Piercing the Corporate Veil

Because the officers and directors of a corporate entity act and think on its behalf, there is a need for the individuals and corporates to be held accountable for their actions, particularly when such person are involved in fraudulent or dishonest activity. In effect, when the corporate veil is pierced or lifted, the court strips away the protective covering of the limited liability presented by the company structure, and in doing so personally holds the person(s) liable.

In terms of section 20(9) of the Companies Act No. 71 of 2008 (“Act“), on application by an interested party, a court may find that the incorporation of the company,  any use of the company,  or any act by or on behalf of the country, may constitute as an unconscionable abuse of the juristic personality of the company as a separate entity. In terms of section 218 of the Act, creditors, employees, trade unions, shareholders and so forth may bring an action for losses damages and costs.

In the old Companies Act, the focus was mainly on the creditor recovering debts rather than punishing errant management. It would appear from this that the classification of piercing the corporate veil is now much broader than before. Furthermore, in terms of the  Act, there is an expansion of director’s liabilities and duties, which also implicates that figuratively speaking, the directors will have a lot less veil to hide behind or to cover them.

In Zeman v Quickelbridge and another  C45/2010 a recent decision by the Labour Court raised a few interesting points regarding the corporate veil. In this case, where the respondent had made a disposition without value, that the sale was done with a fraudulent purpose and was at the very least an abuse of corporate personality.

It is found that section 64 of the Close Corporation Act No. 69 of 1984, liability for reckless or fraudulent carrying – on of business is the equivalent section to section 424 of the Act.

A good definition is also given in paragraph 41 of piercing the corporate veil, ‘Lifting the corporate veil means disregarding the dichotomy between a company and a natural person behind it and attributing liability to that person where he has misused or abused the principle of the corporate personality.

As a general rule, the courts will generally require an element of fraud or other improper conduct.

Nicholson J.A has stated that the general principle underlying the lifting of the corporate veil is that when a corporation is the mere alter ego or business conduit of a person it may be disregarded.

It is thus clear that in terms of both Acts, as confirmed by the courts, that persons will not be able to escape liability behind the corporate veil, particularly when there is fraud or misconduct involved.


23 July 2012