In certain circumstances, the new Companies Act of 2008 empowers a court to declare a company not to exist as a legal entity.
The Companies Act of 2008 - the consequences of the "unconscionable abuse of the company's juristic personality"
Section 20(9)(a) and (b) of the Companies Act 71 of 2008 (as amended) provide that -
If, on application by any 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 a shareholder of the company or, in the case of a non-profit company, a member of the company or of another person specified in the declaration; and
- make any further order the court considers appropriate to give effect to declaration contemplated in paragraph
(a). (Emphasis added.)
This provision - which had no counterpart in the "old" Companies Act of 1973 - has been borrowed, almost word for word, from section 65 of the Close Corporations Act 69 of 1984.
This is a curious provision, and it is not at all clear what purpose it is intended to serve. After all, section 424(1) of the Companies Act of 1973 (which continues in force, despite the passing of the new Act) is very wide in scope, and allows a court to declare a person who was party to the fraudulent or reckless carrying on of business by a company to be declared personally liable for its debts. It is difficult to see how an "unconscionable abuse of the juristic personality of the company" could fail to be such reckless or fraudulent conduct.
Moreover, it is by no means clear how declaring that a company is "deemed not to be a juristic person" - in short, deeming it not to exist as a legal entity in its own right - is, in and of itself, in any way helpful to a victim of the abuse, unless it is to be regarded as implicit that the individuals who were engaged in the company's business would then be regarded as sole proprietors or partners, and would be personally liable for the debts of the business on that basis.
An interesting case in which the parallel provision of the Close Corporations Act was invoked is that of Airport Cold Storage (Pty) Ltd v Ebrahim 2008 (2) SA 303 (C) which was affirmed, on appeal by the Supreme Court of Appeal.
In this case, the Cape High Court held that the following considerations were relevant to whether there had been an "unconscionable abuse" of the close corporation's separate legal personality:
- the fact that the close corporation in question formed part of a conglomerate of associated family businesses that had been conducted with scant regard for their respective separate legal personalities;
- the close corporation in question had failed to keep proper books of account;
- the close corporation had operated without appointing an accounting officer, as required by the Close Corporations Act;
- the close corporation had been incorporated for the specific purpose of taking over another of the family's businesses so as to avoid the liquidation of that business and thereby avoid the adverse personal consequences for the family members that would have attended such liquidation, and that this had been done with the object of defrauding the business's creditors and facilitating the continued trading of the insolvent business;
- the close corporation had voluntarily assumed a large debt owed to an outsider by a separate family business, with the result that the close corporation became incapable of trading profitably and of meeting its financial commitments to its major supplier as and when they fell due.
All of the above points in the judgment make eminently good sense, but the presiding judge then, inexplicably, added that in these circumstances, the conduct of the individuals involved in managing the business of the close corporation was "nothing short of reckless".
The difficulty with this statement is that causing a company to carry on business recklessly is something entirely distinct from conduct that constitutes a gross abuse of the corporation's juristic personality, and the consequences of the reckless carrying on of the company's business are provided for separately in the Close Corporations Act.
In the result, the court in this case held that gross abuse of the cc's juristic personality had been proven, and held, in terms of section 65 of the Close Corporations Act, that the close corporation
is deemed not to be a juristic person but, in respect of the plaintiff's claim herein, a venture of the defendants personally.
The court went on to rule that the business in question would be regarded as belonging to the individuals in question in their personal capacity, with the result that they were personally liable for its debts.
This decision, despite its puzzling aspects, is the best guide presently available as to what section 20(9) of the Companies Act of 2008, quoted above, means and how the courts will apply it.
It seems likely that it will be applied where, as in the Airport Cold Storage case, the individuals in question fail to respect the separate legal personality of their company or else try to exploit its separate legal existence in an unscrupulous and unconscionable way - as the individuals did in that case - by treating it as legal entity when it suits them to do so, and ignoring its separate existence when it would be to their advantage to do so.