Page |1
DISCUSSION NOTES
Please note that these notes do not replace your study guide, textbook
and prescribed articles. It is merely there to assist you in your revision. It
highlights some of the important parts of the work.
Study unit 1: Legal personality and lifting of the veil
Once a company is incorporated and a certificate of incorporation is issued, it is a
separate legal entity distinct from its members. It can enter into contracts in its own
name and sue and be sued. Its members are not liable for its debts and enjoy limited
liability.
Separate legal personality:
Salomon v Salomon & Co Ltd:
The estate of the company is assessed apart from the estates of individual shareholders
or members, therefore the debts of the company are the company’s debts and
separate from those of its shareholders or members. They enjoy limited liability;
The profits of the company belong to the company and not its shareholders and only
after the company has declared a dividend may the shareholders claim that dividend;
The assets of the company are its exclusive property and the shareholders have no
proportionate proprietary rights therein; and
No one is qualified by virtue of his or her shareholding to act on behalf of the company.
Only those who are appointed as representatives of the company in accordance with
the articles (which has been replaced by the Memorandum of Incorporation) can bind
the company.
The branches or divisions of a company are part of the company itself and do not
have their own separate legal existence (ABSA Bank Ltd v Blignaut and Another
and Four Similar Cases 1996 (4) SA 100 (O)).
QUESTIONS FOR DISCUSSION:
When does a company acquire legal personality?
, Page |2
With reference to case law explain the meaning and effects of separate legal
personality.
Piercing the corporate veil/ disregarding separate juristic personality:
In certain cases the courts have disregarded the separate legal personality of a
company in order to recognize the substance or practical realities of a situation rather
than the form.
Innes CJ in Dadoo Ltd and others v Krugersdorp Municipal Council at 550/1 held the following:
“…This conception of the existence of a company as a separate entity distinct from its
shareholders is no merely artificial and technical thing. It is a matter of substance; … cases
may arise concerning the existence or attributes which in the nature of things cannot be
associated with a purely legal persona. And then it may be necessary to look behind the
company and pay regard to the personality of the shareholders, who compose it.”
Before the codification of the principle of disregard of a company’s separate existence by the
Companies Act of 2008, this matter was regulated by the common law and referred to as
“lifting” or “piercing” the corporate veil. The courts used it to place limitations on the
principle of separate legal personality in order to avoid abuse
‘Piercing the corporate veil’ refers to those exceptional circumstances where the
court ignores the separate legal existence of the company and treats the
shareholders as if they were the owners of the assets and had conducted the business
of the company in their personal capacities OR attributes certain rights or obligations of
the shareholders to the company.
There are no hard and fast rules regarding the lifting of the corporate veil.
Botha v Van Niekerk:
The seller must have suffered an “unconscionable injustice” before the court could lift
the veil.
, Page |3
Cape Pacific:
The court confirmed that it has no general discretion simply to disregard a company’s
separate legal personality.
The separate legal personality of a company should not be easily ignored.
However, circumstances do exist for example fraud, dishonesty or other improper
conduct where it would be justifiable to pierce the corporate veil.
Botha v Van Niekerk was too rigid.
The court indicated that it would adopt a more flexible approach namely of taking all
the facts of each case into consideration when determining if the veil should be
pierced.
A balance should also be struck between the need to persevere the separate legal
identity of the company against policy considerations in favour of piercing the
corporate veil. The veil could also be pierced in relation to a specific transaction.
Hülse-Reutter:
Agreed that court has no general discretion simply to disregard a company’s separate
legal personality.
The corporate veil would only be lifted if there was evidence of misuse or abuse of the
distinction between the company and those who control it and this has enabled those
who control the company to gain an unfair advantage
Therefore a dual test was introduced: by adding the element of unfair advantage.
The court further confirmed that much depended on a close analysis of the facts of
each case and considerations of policy.
Die Dros (Pty) Ltd and another v Telefon Beverages CC and others:
Where fraud, dishonesty and other improper conduct is present, the need to preserve
the seperate legal personality of a company must be balanced against policy
considerations favouring piercing the corporate veil.
Le’Bergo Fashions CC v Lee and another:
, Page |4
The Court will pierce the corporate veil where a natural person, who is subject to a
restraint of trade uses a close corporation or a company to front to engage in the
activity that is prohibited by the agreement
The Companies Act 2008: Disregarding the separate legal personality of a
company
Section 20(9) of the Companies Act 71 of 2008:
The Companies Act 71 of 2008 follows the example of the Close Corporations Act by
codifying the general principle of piercing the corporate veil.
Section 20(9) of the Companies Act 71 of 2008 provides that if a court finds that the
incorporation of a company or any act by or use of a company constitutes an
unconscionable abuse of its juristic personality, the court may declare that the
company will be deemed not to be a juristic person in respect of rights, liabilities and
obligations relating to the abuse.
The wording of the section is a combination of section 65 of the Close Corporations
Act and the judgment in Botha v Van Niekerk.
It ignores the view expressed in Cape Pacific Ltd v Lubner Controlling Investments
(Pty) Ltd that described the test in Botha v van Niekerk as too rigid.
We do now know what test will be used and it remains to be seen how the courts will
decide what would constitute an unconscionable abuse and to what extent they will
use the existing case law dealing with the common-law rule of piercing the corporate
veil.
It therefore seems that there are still no hard and fast rules; no general discretion of
the courts and that the fact of each case will still have to be taken into consideration
when deciding whether to pierce the corporate veil.
QUESTION:
Under which circumstances will the separate legal existence of a company be
disregarded? Refer to relevant authority in your answer.
DISCUSSION NOTES
Please note that these notes do not replace your study guide, textbook
and prescribed articles. It is merely there to assist you in your revision. It
highlights some of the important parts of the work.
Study unit 1: Legal personality and lifting of the veil
Once a company is incorporated and a certificate of incorporation is issued, it is a
separate legal entity distinct from its members. It can enter into contracts in its own
name and sue and be sued. Its members are not liable for its debts and enjoy limited
liability.
Separate legal personality:
Salomon v Salomon & Co Ltd:
The estate of the company is assessed apart from the estates of individual shareholders
or members, therefore the debts of the company are the company’s debts and
separate from those of its shareholders or members. They enjoy limited liability;
The profits of the company belong to the company and not its shareholders and only
after the company has declared a dividend may the shareholders claim that dividend;
The assets of the company are its exclusive property and the shareholders have no
proportionate proprietary rights therein; and
No one is qualified by virtue of his or her shareholding to act on behalf of the company.
Only those who are appointed as representatives of the company in accordance with
the articles (which has been replaced by the Memorandum of Incorporation) can bind
the company.
The branches or divisions of a company are part of the company itself and do not
have their own separate legal existence (ABSA Bank Ltd v Blignaut and Another
and Four Similar Cases 1996 (4) SA 100 (O)).
QUESTIONS FOR DISCUSSION:
When does a company acquire legal personality?
, Page |2
With reference to case law explain the meaning and effects of separate legal
personality.
Piercing the corporate veil/ disregarding separate juristic personality:
In certain cases the courts have disregarded the separate legal personality of a
company in order to recognize the substance or practical realities of a situation rather
than the form.
Innes CJ in Dadoo Ltd and others v Krugersdorp Municipal Council at 550/1 held the following:
“…This conception of the existence of a company as a separate entity distinct from its
shareholders is no merely artificial and technical thing. It is a matter of substance; … cases
may arise concerning the existence or attributes which in the nature of things cannot be
associated with a purely legal persona. And then it may be necessary to look behind the
company and pay regard to the personality of the shareholders, who compose it.”
Before the codification of the principle of disregard of a company’s separate existence by the
Companies Act of 2008, this matter was regulated by the common law and referred to as
“lifting” or “piercing” the corporate veil. The courts used it to place limitations on the
principle of separate legal personality in order to avoid abuse
‘Piercing the corporate veil’ refers to those exceptional circumstances where the
court ignores the separate legal existence of the company and treats the
shareholders as if they were the owners of the assets and had conducted the business
of the company in their personal capacities OR attributes certain rights or obligations of
the shareholders to the company.
There are no hard and fast rules regarding the lifting of the corporate veil.
Botha v Van Niekerk:
The seller must have suffered an “unconscionable injustice” before the court could lift
the veil.
, Page |3
Cape Pacific:
The court confirmed that it has no general discretion simply to disregard a company’s
separate legal personality.
The separate legal personality of a company should not be easily ignored.
However, circumstances do exist for example fraud, dishonesty or other improper
conduct where it would be justifiable to pierce the corporate veil.
Botha v Van Niekerk was too rigid.
The court indicated that it would adopt a more flexible approach namely of taking all
the facts of each case into consideration when determining if the veil should be
pierced.
A balance should also be struck between the need to persevere the separate legal
identity of the company against policy considerations in favour of piercing the
corporate veil. The veil could also be pierced in relation to a specific transaction.
Hülse-Reutter:
Agreed that court has no general discretion simply to disregard a company’s separate
legal personality.
The corporate veil would only be lifted if there was evidence of misuse or abuse of the
distinction between the company and those who control it and this has enabled those
who control the company to gain an unfair advantage
Therefore a dual test was introduced: by adding the element of unfair advantage.
The court further confirmed that much depended on a close analysis of the facts of
each case and considerations of policy.
Die Dros (Pty) Ltd and another v Telefon Beverages CC and others:
Where fraud, dishonesty and other improper conduct is present, the need to preserve
the seperate legal personality of a company must be balanced against policy
considerations favouring piercing the corporate veil.
Le’Bergo Fashions CC v Lee and another:
, Page |4
The Court will pierce the corporate veil where a natural person, who is subject to a
restraint of trade uses a close corporation or a company to front to engage in the
activity that is prohibited by the agreement
The Companies Act 2008: Disregarding the separate legal personality of a
company
Section 20(9) of the Companies Act 71 of 2008:
The Companies Act 71 of 2008 follows the example of the Close Corporations Act by
codifying the general principle of piercing the corporate veil.
Section 20(9) of the Companies Act 71 of 2008 provides that if a court finds that the
incorporation of a company or any act by or use of a company constitutes an
unconscionable abuse of its juristic personality, the court may declare that the
company will be deemed not to be a juristic person in respect of rights, liabilities and
obligations relating to the abuse.
The wording of the section is a combination of section 65 of the Close Corporations
Act and the judgment in Botha v Van Niekerk.
It ignores the view expressed in Cape Pacific Ltd v Lubner Controlling Investments
(Pty) Ltd that described the test in Botha v van Niekerk as too rigid.
We do now know what test will be used and it remains to be seen how the courts will
decide what would constitute an unconscionable abuse and to what extent they will
use the existing case law dealing with the common-law rule of piercing the corporate
veil.
It therefore seems that there are still no hard and fast rules; no general discretion of
the courts and that the fact of each case will still have to be taken into consideration
when deciding whether to pierce the corporate veil.
QUESTION:
Under which circumstances will the separate legal existence of a company be
disregarded? Refer to relevant authority in your answer.
