
approaches you with a request to advise her on whether it is possible to pierce the corporate veil of
a group of companies.
With reference to relevant case law and articles advise Zodwa on the concept of piercing the
corporate veil of a group of companies. Your advice must include an explanation of how groups of
companies relate to one another in terms of the Companies Act 71 of 2008; the approach of the
court to the piercing of the corporate veil of a group of companies and whether, in your opinion,
courts have settled the issue of piercing the corporate veil of companies. 

The question first asks you to explain how groups of companies relate to each other. This is set out in
the Companies Act 71 of 2008. Section 1 of the Companies Act, 2008 defines a ‘group of companies’ as a
holding company and all its subsidiaries. In terms of section 3(1) the holding-subsidiary relationship is
based on control of the subsidiary company by the holding company either at board meeting or general
meeting level. The relationship exists if the holding company itself controls the subsidiary, or does so
through other subsidiaries or in combination with other subsidiaries, or through nominees. It is also
important to understand and discuss the meaning of ‘control’ as set out in the Companies Act.

Each of the companies in a group of companies is in law a separate legal entity with its own separate
legal personality and its own rights, privileges, duties and liabilities that are separate and distinct from
those of the other subsidiaries. The fact that a group of companies effectively forms one economic unit
does not necessarily mean that the separate identity of each company is ignored and that the group of
companies is treated as one single entity. Therefore, the acts of a holding company are not per se the
acts of its subsidiaries, or conversely, since the holding company is a separate legal entity from its
subsidiaries.

In discussing the approach of the courts to piercing the corporate veil you must discuss the leading case
of Ex Parte: Gore No and others [2013] 2 All SA 437 (WCC) and the facts of this case. You should also be
familiar with what the court stated about section 20(9) of the Companies Act in this case.

Courts have struggled with the correct approach to adopt in determining whether or not to pierce the
corporate veil, particularly in the context of groups of companies, where the courts have been divided in
their approach whether, and in what circumstances the corporate veil may be pierced so that the group
is in fact treated as a single entity as opposed to a collection of different corporate entities.

South African courts have either adopted a liberal approach or a conservative approach in dealing with
this challenge. You must understand and discuss these two approaches. The liberal approach is
evidenced in Ebrahim v Airports Cold Storage (Pty) Ltd 2008 (6) SA 585 (SCA), [2009] 1 All SA 330 at par
22, when dealing with the case in which section 65 of the Close Corporations is invoked. According to
the conservative approach holds that courts are no limited to disregard the separate legal personality of
a company in a group simply because it is just to do so. In Gore’s case the court appears to have opted
for the conservative approach and pierced the corporate veil on the grounds that the King group was a
sham, and found that this had brought the activities of the group within the meaning of “unconscionable
abuse” in section 20(9).

The court in Gore seems to have found a remedy in section 20(9) which the court interpreted as
applicable whenever the illegitimate use of the concept of juristic personality adversely affects a third
party in a way that reasonably should not be countenanced. However, the court shied away from
declaring specifically that such a provision should be used as an accepted standard in piercing of the
corporate veil.
Accordingly, the issue of when and under what circumstances should the veil of a group of companies
be pierced, is a balancing act between upholding the principle of separate existence of each individual
company in a group setting and the circumstances inherent in each individual case that would
necessitate veil piercing.

Please read the sources listed Appendix A of Tutorial Letter 101 on groups of companies.
Remedies & enforcement

The directors of Axel (Pty) Ltd discover that Musa and Jerome, two of their co-directors, have
been redirecting company funds from the accounts of Axel (Pty) Ltd to their personal accounts.
They also discover that these illicit transactions have been taking place, undetected, for a period
of three years.
Answer the following questions with reference to the Companies Act 71 of 2008 and relevant case
law:
1. Consider whether under the circumstances of this case, the board of directors will have
grounds to successfully obtain a delinquency order against Musa and Jerome. Discuss further
the effects of a delinquency order on a director.
                                                                                                          
2. Discuss whether delinquency proceedings may be instituted by a shareholder using the derivative
action

Look at section 162(5) of the Companies Act for the grounds on which a director may be declared
delinquent.

The facts of this case are similar to those in Gihwala v Grancy Property Limited. In this casetwo directors
of a company had also appropriated financial benefits for themselves.The court held that this conduct
entailed a gross abuse of the position of a director. Since the actions of the two directors had been
intentional the court held further that their conduct involved a breach of trust in relation to the
performance of their duties as directors.

In this case it is arguable that Musa and Jerome grossly abused the position of a director by redirecting
company funds to their personal accounts. They have also intentionally inflicted harm upon Axel (Pty)
Ltd. In addition they have acted in a manner that amounted to wilful misconduct and breach of trust in
relation to the performance of their functions in the company. On these grounds the board of directors
of Axel (Pty) Ltd could successfully obtain a delinquency order against Musa and Jerome.

If any of the delinquency grounds are established a court must declare a director delinquent and has no
discretion in this regard.

The effect of an order of delinquency is that a person is disqualified from being a director of a company
and is thus prohibited from being a director of a company. A delinquency order may under certain
circumstances be unconditional and subsist for the lifetime of the delinquent director or it may be
conditional and subsist for seven years or longer, as determined by the court.
Some of the conditions that a court may impose on the order of delinquency or probation are that the
director concerned is required to undertake a designated programme of remedial education relevant to
the nature of his or her conduct as a director, or to carry out a designated programme of community
service. A court may also order the director concerned to pay compensation to any person adversely
affected by his or her conduct as a director, to the extent that such a victim does not otherwise have a
legal basis for claiming compensation.

A court has a discretion to suspend a delinquency order after 3 years and substitute it with an order or
probation upon an application by the delinquent director.

Question 2

A derivative action is brought by a person on behalf of a company in order to protect the legal interests
of the company. Section 165 of the Companies Act makes provision for derivative actions. A
shareholder or a person entitled to be registered as a shareholder of the company or a related company,
is empowered to serve a demand upon a company to commence legal proceedings or to take related
steps to protect the legal interests of the company.

Where a wrong is done to the company the “proper plaintiff” is the company itself and not the
shareholders See Foss v Harbottle. Therefore, the derivative action is an exception to the “proper
plaintiff” rule.

In Lewis Group Limited v Woollam the court had to decide whether delinquency proceedings could be
instituted by a shareholder using the derivative action. Please read this case to understand the facts of
the case.

The court was required to decide whether Woollam was entitled to proceed derivatively for the given
relief when he was already given standing under the Companies Act to proceed for such relief
personally.

The court held that a shareholder may not institute delinquency proceedings using the derivative action.
It stated that the right of a shareholder that is afforded protection in terms of section 162 is not a right
of the company but it is a personal right that each shareholder enjoys individually. It stated that it is not
within the scheme of the Companies Act that shareholders should seek to proceed derivatively to obtain
a delinquency order in terms of section 162 of the Companies Act.

The court did concede though that the language of sections 162 and 165 of the Companies Act read
together do not explicitly exclude the use of the derivative action procedure in section 162 proceedings.
It held that in exceptional circumstances a shareholder may institute delinquency proceedings
derivatively. One example the court gave where a shareholder may do so is where a company has
already instituted proceedings for a declaration of delinquency but has failed to prosecute them to
conclusion. In these circumstances the court said that the best interests of the company might be
served by the continuation by the shareholder of the proceedings derivatively because the costs that
were already incurred by the company would be wasted if the shareholder were to initiate proceedings
afresh for the same relief on the same facts in his own name.

This however is an exception, and in general, the court held, a shareholder must institute delinquency
proceedings personally rather than by a derivative action. This viewpoint has been criticised by
academics but it is currently the legal position. In your answer you may briefly discuss some of these
critiques to the court's decision.