Piercing the corporate veil explained
ACOMPANY, once registered, becomes a separate person from the people who incorporate it. company is a separate entity distinct from its members. Registration of company creates a legal persona.
The debts of the company are not the debts of its directors or shareholders. A company is a separate legal persona.
It is on established exceptions to that principle which are grounded in policy considerations that the principle of separate legal personability of a company can be disregarded.
See the case of Deputy Sherriff Harare v Trinpack Investments (Pvt) Ltd & Anor HH121/11. Disregarding the separate personality of a company is called piercing the corporate veil.
What it means is that the veil of the company that hides the members who incorporate it is pierced in order to see who are behind the company and make them liable in their personal capacities.
The courts, however, do not lightly disregard a company’s separate personality, but strive to give effect to and uphold it, otherwise the principle of separate personality of a company will become useless.
The courts may lift the corporate veil in limited circumstances such as for purposes of avoiding manifest injustice. Where the veil is pierced, the focus then shifts from the company to the natural person behind it or who controls its activities. Each case turns on its own facts and involves a process of enquiring into the facts.
In circumstances where the company veil is used for fraud, dishonesty or other improper conduct, the need to preserve the separate corporate identity will in such circumstances need to be balanced against policy considerations in favour of piercing the corporate veil. If there has been a misuse of corporate personality, the court can then disregard the separate legal personality of the company and attribute liability to its directors or shareholders, if that is where it should rightly lie.
The veil is also lifted when the corporation is the mere alter ego or business conduit of a person. In case where companies are formed as a ruse to commit fraud, the courts regard the real parties responsible and grant relief against them or deny their claims and defences, based on the principles of equity.
So, where a corporation is formed or used as a device in order to evade an outstanding legal or equitable obligation, the courts, even without reference to actual fraud, refuse to regard it as a corporate entity.
Piercing of corporate veil has been extended to the situation where a single economic entity owns all the shares in its subsidiaries and controls every aspect of their operations. Companies within a group have general tendency to ignore the principle of separate legal entity.
In those circumstances, courts look instead at the economic entity of the whole group and pierce the corporate veil as between companies in a group. This is especially the case when a parent company owns all the shares of the subsidiaries, so much so that it can control every movement of the subsidiaries. This group is virtually treated the same as a partnership in which all the companies are partners.
Where the operations of an economic group are so close as to be virtually indivisible, public policy tends to disregard any legal separation of its integral units, to avoid perpetuating an essentially corporate fiction.
In the case of Trinpac above, a holding company’s goods and assets were attached for sale in execution to satisfy its debts. The subsidiary of the holding company claimed the attached goods as its own and sought their release.
The claimant was a wholly owned subsidiary of Harambe Holdings. All the subsidiaries within the Group are located together at the same physical address. The judgment creditor was employed by the Group and would be deployed to serve any entity within the Group, including the subsidiary company that was claiming the attached goods.
The relevant documentary evidence amply demonstrates that the claimant is an integral entity within the group. The court pierced the corporate veil on finding that to all intents and purposes, the claimant was effectively a vehicle or instrumentality through which the holding company carried out its bakery operations.
On these facts, the court held that the claimant’s assertion of ownership over the seized assets was nothing more than a subterfuge designed to defeat the judgment creditor’s claim.
The overarching control exercised by Harambe Holdings over its subsidiaries was held to justify the treatment of the Group as a single economic entity for the purpose of enforcing a debt incurred by any unit within the group.
It is not procedurally necessary for a judgment creditor to obtain a prior court order lifting the corporate veil before attaching the property of a subsidiary company.