Juristic Personality - Part 1

• Topic 2 focuses on Juristic (legal) Personality, specifically Part 1.

Key Cases

• Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd 1995 4 SA 790 (A) was discussed by Cilliers & Luiz in (1996) 59 THRHR 523-7.
• Huelse-Reutter v Goede 2001 (4) SA 1336 (SCA)
• Ex parte application of Gore NO (18127/2012) [2013] ZAWCHC 9 (13 February 2013)
• Butcher Shop and Grill CC v The Trustees for the time being of the Bymyam Trust (038/2022) [2023] ZASCA 57 (21 April 2023)
• Venator Africa (Pty) Ltd v Watts and Another (053/2023) [2024] ZASCA 60 (24 April 2024)

Nature of Juristic Personality

• Nature of juristic personality is covered in Corp Law 1.06-1.09, 1.18-1.20.
• CA ss 19 and OCA 65 are relevant to the nature of juristic personality.

Disregarding Juristic Personality

• Corp Law 1.21-1.27 covers disregarding juristic personality.
• Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd 1995 4 SA 790 (A) relates to disregarding juristic personality.
• Huelse-Reutter v Goede 2001 (4) SA 1336 (SCA)
• Ex parte application of Gore NO (18127/2012) [2013] ZAWCHC 9 (13 February 2013)
• Butcher Shop and Grill CC v The Trustees for the time being of the Bymyam Trust (038/2022) [2023] ZASCA 57 (21 April 2023)

The Salomon Principle

• The resolution of corporate personality problems involves eloquence and imagery rather than logic or deduction.

Corporate Personality

• Corporate personality means the law recognizes a company as a real entity.
• A company can sue and be sued, hold its own property, and be liable for its own debts
• Limited liability for shareholders stems from this, as debts belong to the company, not the shareholders.

History of Corporate Personality

• It originated with religious orders and local authorities who were granted rights to hold property and sue
• Limited liability was not a feature of these early organizations.
• Over time, the concept was extended to commercial ventures with a public interest

Early Corporations in England

• England created corporations via Royal Charter or Acts of Parliament with monopolies to build a mercantile empire
• In 1600, Queen Elizabeth I granted the British East India Company exclusive trading rights east of India.
• The South Sea Company was founded in 1711 by John Blunt.
• The British government granted the company a monopoly for Spanish South Sea trade in exchange for taking on a significant portion of the national debt
• The company participated in trading slaves to the Spanish and Portuguese Empires.
• John Blunt hid the company's financial troubles and misled the public, leading to a boom in investment
• The South Sea Bubble burst when the public realized the stock was worthless, and prices plummeted
• The South Sea Bubble is considered an early example of an economic bubble

Consequences of the South Sea Bubble

• The South Sea Bubble caused financial mismanagement and a national debt burdening Britain for over 300 years.
• Individuals like Newton and Swift faced significant losses due to investing in the South Sea Company.

Modern Company Law in the UK

• The mid-19th century saw the rise of modern company law in the UK through the passing of a series of Companies Acts.
• These acts allowed individuals to form registered companies with limited liability
• The Joint Stock Company Act 1856 included limited liability.
• The Companies Acts intended corporate personality and limited liability for medium to large ventures.
• There was a requirement of at least seven members to prevent use by sole traders, but the Salomon case proved this wrong.

Salomon v Salomon & Co

• Mr. Salomon, a leather merchant, formed Salomon & Co Ltd in 1892
• Salomon, his wife, and five children held one share each
• This was done to meet the requirement of seven shareholders
• Salomon was the managing director and sold his leather business to the company for £39,000.
• He was paid with £10,000 in debentures, £20,000 in shares, and £9,000 cash and settled his business debts.
• Salomon held 20,001 shares and was a secured creditor due to the debenture.
• Later, the leather business struggled, and Salomon sold his debentures to save it

Insolvency and Court of Appeal Decision

• The company went into insolvent liquidation, and a liquidator alleged the company was a sham.
• It was alleged that Salomon was personally liable for the debts of the company
• The Court of Appeal agreed the shareholders had to be a bona fide association.
• They stipulated that shareholders could not simply hold shares to comply with the Companies Acts.

House of Lords Decision

• The House of Lords disagreed, finding that shareholders holding shares as a technicality was irrelevant
• Individuals carrying on a one-man business can use the registration procedure
• A company formed under the Companies Acts is a separate entity, not an agent or trustee of its controller
• As a result, the company's debts were its own, and members' liability was limited to their investment

Other Cases Illustrating the Salomon Principle

• The Salomon principle is often examined through subsequent cases.

Macaura v Northern Assurance Co [1925] AC 619

• Mr. Macaura owned an estate and timber and sold the timber for shares in Irish Canadian Saw Mills Ltd
• The Timber, the company’s primary asset, was stored on Mr Macaura's estate.
• Mr Macaura insured the timber in his own name in February 1922.
• A fire destroyed the timber two weeks later
• The insurance company refused to pay, claiming Mr Macaura had no insurable interest
• House of Lords found the timber belonged to the company, not Mr Macaura
• Mr Macaura, despite owning shares, had no insurable interest in the company's property

Lee v Lee's Air Farming [1961] AC 12

• Mr Lee formed Lee's Air Farming Ltd in 1954 owning all the shares
• Mr Lee also served as the "Governing Director" and chief pilot.
• He was essentially operating as a sole trader through a corporation
• In March 1956, Mr Lee died in a plane crash while working
• The company had an insurance policy under the Workers' Compensation Act
• His widow sought compensation, but the New Zealand Court of Appeal denied it
• The court argued Lee and the company were the same entity with no separate existence.
• The Privy Council in London overturned this.
• They found the company and Mr Lee were distinct legal entities
• Therefore, they were able to enter into legal relations
• As Governing Director, he could give himself orders as chief pilot, creating a master-servant relationship
• Thus, he was regarded as a 'worker' according to law
• The widow was therefore entitled to compensation

Piercing/Lifting the Corporate Veil

• Legal principles establish that a company's juristic personality is distinct from its shareholders
• This includes limited liability, where shareholders only risk their investment
• Creditors can only claim against corporate assets, not personal assets of the members
• Corporate veil protects the shareholders
• Courts must strike a balance, since it may be misused to protect shareholders from impropriety.
• Finding a principle for disregarding the corporate veil has been historically problematic

Application of the Doctrine

• The application of separate legal personality is at the discretion of judges and courts in common law jurisdictions.
• Courts focus on outlining the legitimate uses of the corporate form rather than its adverse effects.
• Lifting the corporate veil has always been more of a procedure than a principle

Defining Piercing/Lifting the Corporate Veil

• It involves ignoring the separate assets, liabilities, or activities of the company and shareholders
• Marine Co SA v Avalon Maritime Ltd (No 1) 1991 4 All ER 769 (CA) is a relevant case
• It is the power to ignore a core aspect of separate juristic personality, i.e., limited liability

Legal Tests and Principles for Piercing the Veil

• Numerous cases outline legal tests for the doctrine
• It may only be invoked during very limited circumsances
• The principles dictating when the courts can do so are unclear

When to Ignore Juristic Personality/Limited Liability

• It must be weighed against the reason for limited liability in company law, which is at the heart of the company's existence

Abuse of Corporate Personality

• Companies may use their corporate personality as a cover for fraud or improper conduct
• Courts may need to "pierce the veil" to identify the true beneficiaries of the corporate fiction
• The goal is to find those in control of the company
• United States v Milwaukee Refrigerator Co 1905 is a relevant case
• Corporations should be regarded as legal entities.
• Legal entities used to defeat public convenience or justify wrong will not be honored.

Lord Denning's View

• In Littlewoods Mail Order Stores Ltd v Inland Revenue 1969, Lord Denning stated careful oversight of the Salomon doctrine
• Courts can draw aside the veil to look behind the scenes
• Lord Denning was known for his liberal approach and support for the doctrine of veil-lifting

English Law on Piercing the Corporate Veil

• A company is a distinct legal person from its members
• This principle establishes the 'veil of incorporation' origin and this endorses its function.
• The Courts consider themselves bound by this principle.
• Courts may lift the corporate veil to reveal the true form, character, or party behind a troubled company
• This prevents misuse or abuse of the corporate form like allowing fraud to persist

The Salomon Case

• The House of Lords stated a court would pierce the corporate veil where there is evidence of a fraudulent intention or a sham.

Conflicting Principles

• English law in this area is rife with conflicting principles.

Prest v Petrodel [2013]

• This case had the opportunity to resolve the "never ending story" concept
• It attempted to define when the corporate veil can be pierced.
• Before Prest, the principle was vague.
• It is appropriate to pierce the corporate veil only where special circumstances exist, revealing that the company is merely a façade that conceals the true facts.

Summary of Principles on the Corporate Veil

• Ownership and control of a company are insufficient themselves to justify piercing the veil
• The court cannot pierce the corporate veil solely for being necessary in the interests of justice
• The corporate veil can only be pierced when there is some "impropriety"
• The impropriety must link to using the company structure to avoid or conceal liability
• Piercing requires showing both control and impropriety such as the misuse of the company's structure
• The wrongdoer's motive is relevant here.
• The court will only pierce the veil when necessary to provide a remedy for a particular wrong committed.
• UK commentators saw that “a court faced with a proposal to pierce the corporate veil, walks a tightrope."

VTB v Nutritek

• In 2013, appellants argued that veil piercing could hold company controllers liable if they had been parties to a contract.
• Lord Mance rejected this argument since alternative remedies existed for misrepresentation

Lord Neuberger and Piercing

• Lord Neuberger decided the case was clearly not the time to pierce the veil.
• He declined to reach any conclusion on whether a power existed to do so.
• The court did not reach any conclusion.
• The court might only have the power to act when a statute either impliedly or expressly requires.
• The application of the lift or pierce veil failed, in regards to this case.

Lord Sumption's Clarification of the Doctrine

• In Prest v. Petrodel [2013] UKSC 34, Lord Sumption stated the term piercing the corporate veil" means disregarding the separate personality of a company.
• This occurs when the court applies an exception to the rule in Salomon v Salomon.
• Most Court members were reluctant to define the doctrine's scope

Identifying the Scope of Impropriety

• Cases suggest it is most likely when a court believes the doctrine is being used for an improper purpose

Summary of Important Facts

• The case provides a detailed overview of piercing cases.
• Mr and Mrs. Prest were wealthy although their marriage was broken
• Mrs. Prest claimed the husband's wealth owned by his company, which greatly exceeded wealth owned by her husband
• Mrs. Prest argued that the veil of incorporation should be lifted to include her husband's assets.
• Lord Sumption found it that the family properties remained technically in Mr Prest's legal company name
• Due to benefit, the properties could likely be transferred to the wife

What were the Supreme Court Issues?

• The courts had to rule in favor for single-man companies
• The concern was for company law principles and whether they could be used to avoid assets or liability.
• This all had to be done whilst maintaining the Salomon principle.

Inadequate Reasoning

• The law, as characterized by Lord Sumption, contained circumstances in where it was likely for courts to pierce this corporate veil.
• The law contained the term, characterized by "inadequate reasoning."
• Lord Sumption saw that dishonesty was required by the company member/shareholder
• The "veil piercing" principle also should not simply be a device used to ensure justice.
• The dishonesty must indicate the company being utilized as a sham to disguise the true type of ownership.
• Lord Sumption emphasized that recognition of power would be given within clearly defined circumstances.

When the Doctrine Should Mostly be in Practice

• Veil piercing would mostly occur when a company incorporation was used to evade liability.
• Liability alone would not be enough.
• Usually another area of law would also be used to order grant relief.
• The remedy is only for last measure.

Main Takeaways

• Veil piercing can only be appropriated where there has been evasion of liabilities
• Veil piercing can only be appropriated where there is no other remedy
• The judgment provides no specific indication on which the circumstances of piercing may occur.
• The doctrine is only limited to be used as a remedy of last resort, and the courts battle when the doctrine can actually be applied.
• The precise nature, basis, and meaning of this principle can be obscure
• The precise nature of circumstances as to when the principle can apply falls as obscure

When the Lifting of Veils are Important

• Each case is considered on its own and the fact that the circumstances may be related.
• Even if English law may exist, the rules can remain unclear.
• When the courts have exhausted with remedies, they can have the power to pierce the veil

Summary of English Position

• People abuse their corporate stand. To prevent, a doctrine called "lifting the corporate veil" was born
• The Courts rarely respond kindly with this
• They try to save the corporate entity in almost all situations, but may require lifting to ensure justice.
• Lifting's doctrine poses to a limited nature and threat.
• One says that courts refuse to "violate the sacred canon of limited liability."

Hodgepodge of Criteria

• There are categorizations, but under a hodgepodge of criteria'.
• The English Courts rely on vague criterion such as agency, trusts, fraud, and alter ego in their decision making.
• Usually a relationship with agency for those within the Court.

Lack of Agency

• The courts may imply any sort of case with agency, and thus lift the veil; otherwise, the courts will not lift.
• It will pierce the veil if the shareholders are agents
• When it does not appear to pierce the veil, the Court will still not remove.

Adams v Cape Industrial Industries PLC

• The denial to lift the veil by the court resulted with asbestos victims losing for those in their court
• As victims, the asbestos victims found they could not apply their judgments
• The English corporate found the parent was part of a big scheme to limit their payments of liability
• Unfortunately in those situations the court was able to tell that English corporate stood higher than helping for any injustices.

Denying the Court Action

• The Court cannot accept a corporate as a defendant for another company
• The rights of the corporate are to ensure that the other members will have the same legal liabilities for the company