Print Page   |   Report Abuse
News & Press: Corporate Tax

Piercing the corporate veil has been extended

17 March 2013   (0 Comments)
Posted by: Herman van Dyk
Share |

By Andrew Lewis (DLA Cliffe Dekker Hofmeyr Tax Alert)

Executive summary

A company is a separate juristic person liable for its own tax. This article examines this principle and the impact of abusing a company's corporate existence.

Full article

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 5 SATC 93 it was recognised 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 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 [2013] 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, drastic.

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 much more.

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.


WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

MINIMUM REQUIREMENTS TO REGISTER

The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

Membership Management Software Powered by YourMembership  ::  Legal