The recognition of a company as a separate juristic person, liable for its own tax (or other) debts, is an important principle relied on by taxpayers when implementing various transactions.
In Ochberg v Commissioner of Inland Revenue(1) the court stated that:
"The law endows a company with a fictitious personality. The wisdom of allowing a person to escape the natural consequences of his commercial sins under the ordinary law, and for his own private purposes virtually to turn him into a corporation with limited liability, may well be open to doubt. But as long as the law allows it the Court has to recognise the position. But then too the person himself must abide by that. A company, being a juristic person, remains a juristic person separate and distinct from the person who may own all the shares, and must not be confused with the latter."
However, when the circumstances of a particular case make it appropriate to do so – inevitably in matters in which separate juristic personality has been used improperly in a manner that is inconsistent with the rationale for the creation and maintenance of the legal fiction – the courts will disregard it by 'piercing the corporate veil'.
A recent case(2) considered, among other things, the interesting issue of whether Section 20(9) of the Companies Act (71/2008) supplements or substitutes the common law jurisprudence on piercing the corporate veil.
The applicants were liquidators of one or more companies that formed part of the King Group. The King brothers effectively managed and owned the King Group through their family trust shareholdings. The applicants alleged that the relevant business of the group was conducted through the holding company with little or no regard to the distinction between the company's legal personality and that of its subsidiaries. As a result, the applicants sought an order to permit certain of the subsidiaries' assets to be dealt with as if they were the property of the holding company.
The court indicated that the investigation had established that the group's affairs were, in material respects, conducted in a manner that maintained no distinguishable corporate identity between the various constituent companies within the group. For instance, funds from investors were transferred by the controllers of the holding company between various companies in the group at will, with no effectual regard to the individual identity of the companies concerned and with grossly inadequate record keeping.
The judgment discussed the various jurisprudence on instances when the courts have been willing to pierce the corporate veil, including the recent UK Supreme Court judgment in VTB Capital Plc v Nutritek International Corp.(3)
However, the interesting aspect of the judgment was the court's findings(4) on the application of Section 20(9):
- "By expressly establishing its [Section 20(9)] availability simply when the facts of a case justify it, the provision detracts from the notion that the remedy should be regarded as exceptional, or 'drastic'."
- "The term 'unconscionable abuse of the juristic personality of a company' [the requirement for the application of Section 20(9)] postulates conduct in relation to the formation and use of companies diverse enough to cover all the descriptive terms like 'sham', 'devise', 'stratagem' and the like used in that connection in the earlier cases, and – as the current case illustrates – conceivably much more."
- "It seems that it would be appropriate to regard s20(9) of the Companies Act as supplemental to the common law, rather than substitutive."
- "The unqualified availability of the remedy in terms of the statutory provision also militates against an approach that it should be granted only in the absence of any alternative remedy" (thus in agreement with Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd).(5)
Section 20(9), requiring only an "unconscionable abuse of the juristic personality of a company as a separate entity", thus supplements common law and conceivably extends much further (applying a less stringent test than the common law position). Taxpayers should always recognise a company as a separate juristic person when structuring and implementing transactions; otherwise, the courts may disregard its separate existence. Taxpayers should thus be mindful that it may not be easy for the South African Revenue Service to prove abuse of a company's corporate existence with the enactment of Section 20(9).
(4) Paragraph 34, available at www.saflii.org/za/cases/ZAWCHC/2013/21.html.
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