The Sunday Mail
Natasha Ncube & Jacob Mutevedzi
From purchasing building materials, buying airline tickets to ordering pizza, dealing with a company at some point of our life is inevitable.
It is important to realise that though we deal with them on a daily basis, companies retain a separate legal personality. In fact, the concept of a distinct legal personality is one of the foundational principles of corporate law.
This was pronounced in the old case of Salomon v Salomon and Company (1897) wherein the House of Lords held that the company is a different person altogether from the subscribers to the memorandum and is not in law the agent of the subscribers or trustees for them. This means that a company is a separate legal entity from the people behind it. It is not a mere extension of its directors, investors, shareholders or employees.
Thus in the case of Crees (Pvt) Ltd v Woodpecker Industries (Pvt) Ltd (1975), the court said: “Thus a company can be under the control and its activities entirely dictated by another person but that does not deprive it of its distinct legal personality.”
Our brand new companies’ legislation offers no more than a restatement of this common law position. Section 19 of the Companies and Other Business Act (Chapter 24:31) (“the Act”) reads as follows: “the company or private business corporation shall thereupon become a body corporate, with the capacity and powers of a natural person of full legal capacity in so far as a body corporate is capable of having such capacity and exercising such powers.”
The attribute of a distinct corporate personality has been celebrated for decades as if it were the Holy Grail of commerce. The hallowed and vaunted advantages of corporate personality include, among others, perpetual succession when members retire, become insolvent or die.
Another advantage is limitation of liability of members for the company’s debts to the extent of their shareholding which means that upon liquidation of the company, a member’s liability is no more than the amount which remains unpaid on her shares.
As a result of these obvious advantages of incorporation the company has gained immense popularity, not only in Zimbabwe but across the globe, as a convenient vehicle for conducting business.
Day in, day out, entrepreneurs create companies as platforms for the operation of commercial ventures while shielding themselves from personal liability. Companies offer a “corporate shield” which insulates entrepreneurs from personal liability for actions taken for and on behalf of the company even though in reality people such as directors and managers are the real driving force behind how a company acts.
This virtual curtain beyond which the law forbids us to peep has come to be known as the “corporate veil”.
Not infrequently, shareholders, directors and managers of companies commit outright acts of fraud or conduct the affairs of a company in a reckless manner and seek refuge behind the distinct legal personality of the company. As you would expect, the law has imposed limitations, both statutorily and in terms of the common law, on the extent to which the corporate veil can be allowed to protect the real culprits.
Our corporate law recognises exceptions to the principle of separate legal personality.
Statutory exceptions usually sanction breaches of specific statutory provisions while common law exceptions tend to deal with incidents where special circumstances exist to justify piercing the corporate veil because it amounts to nothing more than a mere facade concealing the true facts. In either case, the courts will “lift” or “pierce” the corporate veil to unmask the real rogues behind a company’s operations in order to burden them with personal liability.
Incidents abound where the business of a company has been carried out recklessly or with gross negligence or with fraudulent intent thus causing other people loss.
In such instances the court may, at the behest of prejudiced parties, declare that any person who was knowingly a party to the carrying on of business in a reckless manner or with gross negligence or with fraudulent intent be saddled with personal liability for all debts and liabilities attaching to the company as a result of that person’s mischievous conduct. Section 68 (3) of the Act expressly provides for the piercing of the corporate veil in such circumstances.
Personal liability is not confined to directors; it extends to any person who knowingly carries on the business of the company, be it employees or contractors hired by the company.
Section 62 (3) (a) of the Act prescribes the lifting of the corporate veil where the court finds that the separate personality of a company has been abused by the board, or a manager, director or officer or any one or more members of the company, for their own or some other person’s advantage.
Natasha Ncube and Jacob Mutevedzi are commercial lawyers. They can be contacted on [email protected] and [email protected] respectively. They write in their personal capacities. — ebusinessweekly.co.zw
Section 62 (3) (b) permits the lifting of the corporate veil if the court finds that any acts done or omitted to be done by or on behalf of the company constitute an “unconscionable abuse” of the legal personality of the company.
As a general rule, courts will not lightly pierce the corporate veil and will not disregard the principle of separate legal personality in the absence of compelling reasons.
In the case of Gloria Mukombachoto v Commercial Bank of Zimbabwe & Anor (2002) Justice Ndou said the following: “the court has no general discretion to disregard the company’s separate legal personality whenever it considers it just to do so.
The court may lift the veil only where otherwise as a result of its existence fraud would exist or manifest justice would be denied.”
In Utete & Another v Katerere (2017) the court said that piercing of the corporate veil is only permissible in exceptional circumstances where the company’s activities and those of its directors are so interwoven and interlinked that to separate them would lead to injustice by allowing a party to avoid its obligations to other parties hiding behind the fact that a company is a distinct legal entity.
Examples of common law exceptions include situations where manifest injustice and unfairness would occur if the veil of incorporation were not ignored.
In such instances the courts will lift the veil to defeat fraud, sharp practice, oppression, breach of trust and illegality. A second example is where a company is operating as a mere façade, sham or front for certain individuals or entities.
To achieve justice between citizens, the courts are inclined to reveal the natural person operating under the cover of incorporation.
The principle of separate legal personality, in ordinary circumstances, protects shareholders, directors and managers of companies from personal liability for the company’s actions.
There is a tendency to abuse the limited liability afforded by this corporate veil so the law provides for its upliftment in order to fix the person behind an unconscionable act with personal liability.
The courts are slow to burden individuals with personal liability and will only do so when the notion of separate legal personality has been used to defeat public convenience, justify wrong, protect fraud or defend crime.
Natasha Ncube and Jacob Mutevedzi are commercial lawyers. They can be contacted on [email protected] and [email protected] respectively. They write in their personal capacities. — ebusinessweekly.co.zw
