Piercing the corporate veil has been extended
17 March 2013
Posted by: Herman van Dyk
By Andrew Lewis (DLA Cliffe Dekker Hofmeyr Tax Alert)
company is a separate juristic person liable for its own tax. This
article examines this principle and the impact of abusing a company's
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
In Ochberg v Commissioner of Inland Revenue 5 SATC 93 it was recognised
"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
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 inconsistent with the rationale for the creation
and maintenance of the legal fiction, courts will disregard it by 'piercing
the corporate veil' (see the reportable case of Ex parte application of Stephen
Malcolm Gore No. O and 37 Others N.N.O (Case No: 18127/2012), Western Cape
High Court at para 4).
The recent reportable Stephen Malcolm case considered, among
other things, the interesting issue of whether s20(9) of the Companies Act, No
71 of 2008 (Act) supplemented the common law jurisprudence on 'piercing the
corporate veil' or substituted it.
In this case, the applicants were all liquidators of one or more
companies that formed part of a group of companies, referred to as the King
Group. The King brothers effectively managed and owned the King Group through
their family trust shareholdings. The applicants alleged that the relevant
businesses 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 assets of the subsidiaries to be dealt with as if they were the
property of the holding company.
The court indicated that the investigation established that the affairs
of the group were in material respects conducted in a manner that maintained no
distinguishable corporate identity between the various constituent companies in
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 the instances when
the courts would be willing to 'lift the corporate veil', including the recent
English Supreme Court judgment of VTB Capital Plc v Nutritek International
Corp & Ors  UKSC 5. However, the interesting aspect of the
judgment is Binns-Ward J’s findings on the application of s20(9) of the Act
where it was said at paragraph 34 that:
By expressly stating its [s20(9) of the Act]
availability simply when the facts of the case justify it, the provision detracts
from the notion that the remedy should be regarded as exceptional,
The term 'unconscionable abuse of the juristic personality of a company'
[the requirement for the application of s20(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 the current case illustrates conceivably
It seems that it would be appropriate to regard s20(9)
of the 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 1995 (4) SA 790 (A)).
Section 20(9) of the Act, only requiring an 'unconscionable abuse of the
juristic personality of a company as a separate entity', thus supplements the
common law and conceivably covers much more (that applies a less stringent test
than the common law position). Taxpayers should always give recognition to a
company as a separate juristic person when structuring and implementing their
transactions, otherwise the courts may disregard its separate existence.
Taxpayers should thus be mindful that it may not be easier for the South
African Revenue Service to prove the abuse of a company’s corporate existence
with the enactment of s20(9) of the Act.