Issue in dispute

When will the Labour Courts be willing to go behind the corporate structure of an employer?

Court's decision

In the case of Bargaining Council for the Furniture Manufacturing Industry, KwaZulu-Natal v UKD Marketing CC & others (2013) 34 ILJ 96 (LAC) the Court was asked by the Bargaining Council for the Furniture Manufacturing Industry, KwaZulu-Natal (“the Bargaining Council”) to pierce the so-called “corporate veil” and make an order compelling UKD Marketing CC (“UKD”) to register with it as an employer. UKD was originally a manufacturer of furniture for major retail stores. In 2003 it restructured its operations by setting up individual entities owned by former employees. These entities (close corporations and sole proprietorships each registered for VAT separately) supplied items and services to UKD in order to jointly produce ready made kitchen cupboards to meet orders which UKD obtained.

The eleven entities so created attempted to register with the Council, but the Council refused because it argued that the corporate structure consisting of the individual entities set up by UKD was a sham set up to avoid the consequences of an employment relationship between UKD and its employees. In effect, the Bargaining Council wanted the Court to go behind this structure, declare UKD to be the employer of all the members of the close corporations and their employees and order UKD to register with the Council.

The Labour Court refused to do so. The Bargaining Council appealed to the.

The LAC held that our Courts should not lightly disregard a company's separate legal personality. Fraud, dishonesty or improper conduct could provide grounds for doing so; in which case the court would examine the substance rather than the form of the adopted structure in order to determine whether the corporate personality was misused as a facade. In this case the LAC found no evidence of fraud, dishonesty or improper conduct and dismissed the appeal.

Importance

It is clear that the Courts will be able (and willing) to pierce the corporate veil should it find that there has been a misuse of corporate personality which would justify its being disregarded. A company can be a façade even though it was not originally incorporated with any deceptive intentions; what counts is whether it has been used as a façade at the time of the relevant transactions. If it is found that different legal entities were utilized to avoid legal responsibilities, the Court will be able to pierce the corporate veil between them in order to give effect to their legal obligations.