Despite the principle of limited liability, in exceptional cases the court may ignore the principle of separate legal personality and pierce the veil of the company. In terms of section 20(9) of the Companies Act 71 of 2008 (the Companies Act (2008)), the court can pierce the veil of a company if it appears that there has been unconscionable abuse of the company's legal personality.
Rationale for this study
The dissertation will explore the potential abuse of the principle of limited liability and the unintended consequences of extending limited liability to companies operating within the group.
Research methodology
Legal literature such as journal articles, textbooks, treatises, statutes, and articles from the Internet are used to identify the legal principle behind the doctrine of limited liability and pierce the corporate veil. Since the doctrine of limited liability and corporate veil originates from case law, these sources are of utmost importance for the understanding of these two principles.
Structure of dissertation
The method chosen will best explain the theoretical underpinnings of these two important common law principles.
This chapter provides an outline on the research topic, and it touches on the rationale and the purpose of the study
This chapter deals with the common law principle of piercing the corporate veil in relation to an individual company. It shows how this principle was
This chapter discusses the remedy of piercing the corporate veil in relation to company groups, including some background and history of limited
The chapter will further discuss the case of Ex Parte Gore NO and other NNOs dealing with section 20(9) and the guidance suggested in that case which helps to interpret the terms 'negligent abuse' and 'interested person'. This chapter further discusses foreign cases that address the issue of piercing the veil of corporate personhood.
This chapter offers a conclusion and recommendations for the questions and dilemmas raised in the earlier chapters on piercing the veil of corporate
Separate legal personality at common law
Even shareholders of the company would be more willing to act without having to worry about unlimited liability. Fifth, in a limited liability company, creditors of the company and not shareholders would have to worry about monitoring the company's business transactions and assets in bankruptcy.
Rationale for limited liability
The opposite argument from an economic point of view says that the problems of shareholders with a regime of unlimited liability exceed the problems of creditors with a regime of limited liability.43 Creditors can protect themselves from the risk of loss;. Third, limited liability makes diversification and passivity a more rational strategy and thus potentially reduces the company's operating costs.49 A shareholder of a limited liability company could diversify his portfolio by holding shares in different companies and investing for growth without fear. liability in case of company failure.
Conclusion
Second, limited liability reduces the need to monitor other shareholders;48 no shareholder has to worry about the identity of other shareholders and their activities as a risk factor involved in the operation of a company. It remains to consider the meaning of limited liability where groups are concerned and where inappropriate behavior is found by a company within a group.
DOCTRINE OF PIERCING THE CORPORATE VEIL 3.1 Introduction
Piercing the corporate veil at common law
However, if it appears that the separate legal existence of shareholders or directors has been abused, the court at the request of an injured party can disregard the principle of legal personality and pierce the corporate veil.57 This means that the responsible member can be found that he is personally responsible for the company's debts. The separate legal personality of the company must be balanced against policy considerations favoring the piercing of the corporate veil.70. Van Kooij74 agreed with the approach in Hulse-Reutter75 that only in the presence of exceptional circumstances would the court pierce the corporate veil.
The doctrine has been criticized for being "inconsistent and unprincipled", based on evidence from the cases cited above. The question to be asked is whether the separate legal entity of the company has been abused for fraud and dishonesty.96 The corporate veil can be pierced even if there is an alternative remedy.97 An alternative remedy does not prevent an aggrieved party from applying to the court to pierce the veil.
Piercing the corporate veil under (section 20(9) of the 2008 Companies Act The Companies Act 71 of 2008 introduced a statutory provision under section 20(9)
A similar provision can be found in section 65 of the Closed Companies Act 69 of 1984, which provides that a court can pierce the veil of a company if there appears to have been a "gross abuse" of its legal personality. Section 20(9) of the Companies Act refers to 'unconscionable misappropriation' and section 65 of the Closed Company Act refers to 'gross misappropriation'. The court in Gorenje stated that when deciding whether the perpetrator's behavior amounted to "unconscious abuse", the court should take into account all the surrounding circumstances and ask whether a reasonable person in the same position would have acted in the same way in the same situation.
Gore, held that the reasonable man test should be considered when interpreting the wrongdoer's conduct. The plaintiff only needs to prove that there has been an 'unconscionable misuse' of the separate legal personality of the company.
Conclusion
This was explained in Cape Pacific v. Lubner109 that the existence of another instrument should not act as a limitation on the court to pierce the veil. there was no other medicine available. Section 20(9) has brought an additional advantage to the aggrieved party in that, notwithstanding that the remedy is available at common law, an aggrieved party may choose the relief that suits him in terms of section 20(9) although there may be another remedy available. The remedy under Section 20(9) of the Companies Act 2008 has widened the basis for piercing the corporate veil, based on the concept of 'unconscionable abuse' of the company's separate legal personality, on a flexible case-by-case basis. approach taking into account the facts of each case.
The test of 'unconscionable injustice' was enunciated in the Botha case, which was found to be too rigid and the phrase 'unconscionable abuse' less extreme than the expression 'gross abuse' in section 65 of the Corporations Act. Closed 1984. Introduction of section 20(9) of the Companies Act 2008), introducing the concept of 'unconscionable abuse' is a positive development in company law, especially when compared to the previous regime where there was no coherent principle that covered the application of the legal remedy of drilling. the corporate veil.
GROUPS OF COMPANIES 4.1 Introduction
Nature of groups of companies
Limited liability in relation to groups of companies
The extension of Salomon's principle to include business groups makes it possible to structure a group so that the holding company's risk liability is minimized. As each company in the group is separate from the other, with limited liability, the commercial risk of the group structure is effectively reduced. The rationale that limited liability encourages managers to run the company most effectively for the benefit of shareholders, as it promotes free transfer of shares, has less application to holding companies and wholly owned subsidiaries.152.
The fact that limited liability is concerned with the functioning of the securities market is largely irrelevant in the case of a wholly owned subsidiary, where the structure of the group is such that all shares are owned by the holding company and are therefore traded in shares. . has become irrelevant.153 This justification is still relevant in the case of a partially owned subsidiary, where there is a market for trading shares in the subsidiary.154 However, this justification is limited to the trading of minority shares. These investors are still able to diversify their investments independently of the holding company if the risk of the subsidiaries were assumed by the holding company.156.
Piercing the corporate veil in groups of companies
The reluctance of the courts to lift the corporate veil is evident from the comments of Lord Wilberforce in the case of Ford & Carter Ltd v Midland Bank Ltd160: 'Where creditors become involved, as in the present case, the separate legal existence will of the group's constituent companies must be respected.' However, in recent years there has been a more relaxed approach to the application of the basic principle that a holding company and its subsidiary are separate legal entities.161 When the corporate veil is pierced in a group of companies, the court treats the group as one entity rather than of a collection of different business entities.162 In DHN Food Distributors163 the Court of Appeal stated that there was evidence of a tendency for courts to ignore the separate legal entities of different companies within the group, and to look instead at the economic entity of the entire group. This is especially the case when a parent company owns all the shares of the subsidiaries, to such an extent that it can control the subsidiaries' every move.
Although the court in Gore pierced the corporate veil, the court still took the conservative approach as it only pierced the veil on the basis that the King Group was a sham to the extent that it affected the group's activities for the purposes of the company had brought. of 'unconscionable abuse' under section 20(9) of the Companies Act. Blumberg challenges the application of limited liability in the context of parent subsidiaries, arguing that the main justification for limited liability, namely 'encouraging investors to provide capital for new business ventures', does not apply in this context.170 He argues that the parent company is generally the sole shareholder, providing all capital investment for the subsidiary, and as such limited liability plays no role in facilitating investment, and that171 it cannot be said that investment by the holding company would be discouraged without the protection of limited liability. because the shareholders of the holding company were still protected by the limited liability of the holding company itself.172 Blumberg further argues that courts place too much emphasis on the rights of the company, while they should concentrate on its obligations.173 According to Blumberg courts look to control, economic integration, administrative and financial interdependence and the use of groups.
Analysis of case law
The issue before the court was whether the court should disregard the separate personality of the various subsidiary companies and pierce the corporate veil so that the assets of the subsidiary could be treated as assets of the holding company. The claim was brought at common law, alternatively in terms of section 20(9) of the Companies Act, 2008. The court pierced the veil on the ground that the King Group was a fraud which had brought the group's activities within the meaning of 'abuse of unconscionable' within the meaning of section 20(9).
In the process, the court extended the scope of section 20(9) to the extent that by the term 'interested person' not only referring to financial or monetary interest, but a direct interest of the applicant, which can be established a read through of The facts. The similar term 'gross abuse; in section 65 of the Close Corporations Act provides a useful comparative touchstone for the term 'unconscionable abuse' in section 20(9) of the Companies Act.
CONCLUSION
The reasoning in the Perst case brings the argument back to 'categorizing approach' which, as seen above, is fraught with inconsistency and uncertainty. In the English case of Prest, the court rejected some common law grounds for piercing the veil. Lord Sumption held that the veil could be pierced in the presence of concealment and evasion by the respondent.
There also had to be an existing legal obligation for the veil to be pierced. The Prest decision is unhelpful because of its restrictive approach to piercing the veil only in exceptional circumstances and as a last resort.
CONCLUSION
Recommendations
A critical study of the doctrine of limited liability and corporate cover (LLM Dissertation, University of Cape Town, 2007). Anderson H, "Piercing the Veil on Corporate Groups in Australia: The Case for Reform of the University of Melbourne Law Review". Bhama, M, "The Company Law Implications of attaching a power to a subsidiary to acquire the shares of its holding company" (2006) Stellenbosch Law Review.
Easterbrook, FH in Fischel, DR 'Limited Liability and the Corporation University of Chicago Law Review 89. Huss, RJ 'Revamping Veil Piercing for all Limited Liability Entities: Forcing the Common Law Doctrine in the Statutory Age Cincinnati Law Review 10.
