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Learning Unit 5: Legal Personality and the Companies Act

Theme 1: Separate juristic personality of a company

LO1: Advise on the legal personality of juristic persons with reference to case law and
the Companies Act, 2008.
A company is a legal person separate and distinct from its shareholders.
Legal personality and key features of a company’s juristic personality:
o Directors act on behalf of a company, not shareholders (separation of
ownership/control – managed by directors not shareholders).

o Incorporation requires limited liability of shareholders, with the result that

shareholders in the capacity of shareholders are not liable for the debts of the
company.

o The assets of a company are the exclusive property of that company. The assets
of a company do not belong to its shareholders.

o Where a wrong is alleged to have been committed against a company, it is the

company that must seek redress and not the shareholders.

Letseng Diamonds Ltd v JCI Ltd; Trinity Asset Management (Pty) Ltd v Investec Bank
Ltd, 2007 (5) SA 564 (W) → Limitations of power of shareholders. (Pg 37)
o A company is a legal juristic person.
o Unlike a partnership, a company is not simply an association of persons; it is
itself a separate legal person.
o Section 19(1) of the Act reinforces the common-law position, in that it provides:
‘From the date and time that the incorporation of a company is registered the
company (a) is a juristic person ...’
o In terms of s 14(4), a registration certificate is conclusive evidence that the
requirements for incorporation have been complied with and that a company is
incorporated in terms of the 2008 Act as from the date, and time if any, stated
in the certificate.

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Legal personality of a company: Limitation of liability of shareholders

➢ Incorporation generally results in limited liability of shareholders, which

means that shareholder are generally not liable for the debts of the
company.

➢ Certain companies can have legal personality, but unlimited liability.“ For
example, if a personal liability company were registered in terms of the
Companies Act, 2008, the MOI of such a company would state that the
directors are jointly and severally liable with the company for contractual
debts and liabilities incurred during their period of office

LEGAL PERSONALITY OF A COMPANY: Shareholders do not own company assets

o A legal person is regarded as an entity that can acquire rights and duties
separate from its members.

In Airport Cold Storage (Pty) Ltd v Ebrahim 2008

➢ The court confirmed that one of the most fundamental consequences of
incorporation is that a company is a juristic entity separate from its
shareholders.

➢ Accordingly, the assets of a company are the exclusive property of the company
itself and not of its shareholders. Thus, although a company has no physical
existence, it can acquire ownership in assets and is liable to pay its own
liabilities.
In Dadoo Ltd v Krugersdorp Municipal Council the court found:
➢ The property vests in the company and cannot be regarded as vesting in any or
all of the shareholders of the company. (Pg38)
In Salomon v A Salomon & Co Ltd:
➢ The court found that once a company is legally incorporated, it must be treated
like any other independent person with its rights and liabilities appropriated to
it; the motives of the promoters of a company during the formation of the
company are irrelevant when discussing the rights and liabilities of such a
company.

➢ Section 19(1) of the Companies Act brings the law into line with accepted
judicial pronouncements.

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Legal Personality of a company a wrong to a company is not a wrong to a shareholder:

In Itzikowitz v Absa Bank Ltd:

➢ A wrong to a company is not a wrong to a shareholder. The shareholder in this
matter did not suffer any personal loss. (Pg 38)

Legal Personality of a company: Incorporation and registration

Section 19(1) contains two concepts that need to be examined:
o The Act distinguishes between incorporation, which is effected by the actions of
the incorporators as provided for in s 13(1) of the Act, and

o Registration, which is effected by the Companies and Intellectual Property

Commission (the Commission) as soon as practicable after the act of
incorporation has been perfected by the incorporator, who files a notice of
incorporation (the Notice).

o Given this distinction between incorporation and registration, there may be a

gap in time during which the company will notionally exist but not enjoy legal
personality.

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LO2: Advise, with reference to case law, and the Act, the interaction between the
common law and the Companies Act in terms of: Gaps in the Companies Act and
Interpretation of the Companies Act

The Companies Act, 2008 and the common law

o When the Act is silent, the common law can apply.

o The principles of common of law will continue to apply unless expressly, or

impliedly, abolished or modified by a provision of the Act.

o In some instances, the provisions of the Act will supplement and expand upon the
principles of the common law.

o The Companies Act has abolished the common-law principles in some instances.

❖ In Ngwenda Gold (Pty) Ltd v Precious Trading 80 (Pty) Ltd dealt with common law
on requiring security for costs lives under the Companies Act, 2008 in spite of no
statutory provision. (Pg 25)

South African common law consists of all law that is not found in legislation. It
comprises a combination of rules drawn primarily from Roman-Dutch law and, to
a lesser extent, from English law. In the case of company law, English law has been
particularly influential. The English law rules have, over time, been analysed and
adapted by courts to meet the needs of South Africa. Hence, in most cases, the
common law is to be found in the decisions of the courts (which then act as
precedents) built over more than a century.

The Companies Act, 2008 sets out broad principles relating to the fiduciary duties
and the duty of care and skill owed by directors of companies. Although Act
imposes a fiduciary duty and a duty of care and skill on a director, the content of
those duties cannot be understood or interpreted without knowledge of the
common-law principles pertaining to the range and scope of a director’s duties. A
court will have recourse to the principles of common law in order to give content
to these statutory provisions.

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Theme 3: Piercing the corporate veil:

LO3: Explain the concept of piercing the corporate veil: in terms of the common law;
its adoption and adaptation in terms of the Companies Act; and apply the concept to
a set of fact.
Lifting the corporate veil: The common law and section 20(9)
✓ Although incorporation can provide for the limitation of liability of those persons
behind the company, this principle may not be abused. Courts will not allow a
legal entity to be used to ‘justify wrong, protect fraud or defend crime’.

Lifting the corporate veil (piercing the corporate veil) occurs when a court
disregards the separate legal personality of a company and those of its directors
and shareholders.

Common law provides 3 ways in which a court may lift/pierce the corporate veil:
1. Where a company is used as a device to cover up or disguise fraudulent or illegal
conduct;

2. Where a director and/or shareholder treats the company’s assets as their own; or

3. When a statute empowers the court to ignore corporate personality.

LIFTING THE CORPORATE VEIL: CASE LAW (based on common law)

In Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd (1995):
• It was said that if a company has been legitimately established and is legitimately
operated, but is misused in a particular instance ‘to perpetrate fraud, or for a
dishonest or improper purpose, there is no reason in principle or logic why its
separate personality cannot be disregarded in relation to the transaction in
question.

In Airport Cold Storage (Pty) Ltd v Ebrahim (2008):

• The court held that the directors and members of a company ordinarily enjoy
extensive protection against personal liability.

• However, ‘such protection is not absolute, as the court has the power a in certain
exceptional circumstances to "pierce” or "lift” or “pull aside" ”the corporate veil”
and to hold the directors [and others] personally liable for the debts of the
company.

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LO4: Advise on the liability of directors and shareholders in terms of section 20(9) of the
Companies Act:
Lifting the corporate veil in terms of section 20(9) of the 2008 Companies Act:
The above provision of the act has now supplemented and expanded upon the common
law position (as described above) relating to the lifting of the corporate veil: The section
made it easier for the courts to lift the corporate veil.
❖ Section 20(9) provides that if, on application by 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 strip the company of any juristic personality and make any other
orders that may be appropriate to give effect to such. This would essentially
expose the directors/others hiding behind the separate legal personality afforded
to companies.

✓ Another form of includes holding a director personally liable for the for losses
caused by their wrongdoing, therefore, a director is liable for any loss, damage or
costs if they contravene the Act and there is a direct or indirect consequence of
such contravention.

✓ In addition to section 20 (9), section 218 (2) provides that ‘any person’ who
contravenes any provision of the Act is liable to any other person for any loss or
damage suffered by that person as a result of that contravention. This section will
not only apply to directors but to ‘any person’ who fails to comply with the
provisions of the Act.

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Theme 4: Capacity
LO5: Assess the impact of the Companies Act, 2008 on the ultra vires doctrine;
doctrine of constructive notice; and the Turquand Rule.
The ultra vires and constructive notice doctrines are related to each other in that
both are concerned with the effect of a company’s constitution on the validity of
actions taken by the company and its agents.

The doctrines have been used to nullify certain unauthorised actions. However,
the Companies Act, 2008 has now severely limited the impact of both these
doctrines.

ULTRA VIRES DOCTRINE:

✓ The ultra vires doctrine refers to acts of a company that fall outside the scope of
its powers, as determined in its Memorandum of Incorporation (MOI).
✓ The doctrine follows upon the principle that when an act has been performed on
behalf of another person and the act is beyond the authority of the actor, it is said
that the latter acted ultra vires.
✓ When applied to a company, the doctrine involves the legal capacity pf the
company to perform.

The Ultra Vires Doctrine arose primarily for two separate reasons:
1. Shareholders who invested in a company were entitled to be assured that their
money was applied to the purposes for which such funds were invested; and,

2. Persons who advanced credit to a company wanted assurance that the

company was creditworthy in that its risk profile could be calculated by way of
recourse to its business as evidenced from its statement of objectives.

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ULTRA VIRES AND THE COMPANIES ACT, 2008

In terms of the Act, restrictions on a company’s capacity may only be raised internally in
legal proceedings between the company, its shareholders and directors. This is subject
to the right to restrain an ultra vires contract in certain circumstances, therefore, directors
who act ultra vires can still be held liable for damages as a result of a breach of their
fiduciary duties. Similarly, shareholders who become aware of any proposed conduct may
get an interdict restraining the company from acting ultra vires (unless ratified by special
resolution – section 20 (2)).

• Section 20(1) of the 2008 Act has made the doctrine of ultra vires inapplicable
between a company and a third party.
• According to the section, no action of the company is void if the only reason is
that the action was prohibited by a limitation, restriction or qualification in the
Memorandum of Incorporation (MOI).
• Section 20(2) provides for the shareholder, by way of special resolution, to ratify
any action taken by the company that was inconsistent with or in breach of a
specified limitation, restriction or qualification contained in the MOI.