A company is a separate legal person, distinct from its shareholders and directors. From the date that the company has been registered, it has all the legal powers and capacity of an individual, except to the extent that a juristic person is incapable of exercising any such power or having such capacity. A legal person has legal rights and responsibilities.
If a director or shareholder is distinctly separate from the company or CC, can a director ever be held personally accountable? Can the veil or curtain that separates a director from the company be lifted, thereby holding the director liable?
A company’s directors must meet their fiduciary responsibilities and must act with care and skill. Directors’ duties aim to keep them accountable for their actions and to promote good governance generally (King reports). Directors both a right and a duty to run the business in the best interests of its shareholders.
In the case of Knoop NO and Others v Birkenstock Properties (Pty) Ltd and Others (unreported case no 7095/2008) it was said that ‘The corporate veil may be pierced where there is proof of fraud or dishonesty or other improper conduct in the establishment or the use of the company or the conduct of its affairs and in this regard it may be convenient to consider whether the transactions complained of were part of a “device”, “stratagem”, “cloak” or a “sham”’.
There have been cases where the doctrine of lifting or piercing the corporate veil has been applied outside instances of commercial abuse or fraud. In these instances the application has extended to eliminating the use of the corporate form to avoid legitimate obligations. It has not, however, been applied lightly – the courts should try to uphold the separate legal personality.
In terms of s 20(9) of the 2008 Companies Act:
‘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; and
(b) make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a).’
This means that interested parties can approach the court, by motion, for an order that the incorporation, use or any act by or on behalf of the company constitutes an unconscionable abuse of juristic personality and to pierce the corporate veil. Interested parties include third parties, trade unions, company employees, directors and shareholders to approach court.