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Tutorial Three Biz Ent

A company is recognized as a separate legal entity with its own rights and liabilities, distinct from its members and directors, as established in the Salomon case. The legal principle of 'piercing the corporate veil' allows courts to disregard this separation under certain conditions, particularly in cases of fraud or unjust conduct. Statutory provisions, such as those in the Companies Act, outline specific circumstances under which personal liability may be imposed on individuals involved in the company's operations.

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3 views4 pages

Tutorial Three Biz Ent

A company is recognized as a separate legal entity with its own rights and liabilities, distinct from its members and directors, as established in the Salomon case. The legal principle of 'piercing the corporate veil' allows courts to disregard this separation under certain conditions, particularly in cases of fraud or unjust conduct. Statutory provisions, such as those in the Companies Act, outline specific circumstances under which personal liability may be imposed on individuals involved in the company's operations.

Uploaded by

siyasanga1998james
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Simba-business entities tutorial three-separate legal personality 1

TUTORIAL THREE

A company is a separate legal entity with juristic personality, with the


capacity to perform any acts which a natural person can perform in relation
to its business. In the Salomon case the court held that the debts and
liabilities of a company are those of the company itself and not of its
members.
In our law a company is so separate from its members and directors
that it can borrow money from them in such a way that they become secured
creditors to it (as in Salomon), or own land where its members/directors are
proscribed from doing so by statute (as in Dadoo Ltd v Krugersdorp
Municipality).
The company’s ‘veil of incorporation’ is essentially a legal fiction
depicting the separate legal personality of the company, as distinct from its
members and directors, which is based on the theory of juristic reality [the
legal person is simply seen as a reality from a juristic point of view.]
The corollary of the principle of separate legal personality is that the
company’s estate is assessed separately from that of individual members.

A company acquires separate legal personality in one of three ways;

1. By means of a special Act of Parliament


2. By means of a general enabling Act (eg The Companies Act)
3. At common-law, by conduct- through behaving as though it were a
separate legal person.

However our law provides for situations in which the separate legal
personality of a company may be disregarded by applying certain statutory
provisions or common-law principles. The process of disregarding the
separate legal personality of a company is known as lifting/piercing the
corporate veil.

1. The Companies Act provides for a number of grounds upon which a court
will be obliged to pierce the corporate veil. One of these instances is s 50(3)
which provides that where a director, officer or agent of a company issues or
signs a negotiable instrument (cheques, promissory notes or orders for
money or for goods) on the company’s behalf but fails to correctly mention
the company’s registered name, the agent will be guilty of an offense and
will also personally liable on the bill, to the bill’s holder, unless the

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Simba-business entities tutorial three-separate legal personality 2

company duly pays the debt. The court in Durham Fancy Goods ltd v
Michael Jackson Fancy Goods ltd the purpose of this section is to prevent
confusion which could arise out of the use of abbreviations, thus a director
who abbreviated the name of the company would be guilty of contravening
s50(3). However the words ‘Proprietary’, ‘Incorporated’ and ‘Limited’ may
be limited to ‘Pty’, ‘Inc’ and ‘Ltd’ respectively, due to the censure in s50. In
Gummed Tapes v Pillay, it was held that there is strict liability and thus it
is not relevant to prove fault or to show that the third party knew at the time
that the agent was signing on behalf of the company.
Dee is guilty of infringing s50 (3) by stating upon negotiable the
abbreviated name of the company- “Abbra” (Pty) Ltd. She is thus guilty of
committing an offense and the Liquidator may hold her personally liable on
all the negotiable instruments on which she signed the abbreviated name, to
the holders of those instruments, if the company has not yet paid off the
debt.

2. Our common-law provides certain principles which the courts apply as


guidelines in considering whether or not to pierce the corporate veil. Initially
our courts only pierced the corporate veil in situations where there was
evidence of fraudulent use of the fiction of legal personality (Lategan v
Boyes). This position was set aside in the case of Botha v Van Niekerk
which opted for an objective test of whether or not other persons had
suffered an ‘unconscionable injustice’ as a result of what a reasonable
person would consider to be improper use of the fiction of legal personality
by the defendant.
In Cape Pacific v Lubner Controlling Investment it was held that a
court should not lightly disregard a company’s separate legal personality, but
should uphold it and try to give effect to it. However, the court went on to
replace the rigid test of “unconscionable injustice” laid out in Botha v Van
Niekerk with a more flexible balancing test which allowed the peculiar facts
of each case to ultimately determine whether or not it would be justifiable to
pierce the veil.
In Rhino Hotels and Resorts Ltd v Forbes the court refused to
pierce the veil of a company because there was no evidence of fraudulent
conduct.
In Hulse-Reutter v Godde the SCA held that the remedy of piercing
the remedy of should be one of last resort and any other available remedy
was to be preferred before it.
Our law therefore is that the courts should seek to protect the
company’s separate legal personality of the company as far as possible, only

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Simba-business entities tutorial three-separate legal personality 3

piercing the veil of incorporation in extreme circumstances (eg clear


evidence of fraud), and even then this remedy should only be a remedy of
last resort.

In Dee’s case, there is no clear evidence of fraud, although it could be


argued that her negligence was so gross that it could amount to recklessness
and a justifiable ground to pierce the veil in the circumstances, as there is no
other remedy available to the liquidator and the company’s creditors. The
prospects of success with this route are therefore not certain.

Our law clearly shows a bias towards maintaining the corporate veil
and upholding the Salomon principle religiously. However this may wreak
injustice in certain circumstances where the use of the fiction of legal
personality is not necessarily fraudulent but it nevertheless causes some
injustice to third parties. It has been argued that our courts should apply the
‘agency construction’ in terms of which the company is viewed as an agent
and its shareholders as its principals, to pin liability on the shareholders as
principals of the company.
In Smithstone & Knight v Birmingham Corp 1939 (4) ALL ER
116 the court applied this construction to hold that a subsidiary company
which was wholly owned by the holding company and whose profits were
treated as those of the holding company, was acting merely as an agent of
the holding company. Therefore the holding company was allowed to bring
an action for compensation for the expropriation of the land on which the
subsidiary company had been conducting its business.
This agency relationship between a company and its shareholders is
not precluded in our law, and it may be either express or implied. However
the mere fact that the shareholder is in full control of the company’s affairs
does not make the company an agent, and there must be some evidence of a
real agency construction. An implied agency agreement could be construed
where the shareholder treats the company’s profits as if they belong to him
(as in the Smithstone & Knight case above).

If the Liquidator can show that Dee treated the company’s profits as if
they were her own, as evidenced by the fact that she co-mingled funds, then
the court may well accept the construction that Dee was the company’s
principal, and therefore that she should be held liable for any debts incurred
by the company as it conducted its business as her agent.

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3. One of the statutory instances of piercing the corporate veil is s424 of the
Companies Act. This section allows the court to attach personal liability to
any person who is knowingly a party to the carrying on of a business
recklessly or with intent to defraud, for any debts of the company.
This section is applicable to the situation where debts are incurred by
the company without any intention or reasonable belief that they will be
paid when they fall due.
Dee continues to incur debts long after the company falls into a
serious financial crisis and the auditor warns her of the fact that she is
putting creditors at risk. S424 will therefore apply in spite of Dee’s
subjective belief that the company would bounce back because the section
requires that the belief be ‘reasonable’; based on objective standards, and not
on something as whimsical and subjective as luck.

Simba- business entities tutorial three-separate legal personality

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