When launching a business, there are generally four primary legal structures to choose from, a sole proprietorship, a partnership, a close corporation, or a private company (proprietary limited), subject to a few specific exceptions.

Each option comes with its own set of advantages and disadvantages, but one of the most significant benefits of operating as a close corporation or private company is the protection provided by what is known as the “corporate veil.” This veil acts as a legal barrier between the company as a separate legal entity and its owners (shareholders) and managers (directors). As long as the corporate veil remains intact, the personal assets of shareholders and directors are shielded from the company’s creditors, meaning that debts of the business cannot generally be recovered from their personal property.

However, this separation is not absolute. The law recognises circumstances where the corporate veil can be “pierced” or “lifted”, effectively removing that legal protection. When a court decides to pierce the corporate veil, the individuals behind the company can be held personally liable for its obligations.

Under section 20(9) of the Companies Act 71 of 2008, if a court finds that the formation, use, or conduct of a company amounts to an unconscionable abuse of its separate juristic personality, it can declare that the company should be treated as if it were not a separate legal entity for specific rights, duties, or liabilities. This provision allows any interested party to apply to court for such an order if they believe the company’s structure or actions have been misused.

Section 77 of the Act sets out examples where this might happen, including:

• Breaching a director’s fiduciary duties towards the company or its shareholders.
• Engaging in unauthorised transactions or reckless trading.
• Participating in fraudulent acts or omissions that harm creditors, employees, or shareholders.
• Approving or issuing false or misleading financial statements.
• Failing to oppose certain acts that are prohibited by the Act.

A director may be personally liable if they were present or took part in a decision knowing it violated the law. The Act explains “knowing” as having actual knowledge, or being in a position where they reasonably should have known, investigated, or taken steps to obtain the necessary knowledge, and then failing to act against the prohibited conduct.

Although South African courts are generally cautious in granting orders to pierce the corporate veil, particularly because of the high threshold implied by the term “unconscionable,” directors and shareholders should not assume their personal assets are untouchable. Misuse of the company’s legal personality can strip away these protections.

The prudent approach is to ensure the company operates with full compliance to the law, sound governance practices, and ethical financial management. Engaging qualified legal and financial advisors is key to preserving the protection that the corporate veil offers.