Piercing the Corporate Veil in terms of the Companies Act 71 of 2008

Abstract

There are exceptional circumstances in which a court may pierce or lift the corporate veil to impose personal liability on its shareholders or directors. This power was originally developed in terms of the common law and upon the enactment of the Companies Act 71 of 2008, it was included as a statutory power and has led to instances where the legal personality of a company can be ignored. Section 20(9) of the Companies Act 71 of 2008 states that “a court can declare that a company is to be deemed not to be a juristic person in respect of any obligation of the company or of a shareholder of the company”. For the court to declare a company as not having legal personality, an interested party must file an application, or it can occur during any legal proceedings in which the company is a party. If the court finds that a company's formation, utilisation for any purpose, or any action taken on its behalf involves an unfair exploitation of its separate legal identity, the company may be deemed not to be a juristic person.

However, the terms “interested person”, “abuse” and “unconscionable abuse” are not defined. The concept “unconscionable injustice” was first used in the Botha v Van Niekerk case where it was stated that personal liability could only be justified if it is clear that a third party has suffered “unconscionable injustice” because of the unjust actions of the liable party8 and was expressly dissented from the Cape Pacific Ltd case. In the Cape Pacific Ltd case, the court criticised the stringent criteria applied inthe Botha v van Niekerk case and recommended adopting a more flexible approach. This approach would consider the unique circumstances of each case to decide whether disregarding the corporate entity should be considered or not.