PIERCING THE CORPORATE VEIL

PIERCING THE CORPORATE VEIL:  A BRIEF SYNOPSIS ON NAMIBIAN COMPANY LAW

 

  1. The courts in following South African case law on the subject matter, have for the most steadfastly applied the principle that a company is a distinct legal entity, separate and distinct from the shareholders who comprise it, and the courts have generally refrained to go beyond the Corporate Veil and attach liability to the individual shareholders.

 

  1. However and because of the fact that the corporate structure of a company have and can be abused, the courts have on occasion, pierced the Corporate Veil.

 

  1. The difficulty in analysing when a court will pierce the Corporate Veil has been marked by inconsistent judgements, for example:

 

  • In the matter of Lategan vs Boyes (1980), the court expressed the view that a South African court would not be prepared to disregard the Corporate Veil except upon proof of fraud.

 

  • In 1994 the South African Appellate Division confirmed that the circumstances under which a court would generally pierce the Corporate Veil would include an element of fraud or other improper conduct in the establishment or use of a company[i]

 

  • The following year (1995) the South African Appellate Division explained in another matter that the lifting of the Corporate Veil shifts the focus from the company to the shareholder behind it or in control of its activities, similar to the situation if there was no division between the company and that particular person.[ii]

 

  • Unfortunate the law is not yet settled as to the circumstances when a Corporate Veil should be lifted, but it is important to remember that each case involves an enquiry into the particular facts.

 

 

 

 

  1. Some instances where the courts have pierced the Corporate Veil relate to inter alia the following:

 

4.1       To give effect to the intention of the Legislator:

When the parties had not honestly arranged their affairs in order to evade some provision by proceeding to dress the company up in some sort of disguise.  Such an act is said to be in fraudem legis.[iii]

 

4.2       To prevent the consummate of fraud or breach of Fiduciary Duties:

It is trite law that now person could ever hope to pursue the court to lift the Corporate Veil in order to enable him or her to escape the consequences of what could clearly be a fraudulent use of the company’s separate legal identity.[iv]

 

4.3       To prevent improper evasion of obligations.

            In another matter, the Directors where held personally liable to a seller who had sold goods to the 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, i.e, the sole purpose of this transaction was to diminish the personal liability under the contract of suretyship.[v]   It appears that the basis of the courts’ decision in this matter was really that when Directors ordered goods there is an implied representation by them that they believe that the Company will probably be able to pay for the goods, so if the actually know that there is no such likelihood,  they are committing a fraud.

 

 

  1. Piercing the Corporate Veil by the Legislature

 

  • Unlike the courts, the Legislature has by the its very nature found no difficulty in piercing the Corporate Veil, for example in terms of Section 429 of the Companies Act, if it appears during the winding up that any business of the company was or is being carried on recklessly or with the intend to defraud creditors of the company or of any other person or for any fraudulent purpose, the court may on application by the Master, liquidate a judicial manager or any creditor, member etc. declare that any person who was knowingly a party thereto shall be personally responsible without any limitation of liability for all or any of the debts of the company as the court directs.
  • It is therefore clear that the purpose of Section 429(1) is clearly to attach personal liability on any person who was knowingly a party to the fraudulent and reckless carrying on of the company’s business.

 

  • It is important to remember that the onus is on the person alleging that the business has been carried on fraudulently or recklessly, to establish the facts on the balance of probabilities.[vi]

 

  • The remedy provided by the aforesaid section complements the common law remedies available against wrongdoers who cause injury to third parties by their dolus or The Section accordingly permits the court to extend the company’s liability to those who can be shown to have carried on the business fraudulently or recklessly.[vii]

 

  • In the Ex Parte Lebowa matter the court explained that the term ” recklessly” was used in contradistinction to the term “fraudulently”. It therefore implies the existence of an objective standard of care that would be observed by a reasonable man in concluding the business of the company.  The test for recklessness is objective in that the action of the director is measured against the standard of conduct of the notional reasonable person and it is subjective in so far as one has to postulate that particular notional person as belonging to the same group of class as the director, who operates in the same spheres and has the same knowledge or means to knowledge.[viii] 

 

  • In Ozinsky NO vs Lloyd (1995) the court stated that the reckless conducting of business in the accepted sense meant extreme lack of interest or extreme negligence. It follows that a decision cannot be subsequently characterized as reckless if it turns out to be wrong on condition there is an explanation which indicates that the person was confronted by choice and that thought and reflection went into the decision ultimately taken.

 

  • In the matter of Ex Parte de Villiers NNO: In re Carbon Developments (Pty) Ltd (in. Liquidation) (1993) the court stated that the mere carrying on business by directors and the occurring of it does not constitute an implied representation to those with whom they do business that the company’s assets actually exceeded its liabilities, but that all that is being represented is that the company will be able when the debts become due.

 

  • It therefore follows that the incurral of further debts when the company’s liability exceeds its assets, does not necessarily mean that there has been a fraudulent or reckless trading.  In the Ozinsky matter the court stated with approval that the directors had no general duty to disclose that the de facto insolvency of the company before excepting further credit and that trading in such circumstances did not automatically amount to a contravention of Section 429.[ix]

 

  • The courts have also held that if a director has reason to believe such as a reasonable business man that the occurral of a debt would run a high risk of non-payment and he would notwithstanduing still incur that debt, he would run short of the conduct of a reasonable business man.[x]

 

  • In the matter of Howard vs Herrigel referred to above, the Appellate Division held that when a person sought to be held liable under Section 429 is a director, he may well be such a party even in the absence of some positive steps by him in carrying on the business and in fact his lackadaisical attitude might lead to the conclusion that he in fact concurred in the conduct concerned.  A party to the carrying on of a company’s business is one who has joined with the company in a common pursuit and an auditor who is performing his statutory functions in a normal course is not carrying out the company’s business and is thus not a party thereto.[xi]

 

  • The phrase “carrying on business” is not synonymous with actively carrying on trade, and so the mere collection of assets acquired in the course of business and the distribution of their proceeds in the discharge of business liabilities can and may constitute “carrying on business”.

 

  1. Conclusion

In considering the above it is my considered view that if a member of a corporate entity is aware of the fact that the corporate entity would be unable to pay for its debts because of its insolvency, whether by reason of the disappearance of its substratum or otherwise, such a member or director has the duty to disclose that to the creditor concerned.

[i] Shipping Corporation of India Ltd v Evdomon Corporation (1994)

[ii] Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd

[iii] R v Gillet (1929)

[iv] S v De Jager

[v] Orkin Bros Ltd  v Bell (1921)

[vi] Howard v Herregil (1991)

[vii] Ex Parte Lebowa Development Corporation Limited (1989)

[viii] Philotex (Pty) Ltd v Snyman (1998)

[ix]  Ozinsky NO v Lloyd (1995)

[x]   Philotex (Pty) Ltd v Snyman (1998)

[xi]  Powertech Industries v Mayberry (1996)