Company Law and Practice (CPL512S)
Unit 1 Legal Personality and Piercing the Corporate Veil
Legal Personality and Piercing the Corporate Veil
Introduction
In Business Law you were introduced to some forms of business enterprises such as sole
proprietorships and partnerships. In these types of business enterprises, an entrepreneur is held
personally liable for the debts of the business should the business fail. This is because, in those
instances, there is no legal separation between the entrepreneur and the business. In order to avoid
this risk, the entrepreneur can opt for a business form that has separate legal personality, in which
instance the liability of the entrepreneur will be limited to his/her capital contribution to the
business.
In this unit we will introduce you to the concepts “corporate entity” and “legal personality”. The
unit will also look at those instances when legal personality is disregarded. Those instances are
loosely referred to as ‘piercing of the corporate veil’.
Objectives
Upon completion of this unit you should be able to:
• explain the concepts “corporate entity” and “legal personality”
• differentiate between a natural person and a juristic (legal) person
• list the manners in which an entity can acquire legal personality
• summarise the requirements for an association to obtain legal personality by conduct
• discuss the consequences of legal personality
• formulate and apply the rules laid down in Salomon v Salomon & Co Ltd and Dadoo v
Krugersdorp Municipal Council
• discuss the circumstances under which the separate existence of the corporate entity will be
disregarded
• explain the expression “piercing the corporate veil”
• identify the instances where disregarding the corporate veil is justified
• apply the contents of this unit to solve problems
Additional reading
Cassim, F.H.I, Cassim, M.F, Cassim, R, Jooste, R.D. (2011). Contemporary Company Law. Claremont:
Juta. (Pages 31-37).
Davies, D, Cassim,F.H.I, Geach, W, Mongalo,T, Butler, D, Loubser, A, Coetzee,L, Burdette, D, (2014)
Companies and Other Business Structures in South Africa. Cape Town Oxford University Press.
(Page 17-20).
Delport, P. (2011) The New Companies Act Manual. Durban: LexisNexis. (Pages 9-20).
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Company Law and Practice (CPL512S)
Unit 1 Legal Personality and Piercing the Corporate Veil
1 Legal Personality
The foundation of company law is based on the concept that a company has a separate legal
personality.
Although the word “person” generally refers to a human being, in the legal sense a “person” can be
either a legal person or a natural person. A natural person is a legal subject who has certain rights in
respect of a legal object. Apart from natural person, the law also allows certain other entities to
become legal subjects (that is a legal or juristic person). A legal or juristic person also has the
capacity to acquire rights and duties in the same way as a natural person. Units or entities, which are
permitted to take part in legal transactions, are known as legal or juristic persons, or are said to have
legal personality.
Whether an entity can acquire legal personality is determined by the laws of a particular legal
system. In Namibia, for example, a partnership is not recognised as a legal person, but an
incorporated company and a close corporation is regarded as such.
As a legal person the corporate entity can acquire rights and duties in its own name. It can own
assets, employ employees, be a party to a contract and sue and be sued in court.
A corporate entity cannot be equated with a natural person for all purposes. These entities are
primarily established for business purposes and can generally only acquire rights and duties and
perform acts that are required for purposes of economic activity. They are incapable of performing
acts that are regarded as inherently human in nature, for example getting married. In addition, the
entity does not exist in a physical sense. It can therefore not conclude legal transactions on its own
but must act through its organs or agents.
2 Acquisition of legal personality
An association of persons or an organised body can acquire legal personality only in the few ways
recognised by our legal system. There are three ways in which this may be achieved, namely by way
of a separate Act, by means of general enabling legislation or by conduct.
2.1 Separate Act
Legal personality may be acquired by virtue of an own separate Act. In other words, certain Acts
expressly provide that the entity in terms of the Act has legal personality.
Example:
The Namibia University of Science and Technology Act 7 of 2015 provides that the
Namibia University of Science and Technology is a juristic person.
The University of Namibia Act 18 of 1992 similarly provides that the University of
Namibia is a juristic person.
2.2 General Enabling Legislation
Certain Acts do not give legal personality to a specific entity, but to all entities that comply with the
requirements of the general enabling Act. Therefore, legal personality may also be acquired by
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Unit 1 Legal Personality and Piercing the Corporate Veil
virtue of a general enabling Act such as the Companies Act 28 of 2004 and the Close Corporations
Act 26 of 1988.
The legislation prescribes the method whereby a body can be incorporated as a legal person. Such a
body acquires legal personality in an indirect manner as opposed to the direct manner of acquisition
by a legal person under its own Act.
2.3 Conduct
An association of persons can also acquire legal personality by conducting itself as a legal person in
compliance with certain requirements.
In terms of section 35 of the Companies Act a company, association or partnership consisting of
more than twenty persons, which is carrying on any business and has as its object the acquisition of
gain by the company, association or partnership or by its individual members, shall only be
permitted or formed if it is registered in terms of the Companies Act or formed in pursuance of some
other law.
Section 36 of the Companies Act provides that an association of persons formed for the purpose of
carrying on any business that has as its object the acquisition of gain shall only be a body corporate if
it is registered under the Companies Act or formed in pursuance of some other law.
3 The concept of separate legal personality
On its formation the corporate entity acquires the capacity to have its own rights and duties. It
acquires legal personality and exists apart from its members.
This important legal principle is exemplified in the leading case of Salomon v Salomon & Co Ltd
(1897) AC 22.
3.1 Salomon v Salomon & Co Ltd
The facts of this case are as follows:
Salomon traded as a sole proprietor (a shoe manufacturer) for 30 years. In an attempt to expand the
business and to provide for participation by family members, he registered a company and sold his
business to the company. Salomon received the purchase price by way of 20 000 shares in the new
company (valued at £1 each), a cash amount and secured debentures to the value of £I0 000.
(Secured debentures give the holder thereof a preferent claim in the event of the company being
declared insolvent.)
The only other shareholders were his wife and five of his six children who each held one share.
Salomon and two of his sons were appointed as directors of the company.
Solomon then pledged the debentures to X in order to obtain financing for the company.
Less than a year later the company was liquidated. At the time the company was liquidated it had £6
000 in assets and owed £7 000 to unsecured creditors and £10 000 to X, who was a secured creditor
because of the debentures that had been pledged to him. As a secured creditor X received £6000
and the unsecured creditors received nothing.
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Company Law and Practice (CPL512S)
Unit 1 Legal Personality and Piercing the Corporate Veil
The unsecured creditors wanted to claim their outstanding debts from Solomon, arguing that
Solomon and the company were in fact one person and that Solomon should be liable for the debts
of the company.
The British House of Lords held that, from its inception, a company is legally separate from its
members. It further held that there was no evidence of fraud or impropriety by Salomon.
Accordingly, the extent of Salomon's shareholding in the company was irrelevant and it was held
that the facts provided no basis for holding Salomon personally liable for the debts of the company.
3.2 Dadoo Limited v Krugersdorp Municipal Council
The principle that a company exists separately from its members was also recognised in the matter
of Dadoo Limited v Krugersdorp Municipal Council (1920) AD 530.
The facts are as follows:
In terms of certain legislation applicable in the early 1900’s Asiatics were forbidden to own
immovable property in the (then) Transvaal Province of South Africa. In 1915 a certain Mahomed
Dadoo incorporated Dadoo Limited in the Transvaal. Dadoo held 149 of the total issued share capital
of 150 shares, and one Dindar held the remaining share. Both Dadoo and Dindar were Asiatics.
The company tried to purchase immovable property in the Transvaal but were prevented from doing
so by the Krugersdorp Municipal Council, who attempted to rely on the applicable legislation.
The court held that, despite the fact that the entire shareholding of the company was held by
Asiatics, the statutory prohibition did not apply to the company, since “property vested in the
company is not, and cannot be, regarded as vested in all or any of its members.”
4 The legal consequences of separate legal personality
The fact that a corporate entity has an existence apart from its members has several important
consequences. Some of the more important of these are the following:
• The corporate estate is assessed apart from the estates of the individual members; its debts
are its own debts and not those of its members. The sequestration of the estates of
members will not lead to liquidation of the corporation and its liquidation will not
necessarily entail the sequestration of estates of the members.
• The profits of the corporation do not belong to the members but to the company.
• Perpetual succession in the sense that a change in members does not affect the corporation
• The assets of the corporation are its exclusive property and the members have no
proportionate proprietary rights therein. Only on liquidation are members entitled to share
in a division of the assets.
• A corporation can sue or be sued in its own name.
• Courts have also recognised that a corporation has the right to a reputation, good name and
fame. Companies also enjoy the right to privacy and identity.
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Unit 1 Legal Personality and Piercing the Corporate Veil
5 Disregarding the Separate Existence of the Corporate Entity
The corporate entity is not inviolable. Under certain circumstances situations can arise where a
situation involving the corporation and its members or representatives is judged with due
consideration to the actual state of affairs "behind" the corporate entity. Innes CJ in Dadoo Ltd and
others v Krugersdorp Municipal Council held the following:
“…This conception of the existence of a company as a separate entity distinct from its
shareholders is no merely artificial and technical thing. It is a matter of substance; … cases may
arise concerning the existence or attributes which in the nature of things cannot be associated
with a purely legal persona. And then it may be necessary to look behind the company and pay
regard to the personality of the shareholders, who compose it.”
6 Piercing the Corporate Veil
Despite the established precedents that a company is a separate legal entity, the corporate entity is
not inviolable. Where a corporate personality has been used as a device to cover fraud or improper
conduct or if a statute requires it, the courts will pierce the veil of corporate personality and
attribute personal liability to those misusing the principle of corporate personality. In Amlin (SA)
(Pty) Ltd v Van Kooij 2008 (2) SA 558 (C), it was held that a court piercing the veil necessitates that a
court “opens the curtains” of the corporate entity in order to see for itself what obtained inside.
6.1 Disregard by the legislature
The Companies Act and the Close Corporations Act allow the corporate veil to be lifted. These
instances will be discussed in the study guide in regard to the personal liability of directors and
members of a close corporation.
6.2 Disregard by the court
In certain instances, Namibian courts are prepared to "peer through the corporate veil" to give
effect to the reality behind the facade of a corporate entity or even to ignore the separate existence
of the legal person or, as it is described, to "lift" or "pierce the corporate veil".
This has the effect of stripping the corporation of its legal personality; it is no longer regarded as an
entity that has an existence separate from its members and, accordingly, the liabilities of the
corporation will no longer vest in the corporation, but in the members personally. They can
therefore be held liable for the debts of the corporation.
Example:
Where a subsidiary company is used as "a device" in evading a director's fiduciary
duties to the holding company or where fraudulent use is made of legal personality
for purposes of improper conduct or dishonesty or instances of corporate abuse.
Summary
In this unit you learned that the entrepreneur who does business as a sole proprietor or in
partnership with other persons is personally liable for the debts arising from such business
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Company Law and Practice (CPL512S)
Unit 1 Legal Personality and Piercing the Corporate Veil
activities. In order to avoid this risk he/she can choose a business form that has separate legal
personality.
A juristic person has a legal existence separate from its members: it can acquire rights and duties
in its own name.
References:
Cassim, F.H.I, Cassim, M.F., Cassim, R, Jooste, R.D. (2011) Contemporary Company Law. Claremont:
Juta.
Cassim, R. (2012). Piercing the Corporate Veil: Unconscionable abuse under the Companies Act 71 of
2008. De Rebus 22
Davies, D., Cassim,F, H.I, Geach, W., Mongalo,T., Butler, D., Loubser, A., Coetzee,L., Burdette D.,
(2014) Companies and Other Business Structures in South Africa. Cape Town: Oxford University
Press Delport, P. (2011). The New Companies Act Manual. Durban: LexisNexis.
Pretorius, J.T.,Delport, P.A ., Havenga, M., Vermaas, M. (2012). (2012). Student Case Book on
Business Entities 3rd ed. Claremont: Juta.
Mongalo, T. (2010). Corporate Law & Corporate Governance. Pretoria: New Africa Books.
