Have you ever heard the phrase “piercing the corporate veil” and wondered what it means? This is a legal doctrine wherein the owner of a corporation loses the limited liability that having a corporation affords them. When the corporate veil is pierced, the assets owned by the business owner can be used to pay the debts and liabilities of the corporation. Initially, this doctrine was not codified in South African law however, the Companies Act 71 of 2008 was amended to include section 20 (9) which provides a statutory basis for piercing the corporate veil. It states that: “If, on application by an interested person or in any proceedings in which a company is involved, a court finds that the incorporation of the company, any use of the company, or any act by or on behalf of the company, constitutes an unconscionable abuse of the juristic personality of the company as a separate entity, the court may-
( a) declare that the company is to be deemed not to be a juristic person in respect of any right, obligation or liability of the company or of a shareholder of the company or, in the case of a non-profit company, a member of the company, or of another person specified in the declaration…”[1]
In essence, what lifting the corporate veil does is to ignore the separation between the company and the natural person behind said company.[2] This will be done in instances where the natural person abused the corporate personality of the corporate entity. The relevant case that shows application of this principle is Department of Agriculture, Forestry and Fisheries and Another v B Xulu and Partners Incorporated and Others [2022] 1 All SA 434 (WCC).[2] In this case, the first respondent was a firm of Attorneys (BXI) as well as the owner (BX), who was listed as the fifth respondent. The court found that BX, the sole director of BXI, appropriated funds from BXI under the guise of settling liabilities of the corporate entity. He then channeled the funds to himself, friends, and family instead of paying said liabilities. The owner, BX, was found to have assumed the persona of the company and did not act as an agent of the company. There were sufficient grounds for piercing the corporate veil and BX was held jointly and severally liable with BXI for repayment of the funds.[2]
References:
[1] https://www.gov.za/sites/default/files/gcis_document/201409/34243gon370.pdf
[2] https://www.lexisnexis.co.za/lexis-digest/legal/piercing-the-corporate-veil
