Piercing The Corporate Veil

The existence of the corporate veil does not mean that owners and officers can act recklessly and without regard for their actions as it is possible for the veil can be “pierced”. Piercing the corporate veil (also referred to as the “lifting” of the corporate veil) occurs when the Courts determine that the personal liability protection usually afforded to business owners and officers no longer applies and they can be held personally liable for the debts of the company.

Section 20(9) of the Companies Act 71 of 2008 (“the Act”) provides that:

“If, on application by an interest 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 a company, constitutes an unconscionable abuse of the juristic personality of the company as a separate entity, the court may –

• 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”

This effectively entitles any interest party to approach a court 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.

Section 77 of the Act provides examples of what may be regarded as reasons to pierce the corporate veil, such as:

• A breach of a director’s fiduciary duties to the shareholders;
• Unauthorised trading on behalf of a company or partaking in reckless trading;
• Being party to acts or omissions that defraud creditors, employees or shareholders as well as other fraudulent acts;
• Signing or approving false or misleading financial statements;
• Failing to vote against certain prohibited acts;

The Act further provides that a director may be held personally accountable for their actions when they were present at a meeting / participated in making a decision while knowing such decision contravened provisions of the Act and specifically defines what “knowing” constitutes: 

• Having actual knowledge of the matter; or
• Was in a position in which the person reasonably ought to have –
  • Had actual knowledge;
  • Investigated the matter to an extend that would have provided the person with actual knowledge; or
  • Taken other measure which, if taken, would reasonably be expected to have provided the person with actual knowledge of the matter; and
• Failed to vote against a prohibited act.

While the Courts do tend to take a rather conservative approach when hearing applications to pierce the corporate veil, with specific focus on the use of the word “unconscionable”, business owners and officers should remain conscious to the fact that they aren’t free to act as they please with no repercussions  to their personal assets. 

It is therefore important for companies to involve experts in both financial and legal fields to ensure that the veil remains intact.

The content does not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. Kindly contact us on info@cklaw.co.za or 021 556 9864 to speak to one of our attorneys.