Is the corporate veil under threat?

The case Venator Africa (Pty) Ltd v Lloyd Mason Watts and Another involves a contractual relationship in terms of which Siyazi Logistics and Trading (Pty) Ltd (“Siyazi”) was contracted by Venator Africa (Pty) Ltd (“Venator”) to perform freight forwarding services in relation to goods imported to South Africa. Upon rendering its services, Siyazi issued disbursement invoices to Venator, which recorded monies to payable, by Venator, to the South African Revenue Services (“SARS”). For the 2018 to 2019 calendar year, Siyazi issued its tax invoices recording a total of approximately R66 million being due and payable to SARS. Venator paid the full amount to Siyazi on the understanding that Siyazi shall effect payment of its obligations to SARS.

SARS assessment

Following SARS’ assessment, it was alleged that Siyazi only paid approximately R31 million to SARS. SARS, accordingly, raised an assessment in excess of R41 million for the outstanding amount, inclusive of penalties and interest. Relying on section 218(2) read with section 22(1) of the Companies Act 71 of 2008 (“Act”), Venator instituted proceedings against two directors of Siyazi, alleging that the conduct of Siyazi, through the actions of its directors, was reckless, alternatively grossly negligent and further that the business of Siyazi was established for fraudulent purposes with the intention to defraud Venator. Venator further alleged that the directors of Siyazi were the guiding minds behind the alleged fraud and acted recklessly and, in the alternative, grossly negligent in controlling the actions of Siyazi.

High Court Decision

The high court concluded that instituting action against the directors instead of Siyazi for reckless trading in terms of section 218(2) read with section 22(1) of the Act was misplaced.

One of Siyazi’s directors filed an exception, noting that section 22 of the Act does not regulate what directors must or must not do and section 22, moreover, imposes a duty on the company, and not its directors. The same director further excepted that Venator failed to make any specific averments evidencing any acts or omissions allegedly carried out by the directors, which entitled Venator to any recourse in terms of section 218(2) of the Act.

The same directors further added that section 77(3)(b) of the Act provides a remedy to a company in instances where a director carries out the business of the company despite knowing that the conduct was prohibited in terms of section 22(1) and by extension a breach by a particular director of section 76(3) of the Act.

The high court noted that whilst it may be frustrating where it is clear that a director was “up to no good” and, as a result, a creditor suffers damages or loss, the Act does not make express provision for the liability of any wrongful actions to be attributable to the director. The high court further noted that a claim instituted in terms of section 218(2) must make reference to a breach of a substantive provision of the Act, which Venator failed to do. The high court, therefore, dismissed Venator’s claim, granting leave to amend its claim.

Decision of the Supreme Court of Appeal

On appeal, the Supreme Court of Appeal (“SCA”) stated that the legal persona of a company cannot be ignored at the choosing of a party and that separate personality is not a mere technicality, but rather foundational in company law, adding that a party cannot simply disregard the corporate veil – it must be permitted by law.

SCA agreed with the high court in that section 218(2), which stipulates that “any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention”, requires contravention of a provision of the Act and that Venator failed to identify the provision that was contravened by the directors in order to invoke section 218(2). The SCA referred to De Bruyn v Steinhoff International Holdings N.V and Others which cited Hlumisa Investments Holdings (RF) Ltd and Another v Kirkinis and Others and stipulated that a literal interpretation of section 218(2) of the Act, that is, to impose liability without regarding the concepts of fault, foreseeability and remoteness and give rise to wholesale liability at the instance of all persons who sustained loss or damage as a result of the contravention, would place a burden of liability that was so great it is hard to imagine anyone who would accept office. In respect of section 22(1) of the Act, the SCA agreed with the high court noting that the section imposes a duty on the company and not its directors from carrying on its business recklessly and that interpreting section 22(1) of the Act as being capable of infringement by the directors would be to read a prohibition into the section which is not there. The SCA stated that the fiduciary duties of the company set out in section 76(3) are duties owed to the company and that section 77(2)(b) provides for liability of a director for damages or loss sustained by the company as a result of breach by the director of a duty contemplated in section 76(3)(b). The SCA therefore stated that it is clear that the legislature intended for the company to recover loss from its directors where the directors breached the aforesaid fiduciary duties and the company suffered loss or damages as a result thereof. The appeal was therefore dismissed with leave for Venator to amend its claim and continue proceedings in the high court.

Piercing the Corporate Veil

Although not the focus of the judgment, the SCA touched on sections 19(2) and 20(9) of the Act insofar as it related to the fundamental principle of separate legal personality enjoyed by most companies. The court noted that a party should not simply disregard the corporate veil, instead it had to be permitted by law.

Section 20(9) of the Act stipulates that:

“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-

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 another person specified in the declaration; and

make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a).”

The wording of section 20(9) makes it clear that piercing the corporate veil to hold the directors personally liable should be reserved for exceptional circumstances.

Conclusion

In light of the above, Venator ought to have instituted its application against Siyazi and not its directors in their respective personal capacities. Siyazi would, in turn, be able to institute action against its directors for breaching their fiduciary duties set out in section 76 of the Act.

A successful claim in terms of section 218(2) against the directors without specific reference to the provision which was allegedly contravened may be seen as piercing the corporate veil without satisfying the strict and burdensome common law principles of this remedy and the similarly strict and burdensome provisions of section 20(9) of the Act.

If the courts were eager and willing to pierce the corporate veil without proper cause, very few individuals would be willing to take on the responsibility of being a director. Piecing the corporate veil should, therefore, be relied on as a last resort and not as an alternative to instituting a claim against the company.