What ‘alter ego’ principle entails
THE cardinal principle of company law is that a firm is a separate entity that is distinct from its members.
This is enunciated in Salomon v Salomon & Co Ltd [1897] AC 22 (HL) and Dadoo Ltd & Others v Krugersdorp Municipal Council 1920 AD 530 at 550.
The concept of corporate personality is that a company, once it is registered, acquires a personality of its own quite distinct from its members or shareholders.
But what if a corporation that owes you money is a sham, separate from its owners only on paper, or is used by its owners to defraud creditors?
Can you recover your money from the company’s owners?
The alter ego principle entails the court making a finding that a corporation lacks a separate identity from an individual or corporate shareholder.
This rule is applied to ignore the corporate status of a group of shareholders, officers and directors of a corporation with respect to their limited liability.
Once the court makes the alter ego finding, it has cause to pierce the corporate veil and hold individual shareholders personally liable for debts of the corporation.
The alter ego doctrine has been applied in several other business forms, such as limited liability companies.
There are several considerations that have to be made before the acts and obligations of a corporation can be legally treated as those of a particular person.
It must be demonstrated that the company is not only influenced by that person, but also that any individuality or separateness between person and corporation has ceased (or never existed), and that, under the circumstances, recognising the separate legal existence of the company would result in fraud or promote injustice.
The alter ego doctrine has been applied in many other instances by looking at a plethora of factors.
They include:
Failing to keep corporate and individual funds, and other assets separate; Using corporate funds or assets for individual (non-corporate) purposes; Transferring corporate funds or assets to avoid corporate debts; Failing to adequately capitalise the company so that it has sufficient assets available to meet corporate debts; Representations by an individual that he or she is personally responsible for the debts of the corporation; and Failing to follow corporate formalities such as holding of board of directors and shareholder meetings, and maintaining adequate minutes or other corporate records.
In Contract Hauliers (Pvt) Ltd v Close Proximity Ent (Pvt) Ltd & Anor (HB 15 of 2017), the issue for determination was whether, in the facts before the court, the corporate veil had to be lifted so that the second defendant is held jointly and severally liable with first defendant.
The court went on to find the second defendant liable for the following reasons: ◆ First defendant was second defendant’s alter ego. He was and is the company. There was no board of directors to run the affairs of the company. Second defendant was the managing director and the salesman. He was answerable to no one but himself.
Second defendant used first defendant as a tool of trade and never treated it separately. He operated it from his residence. ◆ He made a false misrepresentation that he could supply fuel within 72 hours of payment. The misrepresentation turned out to be false and caused actual financial prejudice.
◆ Second defendant was literally gambling with plaintiff ’s money and tossing it for luck or some fortune.
In Cattle Breeders Farm (Pvt) Ltd v Veldman (2) 1973 (2) RLR 261, Beadle CJ (as he then was) held that the company was a one-man band. There was only one superpower. There was one sole controller. He went on to state on page 267C – D: “In the circumstances of this particular case, it seems to me that the appellant company was nothing more than Veldman’s alter ego, and the appellant company possessed no greater rights to eject the respondent than Veldman himself possessed.”
In Cape Pacific Ltd v Lubner Controlling Investments Pvt Ltd and Ors 1993 (2) SA 784, the court held: “The general principle underlying this aspect of the law of lifting the veil is that, when the corporation is the mere alter ego or business conduit of a person, it may be disregarded.
This rule has been adopted by the courts where the idea of the corporate entity has been used to subterfuge and to observe it would work an injustice.”
See also W & D Consultants (Pvt) Ltd v Doran HH-551-15.
It must be understood, however, that the purpose of the alter ego doctrine is not to protect every unsatisfied creditor, but rather to give him protection when some bad faith conduct makes it unjust or inequitable for the shareholders to hide behind the company.
Many of the factors mentioned above have been found to be present in those cases where the courts determined application of the alter ego doctrine to be appropriate.
In practice, they remain only factors to be considered by the courts, and no single factor is required or controlling.
The material contained in this article is set out in good faith for general guidance in the spirit of raising legal awareness on topical interests that affect most people on a daily basis. They do not constitute legal advice. They are not meant to create an attorney-client relationship or constitute solicitation. No liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in the article. Laws and regulations are complex and liable to change, and readers should check the current position with the relevant authorities before making personal arrangements.