The Concept of the Corporate Veil

The Concept of the Corporate Veil

The ‘unyielding rock’ of corporation law, as established and relied upon in Salomon v A Salomon & Co Ltd, is the concept of the separate juristic personality of a corporation. Out of this century-old principle, the legal structure of modern business was born. The foundation of corporation law thus rests on the concept that a company has a separate legal personality which is recognised in the Companies Act 71 of 2008 (“the Act’).

Section 19 of the Act allows a company to act in its own capacity, distinct from the personal capacity of its directors and shareholders. This principle creates a metaphorical veil that separates and protects the shareholder and director, acting in his/her capacity as such, from personal responsibility for the company’s obligations and liabilities.

A rigid application of the principle, however, may sometimes cause damage to the rights of parties who deal with the company due to its controllers using the corporate structure as a façade to perpetrate wrongdoing. In such circumstances, the court has developed the doctrine of veil piercing that effectively reveals the individuals in control of the company. This has the effect of causing the separate existence of the company to fall away and treats the rights, liabilities or activities of the company as those of its members in their personal capacity.

Prior to Cape Pacific Ltd v Lubner Controlling Investment (Pty) Ltd our courts tended to follow the law as held in English courts with regard to piercing the corporate veil. Thus they relied on a number of unrelated, discrete categories of conduct which guided the courts in deciding to pierce the veil or not. The decision in Cape Pacific ultimately set South African law apar...

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...ht its actions within the ambit of ‘unconscionable abuse’ found in s 20(9). Upon judgement the court relied upon VTB Capital Plc v Nutritek International where the UK Supreme Court, upon refusing to pierce the veil, inferred that the existence of a relevant statutory provision may determine a different conclusion as to whether a court should pierce the veil.

The reliance on the UK Supreme Court’s judgment in the above case seems to create the idea that the applicability of a statutory provision on veil piercing may counter the judicial hesitancy to disregard the separate legal personality of a company, including in instances of company groups.

Section 20(9) of the Act provides such a statutory provision for piercing the corporate veil. However, it has been submitted that there are some uncertainties regarding the interpretation and scope of s 20(9) of the Act.