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Week 4 Concept of a Company

Concept of a company notes

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11 views4 pages

Week 4 Concept of a Company

Concept of a company notes

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reanetsemotiane
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© © All Rights Reserved
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THE CONCEPT OF A COMPANY & PIERCING OF THE CORPORATE VEIL

The Company as a Legal Person


A co can loosely be described as:
“an association of persons with the common objective of acquisition of gain”

What are the two types of persons recognized by law?

2 types of persons:
1. Natural persons (human beings)
2. Juristic persons (eg co or CC) = Legal subject/person ie an artificial person, which
stands apart from the people who are members of it.

o Juristic persons is something that is capable of bearing rights & duties in its own right
– BUT they do not have all rights as humans
o Only rights necessary to pursue economic activity
ACQUISITION OF LEGAL PERSONALITY

1. By way of a separate Act:

 Corporations are directly created by these Acts:


 Eg: Eskom Act 40 of 1987 or Rhodes University Act 15 of 1949

2. General enabling Act:

 Eg: Companies Act or


 Anyone can form a co, if they do, then these Acts apply

CONSEQUENCES OF SEPARATE IDENTITY

Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 550


 Law stated – persons other than whites were incapable of property ownership
 2 Indian men (1 of them Dadoo) formed a co
 Co bought property in Krugersdorp then leased it to Dadoo in his personal
capacity
 Dadoo carried on a general dealer’s business
 Municipal Council objected
 Held: co was legal entity separate from members & ownership was not prohibited
by law

Salomon v Salomon & Co Ltd [1897]

 S was sole proprietor of business


 Wanted to expand business & enable family to have interest in business
 Formed a co & sold business to co for £39 000
 Purchase price:

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 20 000 shares of £1 each
 A cash amount
 Debentures to value of £10 000 – secured by a bond over assets

 Co went insolvent
 Assets weren’t enough even to cover secured debentures in full
 S was a secured cr & therefore ordinary cr’s received nothing
 Unsecured cr’s argued that S and his co were in essence the same person & that
S should actually be liable for debts of co (& not be a secured cr)
 Held: from its inception, co is separate from its members (S not liable for debts)

Consequences of separate identity:


 Property owned by co, not by shareholders
 Debts belong to co itself, not shareholders
 Has no physical body – acts through its organs
 Separate entity existing apart from members
 Can sue and be sued in own name
 Capacity to have own rts & duties
 Perpetual succession
 Members only entitled to act on behalf of co if specifically appointed as
representatives

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DISREGARDING SEPARATE EXISTENCE OF CORPORATE ENTITY

Company has no physical mind or body so it must operate through human organs, being
the Directors & Shareholders

Question: Has company acted through its human organs, or has human in guise of
organ of company acted, not for the company, but in a self-serving human capacity?

 Human cannot do injustice hiding behind sanctuary of a company.

 If corporate personality has been used as a device to cover fraud or improper


conduct, or if a statute requires it, the courts will pierce the veil of corporate
personality and attribute personal liability to those who misuse the principle of
corporate personality.
Piercing the Veil is allowed in specific certain instances

1. When will the Courts Pierce the corporate veil?

1.1 Public policy:

Daimler Co Ltd v Continental Tyre & Rubber Co [1916] 2 AC 307


 2 companies contracted before the war. War broke out & trade between enemy
countries banned
 Daimler incorporated in England but all shares (except 1) held by enemy aliens
and all directors were enemy aliens resident in enemy country
 English company wanted to cancel contract because they were not allowed to
trade with “enemy”
 German company argued that company cannot have a race & therefore cannot
be classified as an enemy by race
 Courts pierced veil & held, even though company had no race, reality was that it
could be used by enemy
 Held: controller’s race should in times of war be attributed to company.

But – some argue this is in direct conflict with Dadoo & should not be followed in South
Africa

1.2 Improper use of corporate entity:

Robinson v Randfontein Estates GM Co Ltd 1921 AD 168


 R, chairman of Board, purchased farm with mineral rights in his own name after
his company could not agree on terms of sale.
 R bought farm for £60 000 and sold to company for £275 000
 Tried to avoid duty of disclosing to company that he was seller by setting up
subsidiary company through which to channel sale. Was in breach of fiduciary duties –
no secret profits.
 Court ignored existence of subsidiary & saw only R as seller & ordered R to
repay profit

Cattle Breeders Farm (Pvt) Ltd v Veldman 1974 (1) SA 169 RAD
 Controlling shareholder in a company used the company, as owner of the
residence in which he & his wife had been living, to evict her.

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 The law did not permit him to evict her in his personal capacity without providing
alternative accommodation.
 Company had no interest in evicting wife, only the controlling shareholder.

1.3 Tax purposes:


Courts may pierce veil where company trying to avoid tax

1.4 Partnership intention:

Erasmus v Pentamed

Ebrahimi v Westbourne Galleries Ltd 1973 AC 360


 2 partners converted partnership into a company
 Included a 3rd person (3 directors & 3 shareholders)
 2 ‘partners’ didn’t want E as director anymore:
– Could decide what they would earn as fees
– Could declare no dividends & E’s shares would be worthless

 Issue: would it be just & equitable to wind up company?

 Shareholders normally entitled to remove director, but unfair advantage was


taken of corporate structure
 Held: underlying intention still to conduct business as partnership & company
belonged to them as partners
 Company was wound up because of breach of trust relationship

NOTE: courts will not lightly pierce the veil

Cape Pacific Limited 1995 (4) SA 790 (A)


Hulse-Reutter 2001 (4) SA 1336 (SCA)

2. Piercing the veil by Legislature


 Legislature anticipates situations where individuals could abuse existence of
separate legal entity, & pierce veil in advance
 Also as a sanction for non-compliance of a statutory obligation
 The piercing of the corporate veil by the legislature is contained in s75, 76 and
S20 (9)

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