Commercial Law 2.

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(HLCRX2A)

Chapter 2 Part 1

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CONTENT

1. LEGAL PERSONALITY

2. TYPES OF COMPANIES

3. COMPANY FORMATION

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1. LEGAL PERSONALITY
A company is a legal person!

Unlike a partnership, a company is not

simply an association of persons: it is itself
a separate legal person.

Therefore – What does it mean when we say:

“A company is a legal person”? OR “A
company has a separate legal personality”/

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1. LEGAL PERSONALITY (continue)
What is “legal personality”?
Definition:
A legal person is regarded as an entity that can acquire rights and
duties separate from it’s members.
Company is liable to pay it’s own liabilities
and obligations (“Limited or unlimited
liability”), members are not liable for the
debt of the company in their personal
capacity

Assets are the Branches and divisions

exclusive property of are part of the company
the company and not and does not have a
the members separate legal
existence.
A company
is a legal
person (see
Airport Cold
4
Storage-
case)
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1. LEGAL PERSONALITY (continue)
What is “legal personality”?
Definition:

Dadoo v Krugersdorp Municipal Council 1920 AD 530:

“A registered company is a legal persona distinct from the members
who compose it … nor is the position affected by the circumstances that
a controlling interest in the concern may be held by a single member.
This conception of the existence of the company as a separate entity
distinct from the founders is no merely artificial technical thing. It is a
matter of substance; property vested in the company is not, and cannot,
be regarded as vested in all or any of its members.”
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1. LEGAL PERSONALITY (continue)
Lifting the “corporate veil”
 The court will not allow a legal entity to be used “to justify
wrong” or “protect fraud” or “defend crime”

 Airport Cold Storage (Pty) Ltd v Ebrahim & others, 2008

“Directors & members of a company ordinarily enjoy extensive
protection against personal liability. However, such protection is
not absolute, as the court has the power – in certain exceptional
circumstances – to “pierce” or “lift” or “pull aside” the corporate
veil and to hold directors and others personally liable for the
debts of the company.” 6
 1. LEGAL PERSONALITY (continue)
Lifting the “corporate veil” (continue):
Airport Cold Storage (Pty) Ltd v Ebrahim & others, 2008:
• Plaintiff was a creditor of the • Veil piercing will be
defendant, employed only where
• Nature of their business special circumstances • Ignore the separate
relationship was that the exist indicating that the legal existence of the
plaintiff sold and delivered company or close company and treat its
corporation is a mere

Which exceptional circumstances:

imported meat products and members as if they
frozen vegetables to the façade concealing the true were the owners of
defendant on account facts the assets and if they
• The plaintiff’s records • Fraud will be such a had conducted the
indicated that the defendants special circumstance, but business of the
was a close corporation who the existence of fraud is company in their
where later placed under not essential personal capacities;
provisional liquidation and • In certain circumstances or
the defendant owed the the corporate veil will also • Where the court
plaintiff R278 377 at the time be pierced where the attributes certain
of liquidation controlling shareholders rights and obligations
Facts of the case:

• Plaintiff proved their claim do not treat the company of the shareholders to
Courts decision:

against the close as a separate entity, the company.

corporation, but received no • But treat it as their alter
dividend as the close ego or “instrumentality to
corporation had no assets promote their private,
• Plaintiff then sought to hold extra-corporate interests”
the member of the CC and • Ratio for the court
his father (who actually decision: Defendants were
assisted in running the held to be jointly and
business even though he severally liable to the 7
was not a member) plaintiff for the amounts
personally liable for the debt owed to the plaintiff
1. LEGAL PERSONALITY (continue)
Very important!
A plaintiff cannot resort to piercing the veil, unless it can show
that there is no other remedy available and accordingly that it
will suffer injustice if the veil is not pierced.

For example Botha v Van Niekerk (1983) the court refused to

allow piercing of the corporate veil, because there was a
legitimate alternative remedy, and the act of veil piercing would
have been merely a matter of convenience rather than necessary
to obtain legal relief.
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1. LEGAL PERSONALITY (continue)
More relevant court cases:
Die Dros (Pty) Ltd v Telefan
Beverages cc (2003)
If fraud, dishonesty or other improper
conduct is present
The protections of the separate
corporate personality of the
company has to be balanced against
policy considerations favouring
piercing of the corporate veil
Court held: separate personality
may be disregarded when a natural
person , who is subject to restraint
of trade, uses a cc/company as a
front to engage in activity that is
prohibited by an agreement
Le’Bergo Fashions CC v Lee
(1998)
Mrs Lee signed a restraint of trade.
She proceed to trade through a
company of which she is the sole
shareholder and director
Her defence: she signed the restraint
of trade agreement personally and
that the company was not a party to
the contract
Court held: though the company
was not a party to the contract, its
competition with the plaintiff
resulted intentionally to assist Mrs
Lee to breach her contract, which is
wrongful in law. 9
1. LEGAL PERSONALITY
Company seek redress in
respect of an alleged wrong –
not the shareholders

Key features of a
company’s
juristic
personality: Assets are the property
of the company – not of
the shareholders
Limited liability of
shareholders - Company is
liable for debt and not the
shareholders in their capacity
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as shareholder