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4.3. THE PIERCING OF THE CORPORATE VEIL AND CREDITOR PROTECTION 1 Introduction
4.3.2. Piercing the veil under the 2008 Act vis-à-vis creditor protection
Piercing the corporate veil is one of the corporate principles which are used as means/or mechanisms to protect creditor interests among other stakeholders. Thus, for the first time in South African company law, a statutory provision has been enacted that permits a court to disregard the separate legal personality of a company. In terms of s 20(9) of the 2008 Act it is provided that:
If, 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).
The above provision clearly deters directors or shareholders from unconscionably abusing the legal personality of a company. Courts have discretion to deal with any such action
431 Ibid, 805.
432 2007 (3) SA 34 (SCA) para 11.
433 1983 (3) SA 513 (W), 525.
434 Supra note 421, at 805 where it was held that the approach in Botha was too rigid against the need for a flexible approach which allows the facts of each case to ultimately determine whether or not it is suitable to pierce the veil.
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which qualifies as an ‘unconscionable abuse’ should any affected or interested person approach court on notice of motion supported by a substantial affidavit laying out the acts of
‘unconscionable abuse’. According to the Gore case,435 in terms of section 20(9), the words
‘may’ in the provision gives courts discretion to pierce the corporate veil where it finds that there has been an ‘unconscionable abuse’ of the juristic personality of a company. The use of the word ‘may’ is the one which shows that courts have discretion whether to pierce the corporate veil or not. It follows that even where the requirements of section 20(9) are met, a court is not obliged to pierce the corporate veil, but has discretion whether to do so or not.
The general test used to decide when the corporate veil may be pierced is that of
‘unconscionable abuse’ of the juristic personality of a company as a separate legal entity.
The court would look at the conduct of the wrongdoer to determine whether such conduct constitutes ‘unconscionable abuse’.436 If the conduct constitutes ‘unconscionable abuse’ of the juristic personality of a company as a separate legal entity, the court may exercise its discretion and pierce the corporate veil hence holding the wrong doer liable. What constitutes ‘unconscionable abuse’ may be derived from common law such as issues of fraud, dishonesty, any conduct so considered hence the list cannot be a closed one in terms of section 20(9).437 Comparably, in terms of the Close Corporations Act of 1984, the test for piercing the corporate veil is ‘gross abuse of the separate legal personality of a company’.438 The term ‘unconscionable abuse’, according to the court in Ex Parte Gore,439 is less extreme as compared to the term ‘gross abuse’ used in section 65 of the Close Corporations Act of 1984. 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’, ‘stratagem’.440 Section 20(9) is a solution or a remedy available to situations where the illegitimate use of the concept of juristic personality adversely affects a third party in a way that reasonably should not be countenanced.441 In a 2017 case, City Capital SA Property Holdings Ltd`s Case,442 Schippers AJA gave the following meaning to ‘unconscionable abuse’:
435 Ex parte Stephen Malcolm Gore N.O and 37 Others N.N.O, Reportable case, ZAWCHC, Case No.
18127/2012.
436 PT Mashiri ‘A critical analysis of the piercing of the corporate veil in South African corporate law, with special reference to the position in groups of companies’ (2016) UKZN, LLM Dissertation, 33.
437 Supra note 435.
438 Section 65 of the Close Corporation Act 1965.
439 Supra note 435, 34.
440 Ibid.
441 Ibid.
442 City Capital SA Property Holdings Ltd v Chavonnes Badenhorst St Clair Cooper NO (85/2017) [2017] ZASCA 177.
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The meaning of unconscionable‟ in the Oxford English Dictionary includes, showing no regard for conscience... Unreasonably excessive.... egregious, blatant...unscrupulous.‟
It is in my view undesirable to attempt to lay down any definition of ‘unconscionable abuse’. It suffices to say that the unconscionable abuse of the juristic personality of a company within the meaning of s 20(9) of the 2008 Act, includes the use of, or an act by, a company to commit fraud; or for a dishonest or improper purpose; or where the company is used as a device or facade to conceal the true facts…
The above meaning shows the extent or the scope of what may attract the need for the piercing of the veil under the 2008 Act compared to the common law ambits. It is however recommended that the common law meaning be used concurrently with the new provisions in order to enhance interpretation of the meaning of ‘unconscionable abuse’.443 Prior to the 2008 Act, Scott JA in Hulse-Reutter and others v Godde444 said: “[W]hat, I think, is clear is that as a matter of principle in a case such as the present there must at least be some misuse or abuse of the distinction between the corporate entity and those who control it which results in an unfair advantage being afforded to the latter”. If the same approach is used, then ‘abuse’ of the corporate personality will not be sufficient alone to justify the application of section 20(9) of the 2008 Act, instead, it has to result in company controllers having an unfair advantage at the company`s expense and that will then result in the abuse being unconscionable. This approach also reconciles with City Capital SA Property Holdings Ltd`s case where unconscionable abuse is associated with acts of fraud and improper use among others.445 It is trite that fraud is purposed at unduly enriching or benefiting the fraudster at the expense of the victim. This approach is also supported by Professor Nwafor, who upon conducting an extensive exploration of the meaning of ‘unconscionable abuse’, from various angles, came to the following conclusive analysis;
This analysis suggests that an abuse of corporate structure only becomes unconscionable where there is benefit derivable by the abuser and which adversely affects the existing interest of a third party. The mere misuse of the corporate structure is simply not sufficient to constitute unconscionable abuse within the context of section 20(9) of the Companies Act.446
Despite the above approach, it should be noted that such an approach is just a guideline in relevant circumstances and should not be used as the only determining element of the meaning of unconscionable abuse. It has been observed that the circumstances which justify the piercing of the corporate veil are still far from being settled.447 Courts will however look beyond the corporate veil where justice requires it, and not only when there is no alternative
443 Supra note 435, 34.
444 [2002] 2 All SA 211 Para 20.
445 Supra note 442.
446 AO Nwafor ‘Piercing the Corporate Veil: An Incursion into the Judicial Conundrum’ (2015) 11 (3) Corporate Board: Role, Duties & Composition, Virtus Interpress, 148.
447 Ibid, 146.
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remedy.448 To sum it up, what entails an unconscionable abuse of the juristic personality should not be an exhaustive list but should be determined according to the merits of each case.
Having attempted to define the meaning of unconscionable abuse above, it is thus important to consider applicability of the 2008 Act`s provisions. It has always been the modus operandi from the Cape Pacific case guidelines that courts should use the balancing approach when deciding whether to pierce or not to pierce the corporate veil. It will require the court to weigh the separate legal personality against the principles that favours the piercing of the corporate veil as stated in the Gore case where the judge stated the following;
In my view the determination to disregard the distinctness provided in terms of a company’s separate legal personality appears in each case to reflect a policy based decision resultant upon a weighing by the court of the importance of giving effect to the legal concept of juristic personality, acknowledging the material practical and legal considerations that underpin the legal fiction, on the one hand, as against the adverse moral and economic effects of countenancing an unconscionable abuse of the concept by the founders, shareholders, or controllers of a company, on the other. The courts have shown an acute appreciation that juristic personality is a statutory creation and that their separate existence remains a figment of law, liable to be curtailed or withdrawn when the objects of their creation are abused or thwarted.449
Thus the court has a duty to weigh the scales of balance between the need to promote interest of justice where unconscionable abuse is evidenced and also the need to preserve the corporate principle of juristic personality existing separately from company owners and controllers. If the scales of balance are in favour of the juristic personality`s separate existence principle then affected or interested persons may not get relief under the piercing of the veil machinery yet the reverse is true. Of importance to this research, is the locus standi which is given to creditors, among other stakeholders, where there is unconscionable abuse of the juristic person to the detriment of their rights. Section 20(9) provides that any
‘interested person’ may approach court to seek orders in terms of subsection (a) & (b). The meaning of interested person is not given in the Act however it is trite that an interested person must be someone with an interest. The established principle is that for one to be considered as an interested person they need to have a direct and sufficient/ or substantial interest or perhaps have their rights enshrined in the Bill of Rights infringed.450 In the premises, a creditor whose rights or interests have been affected as a result of an unconscionable abuse of the juristic personality of a company will by all means qualify as an interested person hence having a right to stand before the court. It follows that the
448 Gore`s Case, supra note 435para 28.
449Supra note 435, para 29.
450 Ibid, para 35; also Jacobs en ‘n Ander v Waks en Andere 1992 (1) SA 521 (A), at 533J-534E.
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researcher is of the view that the preceding understanding will unequivocally apply where a creditor`s interests are affected by the ‘unconscionable abuse conduct’ of those running the affairs of the company.