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[2013] ZAWCHC 9
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Ex parte application of Gore NO and Others (18127/2012) [2013] ZAWCHC 9; 2013 (3) SA 382 (WCC) (13 February 2013)
REPORTABLE
Republic of South
Africa
IN THE HIGH COURT OF SOUTH AFRICA
(WESTERN CAPE HIGH COURT, CAPE TOWN)
Case No: 18127/2012
Before: The Hon. Mr Justice Binns-Ward
In the ex parte application of:
STEPHEN MALCOLM GORE N.O
AND 37 OTHERS N.N.O.
(in their capacities as the liquidators of 41 companies
comprising King Financial Holdings Ltd (in liq.)
and its subsidiaries)
..................................................................................................................
Applicants
JUDGMENT: 13 FEBRUARY 2013
___________________________________________________________________________
BINNS-WARD J:
The order set out at the end of these reasons for judgment was made
on 14 December 2012. It was made in terms of s 20(9)
of the new Companies Act (Act 71 of 2008).
1
I indicated at the time that I would provide reasons for the order
later.
2
Those reasons now follow.
The order granted the relief sought by the liquidators of 41
companies to permit certain of the assets of those companies to
be
dealt with as if they were the property of the holding company. The
relief that had been asked for entailed selectively disregarding
the
separate personalities of a number of companies in a group of
companies and treating their residual assets (that is the assets
remaining after the payment of the secured creditors and ‘trade
creditors’ of each company) as the assets of the
holding
company for the purposes of settling what have been described as the
‘investors’ claims’. The essential
basis for the
application was the allegation that the relevant business of the
group was conducted through the holding company
with little or no
regard to the distinction between that company’s legal
personality and that of its subsidiaries. The
founding papers
asserted that the application was brought under the common law,
alternatively in terms of
s 20(9)
of the
Companies Act, 2008
.
The application was described on the court roll as being one for the
‘piercing of the corporate veil’; a familiar
term in
this context, locally and in the English common law jurisdictions,
before the introduction of
s 20(9)
of the new
Companies Act.
Some
might suggest that ‘lifting’ the veil was the more
appropriate label in the circumstances. Staughton LJ offered
the following basis for a distinction in
Atlas Maritime Co SA v
Avalon Maritime Ltd,
The Coral Rose (No. 1)
[1991] 4 All
SA 769
(CA), at 779:
To
pierce
the
corporate veil is an expression that I would reserve for treating the
rights or liabilities or activities of a company as the
rights or
liabilities or activities of its shareholders. To
lift
the corporate veil or
look
behind it
, on the other hand, should mean to
have regard to the shareholding in a company
[in other words,
to its controllers]
for some legal purpose.
In
Pioneer Concrete Services Ltd v Yelnah Pty
Ltd
(1986) 5 NSWLR 254
(SCNSW), at 264,
Young J
described ‘lifting the
corporate veil’ as meaning ‘[t]hat although whenever each
individual company is formed
a separate legal personality is created,
courts will on occasions, look behind the legal personality to the
real controllers’.
A broad consideration of the case law in several jurisdictions
impels the conclusion that nothing really turns on the labels
despite the documented debate therein about nuances in the
terminology.
3
Indeed, the inconsistent and often confusing employment of the
expressions ‘piercing’, or ‘lifting’,
or
‘looking behind’ the veil lends support to Van
Heerden JA’s expressed wariness about the use of ‘the
veil’ metaphor altogether.
4
What is entailed on any approach, whether it be called a ‘piercing’
or a ‘lifting’, is a facts-based
determination by the
courts in certain cases to disregard some or all of the
characteristics of separate legal personality that
statute law
ordinarily attributes to a duly incorporated company.
5
Juristic personality is a legal fiction
6
(or a ‘figment of law’ as it has on occasion been
referred to
7
)
and thus, when the circumstances of a particular case make it
appropriate to do so – inevitably in matters in which the
concept has been used improperly, in a manner inconsistent with the
rationale for the creation and maintenance of the legal fiction
-
courts will disregard it.
8
Interestingly, in circumstances to be discussed presently, the UK
Supreme Court recently left open the question of whether, in
the
absence of statutory provision, the courts in that jurisdiction
truly possess the power to ‘pierce the corporate veil’.
It is evident, however, that, irrespective of the answer to the
question, the courts there have acted in many matters over the
years
assuming that they do possess the power.
9
The basis upon which this has been done here and in various foreign
jurisdictions will be considered later in this judgment.
The applicants were all liquidators of one or more companies which
formed part of a group of companies, referred to in the papers
as
‘the King Group’. The overall holding company was King
Financial Holdings Limited (‘KFH’), which is
also in
liquidation, and the liquidators of which are also amongst the
thirty nine applicants.
KFH’s shares were held by three groups of shareholders, namely
the trustees of the Adrian King Beleggings Trust, the Paul
King
Beleggings Trust and the Stephen King Beleggings Trust,
respectively. The King Group was effectively managed and owned by
the eponymous King brothers, Adrian, Paul and Stephen. The
shareholding trusts were so-called family trusts set up for the
benefit of the respective King brothers and their families. The King
brothers were directors of KFH and most of its subsidiaries.
At all
times - even after the ‘share conversion’ scheme
referred to below - the King brothers retained a majority
of the KFH
shares and exercised control of the group.
From about 2004, the King brothers used the companies in the group
to conduct business in the provision of financial services
by way of
marketing investments in commercial and residential immovable
properties in the manner to be described below. In early
2008, their
activities attracted the attention of the Financial Services Board
(‘FSB’), which conducted a search
and seizure operation
at the address from which the business of the group was carried on.
The FSB inspection report that followed
spoke to widespread
irregularity in the conduct of the business of the group and was one
of the factors that precipitated the
subsequent winding up of the
companies in it. The liquidators also commissioned an investigation
by accountants PriceWaterhouseCoopers
(‘PWC’) into the
receipt and allocation of investments by the companies in the group.
The investigations established that the affairs of group were in
material respects conducted in a manner that maintained no
distinguishable corporate identity between the various constituent
companies in the group. The entire group was operated, in effect,
as
one entity through the holding company. Funds solicited from
investors were transferred by the controllers of the holding
company
between the 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
investigations bore out the admission by the King brothers that they
‘treated all their companies as one’. It is thus perhaps
no cause for surprise that the King brothers expressly purported
to
carry on the business of financial service provider in the name of
KFH, notwithstanding that the only company in the group
that was
registered as a financial service provider in terms of the
applicable legislation was King Services (Pty) Ltd; KFH’s
letterhead even misrepresented that
it
was a licensed
financial service provider.
Investments solicited by the King Group were structured
predominately in the form of a purchase by the investor of shares in
a member of the group, the shares being acquired from another member
of the group. The acquisition of the shares was coupled
with the
contemporaneous extension of a loan by the investor concerned to the
company of which he was becoming a shareholder;
the concept being
that the shares could not be dealt with other than together with the
related loan account. All but a nominal
amount of the investment
comprised of money lent by the investor to the company in which he
purchased share/s. The companies
in which investments were
ostensibly made on this basis were property owning entities.
Initially, the King Group used a number of companies to hold already
developed commercial properties. Most of these companies
bore
variations of the name ‘Edrei’, for example ‘Edrei
1’ or ‘Edrei 13’. The Edrei companies
were held by
intermediate companies in the group structure. It was from these
intermediate companies that the investors ostensibly
purchased
shares in the property holding entities. It was represented to
investors that the loans made by them to the property
holding
entities would be secured, but no security was in fact provided.
At a later stage the King Group extended its ventures to the
development of commercial and residential properties. This area
of
enterprise was conducted mainly through entities in the group
bearing the ‘Kingvest’ or ‘Zelpy’ names.
Investments into the Kingvest or Zelpy companies were structured in
essentially the same manner as those into the Edrei companies.
As a consequence of the dishonest and chaotic administration of the
affairs of the King Group of companies by the King brothers,
the
liquidators of the constituent companies have encountered serious
difficulty in identifying the relevant corporate entities
against
which the individual investor-creditors might have claims. To
illustrate: a creditor might have been under the impression
that he
had invested in company A, and might even have been issued with
documentation that purported to confirm as much, but
the flow of
funds might indicate a quite different reality. In many cases the
documentation purporting to evidence an investment
was so ineptly
prepared that it did not identify into which company the particular
investment ostensibly was being made. The
invested funds were in
fact ‘allocated’ by the management of the King Group
into whichever company it saw fit, which,
in effect, meant any
company in the group which happened then to be in immediate need of
funds. This happened without any properly
kept accounting record.
The first applicant avers that ‘it was a matter of luck
whether or not the investor was allocated
to a financially sound
company, or one that was insolvent’. (It has been suggested
that some investors personally connected
to the King brothers may
have been preferred by being ‘allocated’ to subsidiaries
‘where there is a surplus’.)
The flow of funds within
the Group appears to have been materially determined by the need of
the King brothers to sustain their
scheme by finding money to pay
out existing investors who wished to withdraw their funds. Obviously
it would become impossible
to attract fresh investments if there
were a default in payment to existing investors. Thus, during the
period 1 July 2008
to 1 February 2010, of nearly R80 million
received from investors for property investment only just under
R32 million
was applied for the stated purpose, with at least
R15,5 million being used to repay investors in the King group who
wanted to
withdraw their investments.
In the period leading up the collapse of the group the King brothers
also persuaded investors to enter into so-called ‘share
conversion’ transactions in terms of which ostensibly existing
investments in one or more subsidiary companies could be
converted
into shares in KFH. The share conversion scheme was inept and
dishonest. The investigation into it by PWC showed, for
example,
that the shares were ‘converted’ at markedly different
(and apparently arbitrarily determined) values. Corresponding
cashflows to support the realisation of shares in a subsidiary for
the acquisition of shares in KFH could not be found. Supporting
documentation for many transactions was absent. Shareholder
certificates were issued to investors without copies of the
certificates
being maintained in the company’s records. Shares
in KFH were also marketed and sold directly to the public
notwithstanding
that at the relevant time the company had not been
converted from a private company into a public company. Moreover a
greater
number of shares was purportedly issued than had been
authorised.
These are but some of the examples apparent from the FSB and PWC
reports of the manner in which the Group’s affairs were
conducted.
It is evident from the reports that the disregard by the King
brothers of the separate corporate personalities of the companies
in
the King Group was so extensive as to impel the conclusion that
Group was in fact a sham. There was in reality no distinction
for
practical purposes when it came to dealing with investors’
funds between KFH and the subsidiary companies. The relief
that was
granted allowing the consolidation of the residual assets in KFH and
directing that all the investors’ claims
would lie against the
fund thus created was given to afford a convenient and
cost-effective means of dealing with the consequences.
The application was commenced by way of a rule
nisi
, which
was published in the national press and in the Government Gazette.
Notice of the application was also given in some of
the district
newspapers circulating locally in areas in which concentrated
numbers of investors were known to reside. The published
notices
provided a summary of the application and gave a web address at
which the full set of founding papers could be accessed.
Service was effected personally on Kobus Pienaar, Kortrustfin (Pty)
Ltd and Pierre Daniel Smit. They were shareholders in two
of the
companies of the group who, for reasons it is not necessary to
describe, were expressly excluded from the definition of
investors
in terms of paragraph 1.3 of the order. They took no active part in
the proceedings.
Notice was also given to the Master of the High Court at Cape Town,
who indicated that she abided the judgment of the court.
The FSB
filed an affidavit indicating that it supported the application.
It is evident on a consideration of South African, English and
Australian jurisprudence that the readiness of courts to pierce,
lift, or look behind the corporate veil has varied quite
considerably depending on the facts of given cases. It is impossible
to categorise the results premised on any finitely definable
principles. In
Amlin (SA) Pty Ltd v Van Kooij
2008 (2) SA 558
(C), at para. 15, Dlodlo J quoted from two Australian
cases, including the comment of Rogers AJA in
Briggs v James
Hardie & Co Pty Ltd
(1989) 16 NSWLR 549
(NSWCA)
10
that ‘
(T)here is no common, unifying principle, which
underlies the occasional decision of the courts to pierce the
corporate veil.
Although an ad hoc explanation may be offered by a
court which so decides, there is no principled approach to be
derived from
the authorities.
’ An Australasian academic,
Professor John Farrar, reportedly described the Australian
authorities on piercing the corporate
veil as ‘
incoherent
and unprincipled
’ (J Farrar, ‘Fraud, Fairness
and Piercing the Corporate Veil’
(1990) 16
Canadian
Business Law Journal
474
, 478, cited by Prof Ian Ramsay and
David Noakes of the University of Melbourne in their paper ‘
Piercing
the Corporate Veil in Australia
’, (2001) 19
Company and
Securities Law Journal
250-271).
In
VTB Capital
[UKSC] supra, at para. 123, Lord Neuberger,
addressing an argument that the courts enjoyed no power in law to
pierce the corporate
veil, remarked ‘
The
notion that there is no principled basis upon which it can be said
that one can pierce the veil of incorporation receives
some support
from the fact that the precise nature, basis and meaning of the
principle are all somewhat obscure, as are the precise
nature of
circumstances in which the principle can apply
’
.
Indeed, in what is generally accepted to be the leading South
African authority on the subject,
Cape Pacific Ltd
,
11
Smalberger JA (who expressly refrained from being drawn into
making a semantic distinction between ‘piercing’
and
‘lifting’ the corporate veil) observed, ‘
The
law is far from settled with regard to the circumstances in which it
would be permissible to pierce the corporate veil. Each
case
involves a process of enquiring into the facts, which, once
determined, may be of decisive importance…I do not deem
it
necessary or advisable in the present appeal to attempt to formulate
any general principles with regard to when the corporate
veil may be
pierced
’.
12
Recent commentary by the editors of Cassim
et al
(ed.),
Contemporary Company Law
, Second Edition (Juta), 2012, is to
the effect that ‘…
the grounds on which courts will
pierce the corporate veil have been difficult to state with
certainty. Courts have grappled with
the correct approach to adopt
in determining whether or not to pierce the corporate veil….
’.
13
The elusiveness of any clearly determinable principles may be
illustrated with regard to such matters in the context of groups
of
companies by contrasting the robust approach evident in the English
courts’ judgments in
Littlewoods Mail Order Store Ltd v
McGregor
[1969] 3 All ER 855
(CA),
Wallersteiner v More
[1974] 3 All ER 217
(CA) and
DHN Food Distributors Ltd v London
Borough of Tower Hamlets
[1976] 3 All ER 462
(CA) with the
strictly conservative approach taken in
Adams and Others v Cape
Industries plc and Another
[1991] 1 All ER 929
(Ch D and CA).
14
The summary of the circumstances in which an English court will be
prepared to pierce the corporate veil given in
Faiza Ben Hashem
v. Shayif and Another
[2008] EWHC 2380
(Fam)
15
probably provides an accurate reflection of the current position in
that jurisdiction, save that the suggestion that ‘the
court
will pierce the veil only so far as is necessary to provide a remedy
for the particular wrong which those controlling the
company have
done’ has been held to be incorrect (see
Antonio
Gramsci Shipping v Stepanovs
[2011] 1 Lloyds Rep. 647, at
para. 18-21,
16
and
VTB Capital plc v. Nutritek International
[2012] EWCA Civ
808
, at paras. 79 and 82). In
Ben Hashem
, Munby J
set out the following seven principles (at paras 159-164):
1. Ownership and control of a company are not of
themselves sufficient to justify piercing the veil;
2. The court cannot pierce the veil, even when no
unconnected third party is involved, merely because it is perceived
that to do
so is necessary in the interests of justice;
3. The corporate veil can only be pierced when there is
some impropriety;
4. The company’s involvement in
an impropriety will not by itself justify a piercing of its veil:
[furthermore] the impropriety
must be linked to use of the company
structure to avoid or conceal liability;
5. It follows…. that if the
court is to pierce the veil, it is necessary to show
both
control of the company by the
wrongdoer
and
impropriety in the
sense of a misuse of the company as a device or façade to
conceal wrongdoing;
6. A company can be a façade
for such purposes even though not incorporated with deceptive intent,
the relevant question
being whether it is being used as a façade
at the time of the relevant
transaction(s).
7. And the court will pierce the veil
only so far as is necessary to provide a remedy for the particular
wrong which those controlling
the company have done.
In
other words,
the fact that the
court pierces the veil for one purpose does not mean that it will
necessarily be pierced for all purposes.
On the assumption that the courts do have the power to pierce the
corporate veil - as mentioned, a question that has been left
open by
the UK Supreme Court - that statement of principle appears, subject
to the qualification that I have mentioned, to enjoy
broad
endorsement by the Court of Appeal and the Supreme Court in
VTB
Capital
.
17
The facts and matters in issue in
VTB Capital
were
conveniently summarised on the UK Supreme Court website as follows
(insofar as relevant):
The Appellant is a London-based bank. In 2007 the
Appellant entered a Facility Agreement with a Russian company
(“RAP”).
Under that agreement the Appellant loaned RAP
$225m to fund the purchase of six Russian Dairy Plants (“the
Dairy Companies”)
from the First Respondent.
RAP subsequently defaulted on the loan. In 2010 the
Appellant began claims in deceit, alternatively conspiracy to
defraud, against
the Defendants. In May 2011 the Master granted
permission to serve the claims on the Defendants out of the
jurisdiction. In August
2011 the Appellant obtained a worldwide
freezing order against the Fourth Defendant.
In October 2011 the Appellant applied to amend its
Particulars of Claim to add a claim for breach of contract against
the Second,
Third and Fourth Defendants. The Appellant alleged the
Defendants had fraudulently misrepresented that RAP was a purchaser
in separate
control that was buying the Dairy Companies from the
First Respondent under an arm’s length transaction. In fact,
RAP was
controlled by the Second, Third and Fourth Defendants, who
deliberately misused RAP’s corporate structure in order to
defraud
the Appellant.
Arnold J refused the Appellant’s application to
amend the Particulars of Claim. …….
(As explained in the judgment of the Court of Appeal, the reason that
the appellants sought to amend their particulars of claim
to
introduce a claim founded in contract - for which they required RAP’s
corporate veil to be pierced - was to provide an
alternative basis
for establishing the jurisdiction of the English court for its claims
against the defendants.
18
)
The issue for determination was stated thus in the website summary:
If a person uses a puppet company to enter a contract
with a third party in order to perpetrate fraud on that third party,
can the
court pierce the corporate veil and treat that person as a
party to the contract?
The UK Supreme Court answered that question in the negative, holding
that even if the court could in principle pierce the corporate
veil,
doing so in the postulated circumstances would be tantamount to
extending the concept in a manner contrary to principle.
The
principles which Lord Neuberger thought would be offended by such an
extension appear to have been firstly, the absence of
any necessity
for the exceptional course of disregarding the RAP’s corporate
personality because the law of tort afforded
VTB a remedy for
negligent or fraudulent misrepresentation
19
and secondly, the allegations that VTB wished to introduce into its
founding pleading would not make out a case that RAP had been
used as
a ‘façade to conceal the true facts’. Lord
Neuberger, however, expressly allowed that the interposition
of
pertinent statutory provisions could determine a different conclusion
on the question of whether, and in what circumstances,
a court could
pierce the corporate veil. Section 20(9) of the Companies Act 71
of 2008 (discussed below) is a manifestation
of such a provision. It
is not necessary to determine the question, but it does not seem
clear that the UK Supreme Court would
necessarily have come to the
conclusion it did if a statutory provision like s 20(9) of our
new
Companies Act had
been applicable.
In Australia, in
Gorton
v Federal Commissioner of Taxation
[1965] HCA 1
;
(1965)
113 CLR 604
, Windeyer J remarked that an unduly rigid approach
to piercing the corporate veil led the law into ‘
unreality
and formalism
’
. Trending in the
opposite direction, however, Hill J, in the Federal Court, is
reported
20
as having commented in
AGC
(Investments) Ltd v Commissioner of Taxation (Cth)
[1992] FCA 223
;
(1992)
92 ATC 4239
;
23 ATR 287
(which was not available to me) that the
‘
circumstances in which the
corporate veil may be lifted are greatly circumscribed
’,
thus reflecting the entrenched judicial
attachment to formalist legal doctrine commonly discernible in
judgments on the subject
not only in Australia, but also in England
and in South Africa.
In their article analysing the approach of Australian courts to
piercing the corporate veil, Ramsay and Noakes identify ‘group
enterprises’ as one of five categories of ‘factors’
that might lead to a decision to pierce the veil.
21
It is a factor that is evident in cases in which the ‘
circumstances
[indicate that]
a
corporate group is operating in such a manner as to make each
individual entity indistinguishable, and therefore it is proper
to
pierce the corporate veil to treat the parent company as liable for
the acts of the subsidiary
’
.
Our own jurisprudence contains an
en passant
acknowledgment
of the apparent trend during the 1960’s and 70’s towards
an readier willingness to ignore the separate
personality of
individual companies in the group context (see
Ritz Hotel Ltd v
Charles of the Ritz Ltd and Another
1988 (3) SA 290
(A), at
314H-316B), but the more recent conservative trend by the English
courts evidenced in
Adams
has been endorsed in subsequent
South African judgments: see e.g.
Wambach v Maizecor Industries
(Edms) Bpk
[1993] ZASCA 28
;
1993 (2) SA 669
(A), at 675D-E and
Macadamia
Finance BK en ’n Ander v De Wet en Andere NNO
1993 (2) SA
745
(A), at 748B-D. A judicial philosophy that the separate
personality of juristic persons should be disregarded only in
exceptional
circumstances and as a last resort under the common law
has been articulated in some recent South African judgments, cf.
Hülse-Reutter v Gödde
2001 (4) SA 1336
(SCA), at
para 23,
Amlin
supra, at 567J-568C,
22
Airport Cold Storage (Pty) Ltd v Ebrahim and Others
[2007] ZAWCHC 25
;
2008 (2)
SA 303
(C), at para. 9, and
Al-Khafari & Sons v Pema and
Others NNO
2010 (2) SA 360
(W), at para. 36. Our courts
nevertheless do in some senses adopt a discernibly more liberal
approach to the issue than
the English courts. Cameron JA
compared the approach of our courts to those of England in the
following terms in
Ebrahim v Airports Cold Storage (Pty) Ltd
23
,
at para. 22, when dealing with a case in which
ss 64(1)
and
65
of the
Close Corporations Act 69 of 1984
24
had been invoked: ‘
In contrast with the United Kingdom,
where it seems the equivalent provisions have in recent years “been
very rarely used”
to fasten directors with personal liability,
the jurisprudence of this Court evidences claimants’ spirited
reliance on
the provision. Though courts will never “lightly
disregard” a corporation’s separate identity, nor
lightly
find recklessness, such conclusions when merited can only
help in keeping corporate governance true.
’
25
A consideration of the South African authorities shows that despite
the repeated affirmation that the courts enjoy no general
discretion
to do so merely because it would be just and equitable, courts will
ignore or look behind the separate legal personality
of a company
where justice requires it, and not only when there is no alternative
remedy. The involvement of fraud or other improper
conduct has
generally been present in the cases in which the veil has been
lifted or pierced. Corbett CJ - appearing to
broadly endorse
the approach of the English Court of Appeal in
Adams
, while
expressly eschewing any necessity to ‘consider, or attempt to
define, the circumstances under which the court will
pierce the
corporate veil’ - observed, ‘
In this connection the
words “device”, “stratagem”, “cloak”
and “sham” have been
used…
’.
26
Davies and Worthington,
Gower and Davies’
Principles
of Modern Company Law
9
th
ed (2012). at p. 219,
make the point that it is ‘
well-recognised’
that
the separate personality of a company will be disregarded ‘
when
the corporate structure is a “mere façade concealing
the true facts” – “façade”
or “sham”
having replaced an assortment of epithets
27
which judges have employed in earlier cases.
28
The difficulty is to know what precisely may make a company a
“mere façade”.
’ (In
VTB Capital
,
however, Lord Neuberger questioned the usefulness of applying such
epithets as any sort of touchstone, saying ‘…
such
pejorative expressions are often dangerous, as they risk assisting
moral indignation to triumph over legal principle, and,
while they
may enable the court to arrive at a result which seems fair in the
case in question, they can also risk causing confusion
and
uncertainty in the law
’.
29
)
In my view the determination to disregard the distinctness provided
in terms of a company’s separate legal personality
appears in
each case to reflect a policy based decision resultant upon a
weighing by the court of the importance of giving effect
to the
legal concept of juristic personality, acknowledging the material
practical and legal considerations that underpin the
legal fiction,
on the one hand, as against the adverse moral and economic effects
of countenancing an unconscionable abuse of
the concept by the
founders, shareholders, or controllers of a company, on the other.
The courts have shown an acute appreciation
that juristic
personality is a statutory creation and that ‘
their
separate existence remains a figment of law, liable to be curtailed
or withdrawn when the objects of their creation are
abused or
thwarted
’.
30
Section 20(9)
of the
Companies Act, 2008
, has introduced a
statutory basis for piercing or lifting the corporate veil of
companies.
31
It provides:
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 provision is closely similar to, but not exactly the same as,
that in
s 65
of the
Close Corporations Act 69 of 1984
.
32
The introduction of the statutory provision has given rise to some
debate on whether the subsection has replaced the common law
on
piercing the corporate veil. Certainly there is no express intention
apparent to that effect, as for example to be seen in
s 165(1)
of the Act (concerning derivative actions), but, equally, there is
no express indication that the intention is
not to displace the
common law, like that to be found in s 161(2)(b) (concerning
remedies available to protect the rights
of the holders of
securities in companies).
The language of s 20(9) is cast in very wide terms, indicative
of an appreciation by the lawgiver that the provision might
find
application in widely varying factual circumstances. The statute
enjoins that its provisions be construed with appropriate
regard to
subsections 5(1) and (2) read with s 7 of the Act (including,
to the extent appropriate, a consideration of foreign
company law).
Approaching the interpretation of
s 20(9)
of the
Companies Act
in
that manner I am unable to identify any discord between it and
the approach to piercing the corporate veil evinced in the cases
decided before it came into operation.
If anything, the width of the provision appears to broaden the bases
upon which the courts in this country, and certainly those
in
England, have hitherto been prepared to grant relief that entails
disregarding corporate personality. Thus in the current
case, as in
Airport Cold Storage (Pty) Ltd v Ebrahim
[2007] ZAWCHC 25
;
2008 (2) SA 303
(C),
in which the application of
s 65
of the
Close Corporations Act
was
under consideration, the conduct of the business of the group of
companies with scant regard for the separate legal personalities
of
the individual corporate entities of which it was comprised would in
itself constitute a gross abuse of the corporate personality
of all
of the entities concerned.
33
In the current case I would have difficulty in finding a basis on
the approach adopted in the English decisions to disregard
the
separate personality of the individual companies in the King Group.
The reason for the difficulty would be that it is not
apparent that
the improprieties in dealing with investors’ funds involved
the use of the companies to conceal the true
facts (see the fourth
and fifth of the six principles distilled in
Ben Hashem
34
).
The relevant improprieties involved in the current case involved the
controllers of the companies treating the group in a way
that drew
no proper distinction between the separate personalities of the
constituent members and in using the investors’
funds in a
manner inconsistent with what had been represented. The first
mentioned category of impropriety, in my view, constituted
an
unconscionable abuse by the controllers of the juristic
personalities of the relevant subsidiary companies as separate
entities
and brought the case within the ambit of the statutory
provision.
The newly introduced statutory provision affords a firm, albeit very
flexibly defined, basis for the remedy, which will inevitably
operate, I think, to erode the foundation of the philosophy that
piercing the corporate veil should be approached with an
à
priori
diffidence. By expressly establishing its 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’.
35
This much seems to be underscored by the choice of the words
‘
unconscionable abuse
’ in preference to the term
‘
gross abuse
’ employed in the equivalent
provision of the
Close Corporations Act; the
latter term having a
more extreme connotation than the former. The term ‘unconscionable
abuse of the juristic personality
of a company’ postulates
conduct in relation to the formation and use of companies diverse
enough to cover all the descriptive
terms like ‘sham’,
‘device’, ‘stratagem’ and the like used in
that connection in the earlier
cases, and - as the current case
illustrates - conceivably much more. The provision brings about that
a remedy can be provided
whenever the illegitimate use of the
concept of juristic personality adversely affects a third party in a
way that reasonably
should not be countenanced.
36
Having regard to the established predisposition against
categorisation in this area of the law
37
and the elusiveness of a convincing definition of the pertinent
common law principles, it seems that it would be appropriate
to
regard
s 20(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.
38
Paragraph (b) of the subsection affords the court the very
widest of powers to grant consequential relief. An order made
in
terms of paragraph (b) will always have the effect, however, of
fixing the right, obligation or liability in issue of the
company
somewhere else. In the current case the ‘right’ involved
is the property held by the subsidiary companies
in the King Group
and the obligation or liability is that which any of them might
actually have to account to and make payment
to the investors.
Relief in terms of
s 20(9)
of the
Companies Act may
be granted
on application by any ‘interested person’, or
mero
motu
in any proceedings in which a company is involved. The term
‘
interested person
’ is not defined. I do not
think that any mystique should be attached to it. The standing of
any person to seek a remedy
in terms of the provision should be
determined on the basis of well-established principle; see
Jacobs
en ‘n Ander v Waks en Andere
[1991] ZASCA 152
;
1992 (1) SA 521
(A), at
533J-534E, and, of course, if the facts happen to implicate a right
in the Bill of Rights, s 38 of the Constitution.
There can be
no doubting that the applicants have a direct and sufficient
interest in the relief sought so as to qualify as ‘interested
persons’ within the meaning of the provision.
In conclusion it is appropriate to record my appreciation for the
assistance provided in the helpful written argument submitted
by
counsel for the applicants, Mr
Newdigate
SC.
The order made on 14 December 2012 provided as follows:
1.1 It is hereby declared, in terms of section 20(9) of the
Companies Act 71 of
2008 (as amended), that the companies listed in annexure A hereto
(“the King companies”), with the exception of King
Financial Holding Limited (in liquidation) (Reg No. 2001/006894/06),
shall be deemed not to be juristic persons in respect of any
obligation by such companies to the “investors” (as
defined in paragraph 1.3, below).
Pursuant to the declaration in paragraph 1.1, the King companies
shall be regarded as a single entity by ignoring their separate
legal existence and treating the holding company, King Financial
Holdings Limited (“King Financial Holdings”),
as if it
were the only company.
The order in paragraph 1.2 is applicable only to “investors”,
where “investors” refers to individuals
or entities
that invested in the King companies by purchasing shareholdings in
and loan accounts against one or more of the
King companies, and
includes those individuals and entities who purported either to
convert investments in King companies other
than King Financial
Holdings to shares in King Financial Holdings as well as those who
purported to purchase shares in King
Financial Holdings from 2008;
and “investors” does not include creditors who loaned
funds to King companies and
secured such loans by means of mortgage
bonds, nor does “investors” include trade creditors of
the King companies,
nor Kobus Pienaar, Kortrustfin (Pty) Ltd or
Pierre Daniel Smit;
The Applicants (other than the liquidators or King Financial
Holdings) are directed to transfer all monies that might remain
in
each of the King companies after payment of all liquidation costs,
bondholders’ claims and claims other than claims
by investors
to the liquidators of King Financial Holdings to be administered by
the liquidators of King Financial Holdings
as a single pool of
assets available for distribution to the investors;
The Second and Third Applicants, being the liquidators of King
Financial Holdings, shall:
1.5.1 call upon the investors to submit claims to proof against King
Financial Holdings rather than against any other of the King
companies;
1.5.2 require such investor claims to be forChapman29 the capital
amount invested only (i.e. not to include interest or capitalised
interest);
1.5.3 convene necessary meetings of creditors for proof of such
investor claims;
1.5.4 employ dedicated personnel to administer the investors’
claims;
1.5.5 admit investor claims that are rejected at creditors’
meetings, in the event that they are satisfied with those claims;
1.6 The costs of this application shall be treated as costs in the
winding-up of King Financial Holdings.
A.G. BINNS-WARD
Judge of the High Court
Dates of hearing:
11 October and 19 November 2012
Order made:
14 December 2012
Reasons furnished
: 13 February 2013
Judge:
Binns-ward J
Applicants’ counsel:
J.A. Newdigate SC
Applicants’ attorneys:
Edward Nathan Sonnenberg
Cape Town
1
The
provision is quoted in full at para. , below.
2
One
of the causes for delaying the provision of the reasons was to
enable me to update the description of the English jurisprudence
on
‘piercing the corporate veil’ in the draft judgment I
had prepared, with appropriate reference to the then awaited
judgment of the UK Supreme Court in
VTB
Capital Plc v Nutritek International Corp & Ors [2013] UKSC 5
(in which judgment had been reserved on 14 November 2012). The
UKSC handed down judgment on 6 February 2013. I granted
an
order without reasons in December because it was desirable, in the
interests of the creditors, that the applicants be enabled
to
implement the relief granted without further delay.
3
As
Toulson J is reported to have observed in
Yukong Line
Ltd of Korea v Rendsburg Investments Corpn of Liberia (No 2)
[1998]
1 WLR 294
, 305, ‘
it may not matter what language is used as
long as the principle is clear; but there lies the rub
’
(quoted by Lord Neuberger in
VTB Capital
[UKSC] supra, at
para. 118).
4
Cape
Pacific Ltd v Lubner Controlling Investments (Pty) Ltd and Others
[1995] ZASCA 53
;
1995 (4) SA 790
(A), at 808E.
5
See
Salomon v Salomon & Co
1897 AC 22
, [1895–9] All ER
Rep 33 and
Dadoo, Ltd and Others v Krugersdorp Municipal
Council
1920 AD 530
, which are the seminal judgments in England
and South Africa affirming the effects of the independent and
self-standing juristic
personality of companies. In
VTB Capital
[UKSC] supra, at para. 122, Lord Neuberger remarked that ‘
There
is great force in the argument that
[Salomon v Salomon]
represented an early attempt to pierce the veil of incorporation,
and it failed, pursuant to a unanimous decision of the House of
Lords, not on the facts, but as a matter of principle. Thus, at
30-31, Lord Halsbury LC said that a “legally incorporated”
company “must be treated like any other independent person
with its rights and liabilities appropriate to itself …,
whatever may have been the ideas or schemes of those who brought it
into existence”. He added that it was “impossible
to say
at the same time that there is a company and there is not”
’.
6
Which
is not to suggest that the existence of a company as a separate
entity distinct from its members is a merely artificial
and
technical concept. On the contrary, it brings about that property
vested in the company is not, and cannot be regarded as
vested in
all or any of its members; see
The Shipping Corporation of
India Ltd v Evdomon Corporation and Another
[1993] ZASCA 167
;
1994 (1) SA 550
(A),
at 565-6, following
Dadoo, Ltd and Others v Krugersdorp Municipal
Council
at 550-551.
7
Ebrahim
v Airports Cold Storage (Pty) Ltd
[2008] ZASCA 113
;
2008 (6) SA 585
(SCA),
[2009]
1 All SA 330
, at para. 15.
8
Compare
the observation by Angelo Capuano of Monash University in his paper
propounding a ‘realist’ approach to piercing
the
corporate veil, ‘
The realist’s guide to piercing the
corporate veil: Lessons from Hong Kong and Singapore
’,
(2009) 23 Australian Journal of Corporate Law: ‘
The
corporate veil cannot be measured physically, nor can the
corporation be touched, hand cuffed or made to do hard labour. This
is not to say, while it may be true for some, that realists deny the
existence of the corporate veil. It only exists, in law,
if it has
some pragmatic rationalisation and cause or some purpose
for
which it is worthy to be recognised
. If the facts
rationalise it and provide purpose for its existence, then its
grounding in the pragmatic is evident.
’ (emphasis
supplied) In
VTB Capital plc v. Nutritek International
[2012]
EWCA Civ 808
, at para 87, Lloyd LJ (delivering a judgment
jointly written by all three members of the court) stated that ‘
Veil
piercing …is about substance, not form;
…’.
9
Cf.
e.g. the conclusion by Rose LJ in
Re H
[1996] 2 All ER 391
;
[1996] 2 BCLC 500
(CA)
,
who, after referring to the dicta of
Danckwerts
LJ in
Merchandise Transport Ltd. v.
British Transport Commission
[1962] 2
QB 173
at 206-7:
‘
... where the character of
a company, or the nature of the persons who control it, is a
relevant feature the court will go behind
the mere status of the
company as a legal entity, and will consider who are the persons as
shareholders or even as agents who
direct and control the activities
of a company which is incapable of doing anything without human
assistance.
’,
and remarking that this statement
had been endorsed by Slade LJ in
Adams v Cape Industries
,
stated
that ‘[
c]
learly,
as
a matter of law
, the corporate veil can be lifted in
appropriate circumstances
’. (emphasis supplied)
10
Incorrectly
cited in
Amlin
as ‘(1998) 16 NSWLR’.
11
See
note 4 above (at pp. 802-803).
12
Compare
the observation in C Mitchell, ‘
Lifting the Corporate Veil
in the English Courts: An Empirical Study
’ (1999) 3
Company Financial and Insolvency Law Review
15 about ‘
the
courts’ own disinclination to describe a set of principles by
reference to which their decisions on the point should
be taken:
they would prefer to reserve a discretion to themselves to judge
each case on its merits
’ (see Ramsay and Noakes supra).
13
Op
cit at §2.4 (p. 42).
14
The
Court of Appeal’s judgments in
DHN
Food Distributors Ltd
had previously attracted adverse comment in the House of Lords’
decision in
Woolfson
v Strathclyde Regional Council
1978
SLT 159
(HL) (accessible at
http://www.bailii.org/uk/cases/UKHL/1978/1978_SC_HL_90.html
). Lord Keith of Kinkel stated that it was doubtful whether the
Court of Appeal had ‘
properly
applied the principle that it is appropriate to pierce the corporate
veil only where special circumstances exist indicating
that is a
mere façade concealing the true facts
’.
See the discussion on the point in
Al-Kharafi
& Sons v Pema and Others NNO
2010 (2) SA 360
(W), at para. 34-35. (In
VTB
Capital
[UKSC]
supra, at para. 121, Lord Keith’s treatment of the
concept of piercing the corporate veil was characterised
as
obiter
,
it being held that the decision in
Woolfson
does not afford any authority that English courts in fact enjoy the
power to pierce the corporate veil.)
15
Also
reported at
[2009] 1 FLR 115
,
[2008] Fam Law 1179
and accessible at
http://www.bailii.org/ew/cases/EWHC/Fam/2008/2380.html
.
16
Also
reported at
[2012] 1 All ER (Comm) 293
,
[2012] 1 BCLC 561
,
[2012]
BCC 182
and accessible at
http://www.bailii.org/ew/cases/EWHC/Comm/2011/333.html
.
17
See
para 79 of the Court of Appeal judgment and para. 128 of
Lord Neuberger’s judgment in the Supreme Court.
18
See
VTB Capital plc v.
Nutritek International
[2012]
EWCA Civ 808
, at para 44. In
Antonio
Gramsci Shipping Corporation and Others v. Stepanovs
[2011]
EWHC 333
(Comm); [2011] 1 Lloyd's Law Reports 647 and
Alliance
Bank JSC v. Aquanta Corporation and Others
[2011]
EWHC 3281
(Comm), Burton J held that allegations comparable
to those which the appellants in
VTB
Capital
sought to
introduce by way of amendment to their particulars of claim made out
‘a reasonable cause of action’. The
court of first
instance (Arnold J in the Chancery Division) and the Court of
Appeal disagreed in
VTB
Capital
–
see also
Alliance
Bank JSC v Aquanta Corporation and Others
[2012]
EWCA Civ 1588
(12 December 2012) at para 32. So also did the
majority in the Supreme Court.
19
See
VTB Capital
[UKSC]
supra, at para. 139.
20
In
Ramsay and Noakes
‘
Piercing the Corporate Veil in
Australia
’ (see para , above).
21
.
Ibid.
22
See
para. , above.
23
Note
7.
24
Section
64 of the Close Corporation Act provides:
If it at any time appears that any business of a
corporation was or is being carried on recklessly, with gross
negligence or with
intent to defraud any person or for any
fraudulent purpose, a Court may on the application of the Master, or
any creditor, member
or liquidator of the corporation, declare that
any person who was knowingly a party to the carrying on of the
business in any
such manner, shall be personally liable for all or
any of such debts or other liabilities of the corporation as the
Court may
direct, and the Court may give such further orders as it
considers proper for the purpose of giving effect to the declaration
and enforcing that liability.
Section 65 provides:
Whenever a Court on application by an interested
person, or in any proceedings in which a corporation is involved,
finds that
the incorporation of, or any act by or on behalf of, or
any use of, that corporation, constitutes a gross abuse of the
juristic
personality of the corporation as a separate entity, the
Court may declare that the corporation is to be deemed not to be a
juristic
person in respect of such rights, obligations or
liabilities of the corporation, or of such member or members
thereof, or of
such other person or persons, as are specified in the
declaration, and the Court may give such further order or orders as
it
may deem fit in order to give effect to such declaration.
25
The
approach reflected in the dictum of Cameron JA seems consistent with
that stated by the Canadian Supreme Court in
Kosmopoulos
v. Constitution Insurance Co.
,
[1987] 1 S.C.R. 2
, at para. 12:
‘
As a general rule a corporation
is a legal entity distinct from its shareholders: Salomon v. Salomon
& Co.,
[1897] A.C. 22
(H.L.) The law on when a court may
disregard this principle by "lifting the corporate veil"
and regarding the company
as a mere "agent" or "puppet"
of its controlling shareholder or parent corporation follows no
consistent
principle. The best that can be said is that the
"separate entities" principle is not enforced when it
would yield
a result "too flagrantly opposed to justice,
convenience or the interests of the Revenue": L. C. B. Gower,
Modern Company
Law (4th ed. 1979), at p. 112.
’
26
See
The Shipping Corporation of India Ltd v Evdomon Corporation and
Another
supra, at 566F.
27
“
Device”,
“creature”, “stratagem”, “mask”
and “puppet” are cited as examples.
28
The
authors were referring to cases which had preceded the judgments in
Adams
, supra.
29
VTB
Capital
[UKSC] supra, at para. 124.
30
In
ADT Security (Pty) Ltd v Botha and Others
[2010] ZAWCHC 563
,
at para.s 16-18, I remarked upon what I considered to be the
‘
generally flexible approach
’ indicated in the
Cape Pacific Ltd
judgment as being applicable when piercing
of the corporate veil falls to be considered and determined; an
observation illustrated
with reference to Scott JA’s
remark in
Hülse-Reutter
supra, at para. 20 that ‘
Much
will depend on a close analysis of the facts of each case,
considerations of policy and judicial judgment
’.
31
The
provision was inserted into the Act by s 13(d) of the Companies
Amendment Act 3 of 2011 and came into operation upon
the
commencement of the principal statute on 1 May 2011. The same
provision had previously been contained in s 163(4)
of the Act,
but its transfer to s 20 was effected before the Act came into
operation.
32
See
note 24.
33
See
the discussion in Cassim et al (ed),
Contemporary
Company Law
2
nd
ed (Juta) 2012 at pp61-2.
34
Set
out in para. Error: Reference source not found, above.
35
See
Amlin (SA) Pty Ltd v Van Kooij
supra, at para. 23;
Knoop
N.O. and Others v Birkenstock Properties (Pty) Ltd and Others
[2009] ZAFSHC 67
, at para. 23.
36
The
term and the context in which it is used in s 20(9) is
distinguishable from the expression ‘
onduldbare onreg
’
(translated as ‘
unconscionable injustice
’) used
by Flemming J in
Botha v Van Niekerk en 'n Ander
1983
(3) SA 513
(W), at 525F, and referred to in
Cape Pacific Ltd
supra, at 805D-F, as postulating ‘too rigid a test’. The
expression in the statute relates to the conduct giving
rise to the
remedy, whereas that used in the judgments related to the
consequences of the conduct.
37
See
Cassim et al (ed),
Contemporary Company Law
op cit supra, at
§2.4.1.
38
The
judgment of the Supreme Court of Appeal in
Hülse-Reutter
supra, has sometimes been misunderstood to imply that a piercing or
lifting of the corporate veil should not be undertaken if
the
claimant has an alternative remedy. That is not the effect of the
judgment. If it had gone that far it would have stood in
contradiction of the observation to the contrary effect in
Cape
Pacific Ltd
supra, at 805G. The judgment goes no further than to
state that, depending on the facts of a given case, the existence of
an alternative
remedy may be a relevant consideration; see
Hülse-Reutter
at para. 22-23. (In
Antonio Gramsci
Shipping
[2011] 1 Lloyds Rep. 647, at para 18, Burton J
gave a number of examples in English jurisprudence where the veil
was
pierced notwithstanding that an effective remedy could have been
afforded without doing so. See also
VTB Capital PLC v. Nutritek
International
[2012] EWCA Civ 808
at paras 79 and 82, where
Lloyd LJ agreed in principle with the submission that ‘
it
does not follow that a piercing of the veil will be available only
if there is no other remedy available against the wrongdoers
for the
wrong they have committed
’.)