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Company Law A > Chapter 2 Legal Personality > Flashcards

Chapter 2 Legal Personality Flashcards

1
Q

What is a company?

A

A juristic person incorporated ito the Act.

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2
Q

What does a juristic person include?

A
  1. Foreign company
  2. Trust
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3
Q

What is the difference between the legal person and the human ‘person’?

A

The legal person is a fiction which is incorporeal and can acquire rights and incur obligations that are distinct from its directors an shareholders.

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4
Q

When does the legal person and legal personality come into effect?

A

According to section 19(1)(b) of the Act, at the date and time that the incorporation of a company is registered, the company has all the legal powers and capacity of an individual, except to the extent that a juristic person is incapable of exercising such power or in having such capacity or to the extent that the company’s MOI provides otherwise.

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5
Q

Which section of the constitution grants constitutional protection to juristic persons?

A

Section 8(4)- application clause.

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6
Q

What does section 8(4) hold?

A

A juristic person is entitled to the rights in the BoR to the extent required by the nature of the rights and the nature of the juristic person.

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7
Q

What does section 8(4) of the Constitution mean?

A

A company has the right to be treated equally in relation to other persons, has the right to sue for defamation and even the right to privacy, but does not enjoy the right to life or human dignity.

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8
Q

Which case deals with separate legal personality?

A

Dadoo v Krugersdorp Municipality Council.

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9
Q

When is separate legal personality established?

A
  1. Compliance with all the requirements for incoporation (section 14(4)(a))
  2. Company is incorporated under the Act as from date and time stated in the certificate.
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10
Q

What is section 14 of the Act?

A

Registration.

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11
Q

What is section 19?

A

Legal status.

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12
Q

What are the legal consequences of separate legal personality?

A
  1. Limited liability
  2. Perpetual succession
  3. Property and assets of the company belong to the company
  4. Profits of the company belong to the company
  5. Debts and liabilities of the company belong to the company
  6. Shareholder has no right to manage the company business or to enter into contract on its behalf
  7. Company can sue or be sued in its own name
  8. Company may contract with its shareholders.
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13
Q

What is limited liability?

A

The extent to which a shareholder is liable for the debts of a company.

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14
Q

To what extent is a shareholder’s liability limited?

A

To the amount that they have paid to the company for its shares.

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15
Q

What does shareholder liability mean?

A

Shareholders are under no further obligation to the company or to creditors beyond the amount that they have paid to the company for its shares (the initial obligation based on the value of their shares).

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16
Q

What does limited liability mean for creditors?

A

Creditors claims are confined to that of the company and they cannot obtain satisfaction for debts from the personal assets of its shareholders as the debts and liabilities of the company are those of the company alone.

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17
Q

Which section of the Act refers to separate legal personality and limited liability?

A

Section 19(2).

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18
Q

What does section 19(2) of the Com Act hold?

A

That a person as incorporator, shareholder or director, is not liable for the debts of the company except to the extent that the MOI or the Act provides.

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19
Q

What is the privilege of separate legal personality?

A

It creates an environment that encourages people to invest into a business venture thereby encouraging economic growth, wealth creation and employment.

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20
Q

What is perpetual succession?

A

The existence and the legal status of the company is not affected by changes in membership.

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21
Q

What is the exception to the rule that property and assets of the company belong to the company?

A

Only once a company is liquidated do shareholders have a right to share in the company assets after all the creditors have been paid.

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22
Q

When does a shareholder have a right to profits of the company?

A

Once the company declares a dividend.

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23
Q

What are the benefits of separate legal personality?

A
  1. If the company is liquidated then the estate of the shareholder cannot be sequestrated.
  2. If the estate of the shareholder is being sequestrated, then the creditors of the shareholder do not have a claim against the assets owned by the company.
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24
Q

What does it mean to lift the ‘corporate veil’?

A

The situation where a court, in terms of the common law or under a particular statute, ignores the legal identity of a company as a legal person in its own right that is separate from its shareholders and directors.

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25
Q

What is the corporate veil?

A

the metaphorical
barrier that separates a company, as a legal persona in its own right,
from its shareholders and directors.

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26
Q

What does it mean to ‘pierce the corporate veil’?

A

The situation where the law treats the rights or duties of a company as the rights or liabilities of its shareholders or directors.

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27
Q

Which case deals with piercing the corporate veil?

A

Amlin v Kooii.

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28
Q

Which case deals with when courts can pierce the corporate veil?

A

When there is abuse of separate legal personality

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29
Q

What are the facts of Dadoo v Krugersdorp Municipal Council?

A

There was legislation that prohibited Asian/Coloured people from owning land and Dadoo Ltd was a registered company the shares of which were held by two Asian people. The MOA of the company indicated that the objects of the company were the acquisition of, and the attraction of customers in, landed property and the conduct of any business connected with the property so acquired. Dadoo Ltd purchased and received transfer of two stands in Krugersdorp Municipality and one stand was lease to the majority shareholder for business purposes and the other to his Asian manager for residence.

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30
Q

What was the issue in Dadoo v Krugersdorp Municipality?

A

Whether ownership by Dadoo Ltd, is in substance ownership by its Asian shareholders.

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31
Q

What rules were applied in the Dadoo v Krugersdorp case?

A
  1. A registered company is a legal persona distinct from the members who compose it.
  2. Principle of separate legal personality is not affected by the circumstance that a controlling interest in the concern may be held by a single member.
  3. Principle of separate legal personality is a matter of substance.
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32
Q

What was the holding in Dadoo v Krugersdorp?

A

Property vested in the company is not, and cannot be, regarded as vested in all or any of its members.

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33
Q

What was the role of Salomon v Salomon?

A

It confirmed the principle of separate legal personality.

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34
Q

What did the court hold in Salomon v Salomon?

A
  1. Once a company is legally incorporated, it must be treated like any other independent person with its rights and liabilities appropriated to it.
  2. 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.
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35
Q

What is the corporate veil?

A
  1. The veil that separates substance from form
  2. Distinguishes between the company, its shareholders and directors
  3. Protects the shareholders and directors from the liabilities and wrongful acts of the company
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36
Q

Which case is authority for ‘piercing the corporate veil’?

A

Amlin (SA) Pty Ltd v Kooij

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37
Q

What did the court hold in Amlin v Kooij?

A

Piercing the corporate veil amounts to a court ‘opening the curtain’ of the corporate entity to see for itself what is ‘obtained inside’

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38
Q

What does it mean to ‘pierce the corporate veil’?

A

Court looks beyond the fiction to the natural person, who is behind or in control of the company, who abused the principle of corporate personality.

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39
Q

Which case is the authority for when courts can ‘pierce the corporate veil’?

A

Ebrahim v Airports Cold Storage

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40
Q

What did the court hold in Ebrahim v Airports Cold Storage?

A

Separate existence remains a figment of law, liable to be curtailed or withdrawn when the objects of their creation are abused or thwarted.

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41
Q

Which provisions of the Company Act deals with unconscionable abuse?

A

Section 20(9).

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42
Q

Which cases illustrate examples of abuse of separate legal personality?

A
  1. Cape Pacific Ltd v Lubner Controlling Investments
  2. Robison v Randfontein Estates Gold Mining Co Ltd
  3. Gilford Motor Co ltd v Horne
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43
Q

What did the court imply in Cape Pacific Ltd v Lubner Controlling Investments?

A

No set categories- no exhaustive list or else it leads to absurdities.

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44
Q

What are examples of abuse of separate legal personality?

A
  1. Where a separate legal personality was used as a device by a director to evade fiduciary duties
  2. Where separate legal personality was used to overcome a contractual duty
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45
Q

What happened in Robinson v Randfontein Estates Gold Mining Co Ltd?

A

There was an attempt to use subsidiary company to evade fiduciary duties owed by him to the holding company as a director of the holding company.

46
Q

What happened in Gildford Moto Co Ltd v Horne?

A

Company used as a mere channel enabling the party to compete against the plaintiff.

47
Q

Which case deals with when personal liability can be imposed on directors of a company?

A

Tladi Holdings v Modise

48
Q

What did Tladi Holdings v Modise say?

A

Sometimes it may be necessary to pierce in other cases it will only be necessary to lift.

49
Q

What are situations that will necessitate lifting the corporate veil?

A

Where the company will be used as an instrument, alter-ego, agent, puppet or mask.

50
Q

What is the authority for the guiding principle when ‘piercing the corporate veil’ will take place?

A

Cape Pacific v Lubner Controlling Investments.

51
Q

Which case deals with general principles that apply when piercing the corporate veil?

A

Cape Pacific v Lubner Controlling Investments.

52
Q

What are the general principles that may apply when piercing/lifting the corporate veil?

A
  1. Strive to give effect to SLP
  2. A court does not have a general discretion to disregard SLP when it wants
  3. Alter-Ego Doctrine is not creating general principles as to when the corporate veil must be pierced
  4. Where there is fraud/dishonesty or other improper conduct, these facts are weighed against the policy considerations in favour of SLP (Court looks at substance rather than form to arrive at the facts)
  5. More flexible approach based on facts to piercing the corporate veil in cases of unconscionable
  6. Intent to deceive underlying purpose for incorporation and misuse of company is sufficient
  7. Alternative remedy does not bar piercing the corporate veil..
53
Q

Which section of the Companies Act deals with piercing the corporate veil?

A

Section 20(9).

54
Q

Which case illustrates unconscionable abuse?

A

Airport Cold Storage v Ebrahim.

55
Q

Which section of the Companies Act deals with imposing personal liability on the directors of a company?

A

Section 77(3).

56
Q

What acts may result in the imposition of personal liability on the directors of a company?

A
  1. Acting without authority
  2. Reckless trading
  3. Fraud
  4. False or misleading statements
  5. Unlawful distributions
57
Q

What is ‘acting without authority’?

A

Purport authority to bind company, takes action despite knowing they lack the authority.

58
Q

What are examples of ‘reckless trading’?

A
  1. Trade in contravention of section 22(1)
  2. Company must not carry on its business recklessly with gross negligence with intent to defraud any person or for any fraudulent purpose
  3. Trade under insolvent circumstances
  4. False or misleading statements
  5. Unlawful distributions
  6. Causing the company to act contrary to the Companies Act or the MOI
  7. Contravening the Companies Act
59
Q

What is ‘fraud’?

A

Been a party to an act or omission by the company, despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company or had another fraudulent purpose.

60
Q

What is ‘false or misleading statements’?

A

Signing, consenting to, authorising to or publishing financial statements, a prospectus or a written statement that is false or misleading in a material respect.

61
Q

Which section deals with ‘causing the company to act contrary to the Companies Act or the MOI’?

A

Section 20(6).

62
Q

What does section 20(6) hold?

A

Each shareholder has a claim for damages against any person who intentionally, fraudulently or due to gross negligence causes the company to do anything inconsistent with the Act or the MOI.

63
Q

Which section deals with contravening the Companies Act?

A

Section 218(2).

64
Q

What does section 218(2) hold?

A

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.

65
Q

Which companies are recognised as companies under the Act?

A
  1. Companies under 2008
  2. Companies under 1973
66
Q

Is a branch or division of a company regarded as having a separate legal personality?

A

No

67
Q

Which case found that the branch or division of a company is not regarded as having a separate legal personality?

A

Kilburn v Tuning Fork.

68
Q

What did the court hold in Kilburn v Tuning Fork?

A

Divisions operating within the same juristic entity are not in law regarded as distinct or severable or as having separate legal personalities even if each division operates a distinct business under its own trading name.

69
Q

What is the effect when a reference is made to a business that is conducted under a trading name and the words ‘Ltd’ or (Pty) Ltd are not affixed to it?

A

There is no ground for drawing the inference that the business as an entity enjoys legal personality.

70
Q

What is the case that first established the principle of separate legal personality?

A

Salomon v Salomon & Co Ltd

71
Q

What are the facts of Salomon v Salomon Co Ltd?

A
  1. Salomon sole trader of a business selling leather and wholesale boot manufacturer
  2. Wanted to expand business and enjoy the benefits of limited liability and perpetual succession
  3. Sold business to a company with a nominal capital of 40 000 shares of 1 pound each
  4. Salomon, wife, daughter and four sons were shareholders with each subscribing for one one pound share in the company
  5. Salomon and two sons were directors
  6. After payment of purchase price, Salomon held 20 001 out of the 20 007 shares issued by the company
  7. Company also issued debentures, secured over its assets, to Salomon
  8. Salomon was a secured creditor, a controlling shareholder, a director and an employee of the company
  9. The company went into liquidation a year later
72
Q

What did the court hold in Salomon v Salomon Co Ltd?

A

Once a company has been legally incorporated, it is a separate person with its own rights and liabilities, therefore, the motives of those who took part in the formation of the company is irrelevant in discussing what those rights and liabilities are

73
Q

What is the legal principle in Salomon v Salomon Co Ltd?

A
  1. The company is at law a different person altogether separate from the subscribers to the memorandum
  2. After incorporation the business may be the same as it was before and the same persons are managers and the same hands receive the profits
  3. Company is not in law the agent of the subscribers or a trustee for them
74
Q

What is of fundamental importance to the outcome of the Salomon case?

A

There was no fraud in the part of Salomon or the creditors, hence the finding that the company had been validly formed and registered.

75
Q

What did Salomon v Salomon do?

A

It legitimated the one-man company by showing that incorporation was readily available to the small private partnership or sale trader as to a large public company.

76
Q

What is section 14 of the Act?

A

Registration of company.

77
Q

What does section 14(4) of the Act provide?

A

Registration certificate issued by the CIPC is conclusive evidence that:
1. All the requirements for incorporation have been complied with
2. The company is incorporated under the Act as from the date, and the time, if any, as stated in the registration certificate.

78
Q

When does a company acquire its own separate legal personality?

A

Once the registration certificate has been issued [section19(1)(a)]

79
Q

Which case deals with the contrast between mere pecuniary interest and actual legal right of the shareholder??

A

Stellenbosch Farmers’ Winery Ltd v Distillers Corporation

80
Q

What did the court hold in Stellenbosch Farmers’ Winery v Distiller’s Corporation?

A

Shareholders’ entitlement to a fractional share in the distribution of the surplus assets when the company is wound up proves their financial interest in the success or failure of the company not their right or title to any assets of the company.

81
Q

Which case deals with the consequence that the ‘property and assets of the company belong to the company’?

A

Dadoo v Krugersdorp Municipal Council.

82
Q

What does the ‘property and assets of the company belong to the company’ mean?

A

Shareholder has no legal interest in the company’s property and lacks an insurable interest in the company’s property.

82
Q

Which provision of the Act protects shareholders from being held liable for the debts and liabilities of the company?

A

Section 19(2).

83
Q

What does the ‘profits of the company belong to the company’ mean?

A

The shareholders have a right to profits only once the company declares a dividend.

84
Q

How can limited liability be nullified?

A

Guarantee of company’s obligations

85
Q

What does the consequence of a shareholder having no right to manage the company’s business or to enter into transactions on its behalf mean?

A
  1. Membership of a company does not qualify a shareholder to manage the company’s business or to bind the company to a contract.
  2. Shareholder is not an agent of the company.
  3. Only authorised persons may bind the company
  4. Contracts entered into are company’s contracts not shareholders’
86
Q

What are examples of a company contracting with its shareholders?

A
  1. Transactions
  2. Employment
87
Q

What is the purpose of the corporate veil?

A
  1. Separates the company from its shareholders and directors
  2. Protects the shareholders and the directors of the company from liability for the debts and wrongful acts of the company.
88
Q

What does piercing the corporate veil result in?

A

The attribution of personal liability to someone who misuses or abuses the principle of corporate personality.

89
Q

Which case deals with the piercing of the corporate veil?

A

Ebrahim v Airports Cold Storage.

90
Q

What did the court hold in Ebrahim v Airports Cold Storage?

A

Separate legal personality is a figment of law, liable to be curtailed or withdrawn when the objects of their creation are abused or thwarted.

91
Q

What are the exceptions to the principle of separate legal personality?

A
  1. Piercing the veil
  2. Underlying partnership intention between parties
  3. Reliance on agency principles
  4. Statutory provisions
92
Q

Is there a definite categorisation of the instances in which a court will pierce the corporate veil?

A

No (Cape Pacific Ltd v Lubner Controlling Investments)

93
Q

What are the instances in which the court has pierced the veil?

A
  1. Where separate legal personality was used a device by a director to evade their fiduciary duty
  2. Where SLP was used to overcome a contractual duty (RoT)
94
Q

Which case deals with where SLP was sued as a device by a director to evade their fiduciary duty?

A

Robinson v Randfontein Estates Gold Mining.

95
Q

What are the facts of Robinson v Randfontein Estates?

A

Robinson had attempted to use the subsidiary as a device to evade the fiduciary duties he owed to the holding company as a director of that company.

96
Q

What did the court hold in Robinson v Randfontein?

A

The subsidiary company was no different from the holding company because it was a mere device or camouflage to allow Robinson to evade his fiduciary duties to the holding company.

97
Q

What is the difference between ‘piercing the veil’ and ‘lifting the veil’?

A
  1. Piercing is to treat the liabilities of the company as those of its shareholders and directors and disregards the corporate legal personality of the company
  2. Lifting is to merely take into account who the company’s shareholders or directors are for a legal purpose.
98
Q

Which case establishes the guiding principles as to when a court will pierce the corporate veil?

A

Cape Pacific v Lubner Controlling Investments.

99
Q

What are the principles laid down in Cape Pacific v Lubner relating to the common-law instances of piercing the veil?

A
  1. Courts should strive to give effect to and uphold SLP because it is a salutary principle
  2. Court does not have a general discretion to disregard a company’s SLP whenever it considers it just to do so.
  3. Each case must be decided on its own facts, which, once determined, are of decisive importance
  4. Where there is fraud, dishonesty or other improper conduct; the need to preserve the separate corporate identity would in such circumstances have to be balanced against policy considerations which arise in favour of piercing the corporate veil (SLP v Piercing)
  5. If a company that has been legitimately established and operated is misused in a particular instance.
  6. Piercing the veil is a last resort where justice will not otherwise be done between two litigants
100
Q

What are domestic companies or quasi-partnerships?

A

Where there is an underlying partnership intention between parties.

101
Q

What is the agency/alter ego doctrine?

A

The relationship between a company and its directors or shareholders is that the company is the principal, and the directors and shareholders are agents of the company.

102
Q

When the company is treated as the agent of the directors or shareholders, is the SLP of the company still recognised?

A

Yes, hence the veil is not pierced.

103
Q

How is the veil lifted in cases of the alter ego doctrine?

A

Liability is imposed personally on the directors or shareholders in their capacity as the principal of the company

104
Q

In applying the agency doctrine, what are the courts concerned with?

A

The manner in which the company operated and with the individual’s relationship to that operation.

105
Q

What are the facts of Modise v Tladi?

A
  1. Modise is director of Tladi Holdings
  2. Modise was appointed as director for BEE compliance purposes so that the company was eligible to exploit opportunities
  3. Controlling shareholder (Sandler) saw an opportunity worth pursuing in ARB
  4. When ARB needed a new BEE partner, Modise and his company were offered the same deal Sandler had instituted as the ARB opportunity for Tladi
106
Q

What are the factors that are emphasised in applying the alter ego doctrine?

A
  1. Company is grossly undercapitalised for the purposes of the corporate undertaking
  2. Failure to observe corporate formalities
  3. Non-payment of dividends while substantial sums are paid by way of salary or to the controlling shareholder
  4. Profits of the company are treated as the director’s or shareholder’s profits
  5. Siphoning off the company’s funds by the dominant shareholder
  6. An absence of corporate records
  7. Officers/Directors are non-functioning

(To be considered collectively)

107
Q

What are company groups?

A

Each company in a group of companies is a separate legal entity with its own separate legal personality and rights, privileges, duties and liabilities separate from those of the other member companies.

108
Q

How do courts depart from the principle of separate legal personality in cases of company groups?

A

They invoke principles of agency law and treat the subsidiary as the agent of the holding company and in therefore attach liability to the holding company.

109
Q

What are the situations in which a director will be found personally liable?

A
  1. Acting without authority
  2. Reckless trading
  3. Fraud
  4. False or misleading statements
  5. Unlawful distributions
  6. Causing the company to act contrary to the Companies Act or the MOI
  7. Contravening the Companies Act.
110
Q

Which provision allows for piercing of the corporate veil?

A

Section 20(9).

111
Q

What does section 20(9) hold?

A

If the court finds that the incorporation, use or any act by or on behalf of the company constitutes an unconscionable abuse of the juristic personality of the company as a separate legal entity, the court may pierce the corporate veil.

Company Law A (8 decks)

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