It is trite that a company is a separate juristic entity from its directors and shareholders, with its own rights and legal duties. The debts of a company cannot be regarded as debts of its shareholders or directors. However, if it comes to light that a natural person such as a director or shareholder has misused the company’s separate legal personality to engage in a wrongful act, our courts may, in exceptional circumstances, hold such a person personally liable. This is called ‘piercing the corporate veil’.
Section 20(9) of the Companies Act provides our courts with a statutory discretion to pierce the corporate veil. It states as follows:
“If, on application by an interested 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 the company, constitutes an unconscionable abuse of the juristic personality of the company as a separate entity, the court may –
(a) 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; and
(b) make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a)”.
The recent decision of Kolisang v Alegrand General Dealers and Auctioneers and Another (31301 /2020)  ZAGPJHC 431 demonstrates exactly how a court may apply section 20(9) to ensure that a wrongdoer does not hide behind a company in order to avoid being brought to book.
In 2016 Ms Kolisang attended an auction arranged by Alegrand. Here, she purchased a vehicle described as a 2012 Golf GTI for R177 560. It later transpired that the vehicle was in fact a 2010 model. Ms Kolisang subsequently returned the vehicle and requested a refund from Alegrand. Although Alegrand confirmed the cancellation of the sale agreement, it failed to refund Ms Kolisang.
After obtaining default judgment against Alegrand, Ms Kolisang was unable to execute the judgment as the sole director of the company, Mr Jassat, resigned from this position and sold the company. The company had ceased trading and was awaiting deregistration. In these circumstances, the relief sought by Ms Kolisang was for the Court to deem Mr Jassat personally liable for the debts of the company.
The Court first had to determine whether Mr Jassat had misrepresented to Ms Kolisang that the vehicle was a newer model, and that this misrepresentation induced her to make the purchase. Secondly, it had to determine whether the misrepresentation amounted to ‘unconscionable’ conduct as conceived of in section 20(9).
The Court highlighted section 76(3) of the Companies Act, which lays out the fiduciary obligations of every director. It states as follows:
“… a director of a company, when acting in that capacity, must exercise the powers and perform the functions of director-
(a) in good faith and for a proper purpose;
(b) in the best interests of the company; and
(c) with the degree of care, skill and diligence that may reasonably be expected of a person-
(i) carrying out the same functions in relation to the company as those carried out by that director; and
(ii) having the general knowledge, skill and experience of that director”
It was held that Mr Jassat breached his fiduciary obligations by deliberately misrepresenting the specifications of the vehicle in order to induce Ms Kolisang to purchase it. His conduct was deemed fraudulent, dishonest and improper. The Court stated that in addition to committing fraud, Mr Jassat disregarded his duty to act in the company’s best interests, stating:
“Additionally, as the director and owner, he acted with cavalier disregard for the interests of the company … Such conduct is manifestly not in the best interest of the company and may be considered reckless and dishonest. This conduct was indubitably with callous disregard for its effect on the company as a separate legal entity and at a time when he describes its financial situation as being parlous. Therefore, whilst a director is entitled to resign at any time, his resignation cannot be used as a means of evading his fiduciary duties as a director.”
The Court was therefore satisfied that Mr Jassat’s conduct constitutes an unconscionable abuse of the company’s juristic personality as conceived of in section 20(9). The corporate veil was subsequently pierced and Mr Jassat was held personally liable for the full amount.
It is important to note that the Court rejected Mr Jassat’s contention that Ms Kolisang was obliged to exhaust her remedies against the company before proceeding against him personally. The Court stressed that the remedy provided by section 20(9) may be granted at any time as long as the facts justify such relief.
Based on the approach taken in the above matter, section 20(9) proves to be a highly effective and attainable measure by anyone seeking to nip the misuse of a company’s separate legal personality in the bud and hold directors personally liable for company debts.
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