Company law

Give a thorough definition of piercing of the corporate veil in terms of common law and in terms of statutes law as well as case law.

Assignment question
Both the court and the legislature have made exceptions to the principle or the concept of separate legal personality of the company, to the forum of piercing of the corporate veil. With reference to legal literature and case law, discuss the above quotation. Give a thorough definition of piercing the corporate veil in terms of common law and in terms of statute law as well as case law.

Table of content
Introduction and definition..3
Characteristic of a company...3

Acquisition of legal personality....4

Acquisition of legal personality 5 Ways of acquiring and consequences of legal personality6 Case law in re Solomon v Solomon..6

Piercing of the corporate veil..7 The courts and the legislator..8 The conclusion ..9 Bibliography and case list.10

Introduction and definition

A company is a business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be made to exist in law and then a company is itself considered a "legal person". The name company arose because, at least originally, it represented or was owned by more than one real or legal person.
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In Dadoo Ltd & others v Krugersdorp municipal council2 a company was defined as essentially a partnership of which the shareholders partners, its juristic nature is very different, for the principles of incorporation are fused with those of partnership. Section 1 of the companies Act3 of 2004, defines a company as: a company incorporated under this Act and includes anybody which immediately prior to the commencement of this Act was a company in terms of any law repealed by this Act. The Namibian constitution4 is the supreme law of the land under article 1(6), article 21 (e) provides that freedom of association, which shall include freedom to form and join Associations or unions, including trade unions and political parties. This provision grants all citizens to form and belong to associations by law.

The characteristics of a company:

1 Gibson: south African mercantile and company law

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2 Dadoo ltd and others v Krugersdorp municipal council 1930 AD 530

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3 The companies Act 28 of 2004

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4 The Namibian constitution article 1 of 1990 ( all legal persons have the right to property)
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A company as an entity has many distinct features which together make it a unique organization. The essential characteristics of a company are following:
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1. A separate legal entity Companies are in law legal persons independent from the shareholders. A company does not cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Insolvency or Death of member does not affect the existence of the company. 2. Separate Property

A company is a distinct legal entity. The company's property is its own (article 166). A member cannot claim to be owner of the company's property during the existence of the company. In Macaura v Northern Assurance Co7 Mr. Macaura owned an estate and some timber. He agreed to sell all the timber on the estate in return for the entire issued share capital of Irish Canadian Saw Mills Ltd. The timber, which amounted to almost the entire assets of the company, was then stored on the estate. On 6 February 1922 Mr. Macaura insured the timber in his own name. Two weeks later a fire destroyed all the timber on the estate. Mr. Macaura tried to claim under the insurance policy. The insurance company refused to pay out arguing that he had no insurable interest in the timber as the timber belonged to the company. Allegations of fraud were also made against Mr. Macaura but never proven. Eventually in 1925 the issue arrived before the House of Lords who found that: the timber belonged to the timber belonged to the company and not Mr. Macaura Mr. Macaura, even though he owned all the shares in the company, had no insurable Interest in the property of the company just as corporate personality facilitates limited liability by having the debts belong to the corporation and not the members; it also means that the companys assets belong to it and not to the shareholders.
3. Perpetual succession

The existence of the company is not affected by the changing of directors or owners; it continues to exist even when the founders have long gone.
4. Limited liability of shareholders

The liability of shareholders is limited to their investments. A shareholder cannot lose more than his or her investment.
5. Transferability of shares

5 R C Bethink & S M Luis: Basic company law 2nd end

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6 Article 16 of the Namibian constitution article 1 of 1990

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7 Macaura v northern assurance Co 1925 AC 619

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The capital of a company is divided into transferable units of ownership, called shares. These may be sold freely in a public company or with the approval of the directors in the private company. Shares in a company are freely transferable, subject to certain conditions, such that no share-holder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares.
6. Common Seal

A company is an artificial person and does not have a physical presence. Thus, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force. 7. Separate Management: A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company.
8. One Share-One Vote: The principle of voting in a company is one share-one vote i.e. if a person has 10 shares; he has 10 votes in the company. This is in direct distinction to the voting principle of a co-operative society where the "One Member - One Vote" principle applies i.e. irrespective of the number of shares held, one member has only one vote. 9. Professional management

The ownership and management of companies are usually separate. The ownership of a company vests with the shareholders. The shareholders in general meet to elect a board of directors who determine the company policies and strategies. Executive officer such as chief executive officers and management are appointed to manage the day to day business.

Acquisition of legal personality

Legal personality refers to the fact that, as far as the law is concerned, a company really exists. This means that a company can sue and be sued in its own name, hold its own property and crucially be liable for its own debts. It is this concept that allows limited liability for shareholders as the debts belong to the legal entity of the company and not to the shareholders in that company. The distiquishing mark of legal persons is their ability to acquire rights which can be enforced against others in a court of law and to incur legal duties which can be enforced against them. Although in general an artificial person enjoys such capacity it cannot in all respects be equated with human person, for it has no physical substance and exists only in the contemplation of the law.

In the case of Salomon v Salomon & Co8 Mr. Salomon carried on a business as a leather merchant. In 1892 he formed the company Salomon & Co Ltd. Mr. Salomon, his wife and five of his children held one share each in The Company. The members of the family held the shares for Mr. Salomon because the Companies Acts required at that time that there be seven shareholders. Mr. Salomon was also the managing director of the company. The newly incorporated company purchased the sole trading leather business. The leather business was valued by Mr. Salomon at 39,000. This was not an attempt at a fair valuation; rather it represented Mr. Salomons confidence in the continued success of the business. The price was paid in 10,000 worth of debentures, giving a charge over all the companys assets (this means the debt is secured over the companys assets, plus 20,000 in 1 shares and 9,000 cash. Mr. Salomon also at this point paid off all the sole trading business creditors in full. Mr. Salomon thus held 20,001 shares in the company, with his family holding the six remaining shares. He was also, because of the debenture, a secured creditor. However, things did not go well for the leather business and within a year Mr. Salomon Had to sell his debenture to save the business. This did not have the desired effect and the company was placed in insolvent liquidation and a liquidator was appointed. The liquidator alleged that the company was but a sham and a mere alias or agent for Mr. Salomon and that Mr. Salomon was therefore personally liable for the debts of the company. The Court of Appeal agreed, finding that the shareholders had to be a bona fide association who intended to go into business and not just hold shares to comply with The Companies Acts. The House of Lords disagreed and found that: up the fact that some of the shareholders were only holding shares as a technicality was irrelevant; the registration procedure could be used by an individual to carry on what was in effect a one-man business up a company formed in compliance with the regulations of the Companies Acts is a separate person and not the agent or trustee of its controller. As a result, the debts of the company were its own and not those of the members. The members liability was limited to the amount prescribed in the Companies Act or the amount they invested.

Ways of acquiring legal personality:

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Legal personality is acquired in the following three ways:

1. By a separate act

Legal personality may be acquired by own separate act. The university of Namibia, for example is a legal person that was established in terms of the university of Namibia act, 1992 (Act No.18 of 1992). This applies to other legal entities such as Namibia Airport Company limited is established in terms of the airports company Act, 25 of 1998.
2. By general enabling legislation
8 Solomon v Solomon & co 1897 AC 22
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9 B N Chaka: Company law and practice

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Juristic personality may also be acquired in terms of general legislation such as the companies Act, 28 of 2004 for companies and the close corporation Act, 26 of 1988. These laws set out how a body incorporated in order to acquire legal personality.
3. By conduct

Legal personality can also be acquired by persons or organized body conducting themselves as legal persons in compliance with the requirements set out in section 35 of the companies Act, 2004. This refers to associations or partnerships consisting of more than twenty persons, carrying on any business and has their object the making of a profit.

Consequences of legal personality

A number of consequences flow from the fact that a company enjoys separate legal personality. The following are some of the consequences of a companys legal personality or separateness:
1. The companys business and property

The business of the company is its own business and not the business of the shareholders. According to Stellenbosch farmers winery Ltd v Distillers crop SA Ltd10: shareholders have a priority interest in the company and not in its business. Properties which are owned by the company cannot be treated as if they were owned by the shareholders.
2. Company debts

The debts of the company cannot be regarded as debts of any of its members.
3. Perpetual existence or succession

A company is not a natural person and thus has no natural death. It exists despite changes in membership whether by death or otherwise.

The exception to the rule: lifting (piercing) of the corporate veil:

The general rule is that the separate existence of corporate entity is not inviolable. However the separate existence of a corporate entity can under certain circumstances be disregarded.in Cape pacific Ltd v Lubner controlling investment (Pty) Ltd & others11 it was stated that it is undoubtedly a salutary principle that our courts should not lightly disregard a companys separate personality,but should strive to give effect to and uphold it. To do otherwise would negate or undermine the policy and principles that underpin the concept of separate corporate personality and
10 Stellenbosch farmers winery Ltd v Distillers crop SA Ltd 1962
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11 Cape pacific Ltd v Lubber controlling investment (Pty) ltd & others 1995 (4) SA 790
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the legal consequences that attach to it. But where fraud, dishonesty, or other improper conduct is found to be present. Other considerations will come into play. He need to preserve the separate corporate identity would in such circumstances have to be balanced against policy considerations which arise in favour of piercing the corporate veil. And courts will then be entitled to look to substantiate rather than form in order to arrive at the true facts, and if there has been a misuse of corporate personality, to disregard it and attribute liability where it should rightly lie.

The instances under which the exception will take effect:

1. Disregard by the legislator

Both the companies act 2004 and the close corporation act of 1988 provides that when it appears that business of the company or a close corporation was or is carried on recklessly or with intent to defraud, the court may declare that any person who was so knowingly a party to the carrying on of the business in the manner shall be personally liable for any debts of the company or close corporation-sec 430.
2. Disregard by the courts

In certain instances the court may disregard or ignore the separate legal existence of the legal person or lift the corporate veil. In Lategan v Boyes12 the view was expressed that a South African court would not be- prepared to disregard the corporate veil except upon proof of fraud.in Orkin bros Ltd v bell13the directors of a/ company were held personally liable to a seller who had sold goods to their company at their instance at a time when the directors had known that the company was insolvent and totally unable to pay for the purchase, the sole purpose of the transaction being to diminish their personal liability under a contract of surety ship. In Cattle Breeders farm(Put) ltd v Feldman 14(1974) a company of which a husband was the sole effective shareholder and in complete control as managing director, claimed the ejectment of his wife from a dwelling house on a farm leased by the company . This dwelling had been the matrimonial home before the husband left it after committing adultery and he had not offered his wife any suitable alternative accommodation. The court held that on the facts of the company was nothing more than the husbands alter ego and refused to allow him to use the companys cooperate
12 Lategan v Boyes 1980
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13 Orkin bros v bell

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14 Cattle breeders farm (Ptu) Ltd v Fieldman 1974

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personality for the purpose of enabling him to evade his matrimonial duties. The company here had no greater right to eject the wife than had the husband.

The effect of lifting the legal personality is that

a. The legal entity/company is no longer regarded as separate from members. b. The corporation and the members become severally and jointly liable for the debts of the

corporation.
c. Where fraudulent use, dishonest is made of legal personality for improper conduct.

The conclusion
Companies in our law have juristic personality. It means that even though they are founded by natural persons upon registration they acquire an artificial personality that allows them to be viewed as a person in the law. Juristic persons can own and dispose of property, sue and be sued by others in its own name. The juristic person however is a nonliving entity meaning it cannot run itself that is why its founders are in charge with working out the board of directors who direct the company. The courts and the legislator however had to look out for the natural persons who might hide behind the legal personality of the company to commit crimes or self-enrich themselves to the
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expense of the company. The concept of the lifting of the corporate veil was born in circumstances of fraud, dishonesty and irregularities to expose the natural persons to liability when it is just to do so.

References

Books
1. Beuthin R C and Luiz S M (1992) basic company law 2nd ed butterwhoths: durban 2. Gibson J T R (2010) south african mercantile & company law 8th ed Juta: Cape town

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3. Chaka B N (2011) company law and practice, University of Namibia

Cases
1. Macaura v northern assurance Co 1925 AC 619 2. Solomon v Solomon & co 1897 AC 22 3. Stellenbosch farmers winery Ltd v Distillers crop SA Ltd 1962 4. Cape pacific Ltd v Lubber controlling investment (Pty) ltd & others 1995 (4) SA 790 5. Lategan v Boyes 1980 6. Orkin bros v bell 7. Cattle breeders farm (Ptu) Ltd v Feldman 1974 8. Dadoo ltd and others v Krugersdorp municipal council 1930 AD 530

Statutes
1. The Namibian constitution article 1 of 1990 2. The companies act 28 of 2004 3. The companies act 61 of 1978

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