Limited Liability: A Director’s Guide to Fortifying the Corporate Veil in South Africa
A private limited liability company in South Africa, most easily recognised by the “(Pty) Ltd” suffix at the end of the company’s name, is a legal business entity that combines the features of a corporation with limited liability for its shareholders and the flexibility of a partnership in terms of management and operations. It is a prevalent business structure chosen by entrepreneurs and businesses in South Africa.
A key component of a private limited liability company is the existence of “limited liability”. Limited liability, in essence, refers to the fact that the shareholders of a private limited liability company have their liability limited to the amount they have invested in the company. Their personal assets are protected, and they are not personally responsible for the company’s debts and liabilities. This limitation on liability is commonly referred to as the “corporate veil”. This veil provides a shield to protect personal assets of directors from the liabilities of the company. However, this limited liability is just that – limited. Under certain circumstances, the Court may “pierce” this corporate veil, holding directors personally liable for the company’s debts or actions. Section 20(9) of the Companies Act 71 of 2008 is the statutory basis for piercing the corporate veil, requiring an unconscionable abuse of the company’s juristic personality. It broadens the basis on which relief may be granted, so Courts will now resort to the remedy where justice requires it. By doing so the court can then hold the person (it could be a human being or another legal person) who has abused the company’s separate personality liable for the obligations they have tried to evade.
Even where a company is liquidated, if the creditors of the company are not repaid, there may be instances where the shareholders had misappropriated funds across various entities forming part of a group of companies, but then the creditor only has a claim against the entity with which they have an agreement. This happened in the renowned liquidation of the King Group and the court case, Ex Parte Gore NO and Others where the liquidators successfully applied in terms of Section 20(9) of the Companies Act to have the assets of the group be regarded as being owned by a single entity
It is therefore important that certain steps and practices are followed to protect themselves from such piercing of the corporate veil.
- Adhere to Corporate Governance Principles:
Directors should comply with sound corporate governance principles, including acting in the best interests of the company and its stakeholders. This involves promoting transparency, accountability, and ethical behaviour within the organization.
- Maintain Proper Corporate Records:
Ensure that the company’s records are accurately maintained, including meeting minutes, financial records, and compliance documents. This demonstrates a commitment to proper corporate governance and can be crucial in protecting the corporate veil.
- Avoid Commingle of Personal and Company Assets:
Directors should avoid mixing personal and company funds or assets. Maintain separate bank accounts and financial records for the company and personally, emphasizing the distinction between personal finances and those of the business.
- Comply with Legal and Regulatory Requirements:
Adhere to all applicable laws and regulations governing the operation of the company. This includes tax laws, employment laws, environmental regulations, and industry-specific rules. Compliance demonstrates a commitment to the law and can help protect against the piercing of the corporate veil.
- Operate Within the Scope of Authority:
Directors should exercise their powers and fulfil their duties within the confines of the company’s Memorandum of Incorporation (MOI), shareholder agreements, and applicable laws. Acting outside these prescribed limits may expose them to personal liability.
- Fulfil Directorial Duties and Responsibilities:
Act diligently and with care, skill, and judgment expected from a reasonably prudent person in a similar position. Directors should always act in good faith and in the best interests of the company.
- Seek Legal Counsel and Professional Advice:
Consult legal professionals and financial advisors to stay informed about the legal landscape and potential risks associated with the company’s activities. Regular legal reviews and consultations can help directors make informed decisions and mitigate legal risks.
- Stay Informed and Educated:
Keep up-to-date with changes in laws, regulations, and industry standards. Continuous education and awareness enable directors to make informed decisions and adapt to evolving legal requirements.
- Implement Robust Risk Management Strategies:
Develop and implement comprehensive risk management strategies that identify, assess, and mitigate risks associated with the company’s operations. Proactive risk management minimizes potential legal issues and reinforces the protection of the corporate veil.
Protecting oneself as a director from the piercing of the corporate veil in South Africa involves adhering to legal and ethical standards, maintaining proper corporate records, and diligently fulfilling directorial duties. Seeking professional advice, staying informed, and implementing robust risk management strategies are key practices to safeguard personal assets and maintain the integrity of the corporate veil.
Neil primarily practices in commercial law, with a focus on insolvency law, collections, evictions, contracts and perfection of notarial bonds.
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