CLA2601
NOTES
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accordance with the articles (which has been replaced by the Memorandum of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)).
2
, QUESTIONS FOR DISCUSSION:
When does a company acquire legal personality?
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.
3
, Botha v Van Niekerk:
The seller must have suffered an “unconscionable injustice” before the court
could lift the veil.
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.
4
NOTES
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)).
2
, QUESTIONS FOR DISCUSSION:
When does a company acquire legal personality?
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.
3
, Botha v Van Niekerk:
The seller must have suffered an “unconscionable injustice” before the court
could lift the veil.
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.
4
