Piercing the corporate veil

THE concept of separate legal personality of a company is the cornerstone of company law.

The cardinal principle of company law, as enunciated in Salomon v Salomon & Co Ltd [1897] AC 22 (HL) and Dadoo Ltd & Others v Krugersdorp Municipal Council 1920 AD 530 at 550, is that a firm is a separate entity that is distinct from its members.

The concept of corporate personality is that a company, once it is registered, acquires a personality of its own, quite distinct from its members or shareholders. [See Welli-Well (Pvt) Ltd v Malvern Imbayago & Anor SC 8/21].

A company is, therefore, “veiled”, or clothed with legal personality, which technically prevents people from seeing who is behind the firm.

Because a company is separate from its members, the courts will not readily disregard such a corporate legal personality and lift the corporate veil so as to attach liability to individuals who are related to the firm.

There are, however, situations where the courts have thrown aside the concept of legal personality and looked to see who was behind the company activities.

This is referred to as lifting or piercing the corporate veil. In the case of Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd & Ors 1995 (4) 790(A) at 803G — 804A SA, the court held as follows: “It is undoubtedly a salutary principle that our courts should not lightly disregard a company’s separate personality, but should strive to give effect to and uphold it.

To do otherwise would negate or undermine the policy and principles that underpin the concept of separate corporate personality and the legal consequences that attach to it. But where fraud, dishonesty or other improper conduct is found to be present, other considerations will come into play.

The need to preserve the separate corporate identity would in such circumstances have to be balanced against policy considerations which arise in favour of piercing the corporate veil . . . and a court would then be entitled to look to substance rather than form in order to arrive at the true facts, and if there has been a misuse of corporate personality, to disregard it and attribute liability where it should rightly lie. Each case would obviously have to be considered on its own merits.”

There are no hard and fast rules on the circumstances that justify the lifting or piercing of the corporate veil.

Each case generally has to depend on its own facts and merits.

There are common law and statutory exceptions that justify piercing of the corporate veil.

Statutory exceptions:

1. Abuse of the corporate principle

This is a situation where the court is of the opinion that the corporate principle has been abused or has been used simply to hide from the eyes of equity. In such circumstances, the court will disregard the Salomon principle and hold that the company and its members are one and the same.

The locus classicus is the case of Gilford Motors Ltd v Horne Co. Ltd.

The brief facts of that case were that there was a contract in restraint of trade, which was to the effect that Horne, on leaving the employ of Gilford Motors, would not solicit or take away the latter’s customers.

Horne subsequently left employment with Gilford Motors and proceeded to form his own company.

Through that company, Horne was soliciting his former employers’ customers. Gilford Motors was not impressed and sued Horne’s company. Horne argued that he was not in breach of the covenant in restraint of trade because it was not him but his company which was soliciting and, in any event, he and the firm were two distinct personalities.

The court came to the conclusion that this was a sheer case of abuse of the corporate principle. Horne was using the company to evade an equitable obligation.

Another case is that of Jones v Lipman.

In that case, there was a contract of sale of a house. The seller realised that the prices were going up and he sought to avoid the contract.

He, therefore, decided to sell the house to a company he had formed.

When the dispute came to court, it was held that the company was just a little house built by the seller to avoid the eyes of equity.

In Cattle Breeders Farm (Pvt) Ltd v Veldman (2) 1973(2) RLR 261, a husband used the company to evict his wife from a matrimonial house leased by the firm.

It was found that the husband was the company’s sole shareholder. The court was prepared to pierce the corporate veil to do justice to the wife.

Beadle CJ said the husband owned the company and its mind was his.

The case of Re: Burgle Press Ltd concludes the discussion of abuse of the corporate principle.

In this case, the directors of the firm had fallen out with a third director.

These directors held over 90 percent of the shares of the company. They then formed a company for the purposes of taking over the business of the first firm (in which they held 90 percent of the shares). Their intention was, therefore, to exclude the third director.

In pursuance of their plan, they applied for a takeover scheme. The court refused to sanction their intention and held that this was highly improper.

The directors had built a little house around themselves. There was no need for the plaintiff to knock. He only needed to shout and the walls of Jericho would come tumbling down!

To be continued . . .

 

◆ Arthur Marara is a corporate law attorney practising law in Harare. He is also a notary public and conveyancer. He is passionate about employment law, commercial law, family law and promoting legal awareness and access to justice. He writes in his personal capacity. You can follow him on social media (Facebook Attorney Arthur Marara), or WhatsApp him on +263780055152 or email [email protected]