South Africa: Piercing The Corporate Veil – Easier Under The New South African Companies Act?

The common law remedy known as 'piercing the corporate veil', a remedy notorious for being difficult to prove and inconsistently applied by our courts, has recently received attention from the Western Cape High Court in the decision of Ex parte Gore NNO [2013] 2 All SA 437 (WCC). The remedy allows an aggrieved party to obtain an order declaring that the rights, liabilities or activities of a company ought to be treated as those of the relevant shareholder or director in his personal capacity, usually in circumstances where there has been some impropriety linked to an abuse of the company's structure.

The Gore case is the first decision dealing with this remedy since the Companies Act 71 of 2008 has come into operation, and as such has been much anticipated by the legal and business community. The case deals with the interpretation of section 20(9) of the Act, a new provision which specifically permits piercing of the corporate veil in certain circumstances. If the reasoning in the Gore case is anything to go by, this new statutory basis of the remedy may well allow for its successful use more frequently in the future.

The issue in Gore was whether the court should pierce the corporate veil in a group of companies consisting of one holding company and various subsidiaries (over 40 companies), in circumstances where the affairs of the group were being conducted in a manner that did not maintain any distinguishable corporate identity between the various subsidiaries. For example, funds would not be allocated to the particular company that investor sought to invest in, but would be transferred to whichever company in the group needed the money at the time.

The court found that the entire group had in effect operated as one entity through the holding company, and that the directors had 'treated all their companies as one'. It was also held that the remedy is available 'whenever the illegitimate use of the concept of juristic personality adversely affects a third party in a way that reasonably should not be countenanced'. It was further decided that the remedy could be used in a variety of circumstances as a remedy of first instance, and not as a last resort in circumstances where justice will not otherwise be done.

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