The
second and third defendants are husband and wife and the only Directors of the
first defendant. The
plaintiff has prayed, as against the two, for an order lifting the corporate
veil and for judgment against them jointly and severally with the first
defendant, on the basis that they cannot be divorced from the latter.The
first ...
The
second and third defendants are husband and wife and the only Directors of the
first defendant.
The
plaintiff has prayed, as against the two, for an order lifting the corporate
veil and for judgment against them jointly and severally with the first
defendant, on the basis that they cannot be divorced from the latter.
The
first defendant was incorporated as a company in 2006 and commenced operations
in full in 2007. When the contract, which is the subject matter of this
dispute, was concluded the first defendant had been operational for just a
year. The second and third defendants, who are husband and wife are the only Directors
of the first defendant.
The
second defendant indicated to the court that he is, in fact, the alter ego of
the first defendant.
The
plaintiff averred, in its declaration, that the second and third defendants,
where the contract with the plaintiff was concerned, had, instead of ensuring
that due compliance by the first defendant of its obligations to the plaintiff,
wrongfully, unlawfully and fraudulently diverted funds paid by the plaintiff in
terms of the Agreement for their own purposes.
Counsel
for the defendants, in his submissions at the close of the trial, did not seek
to address the question of whether or not the corporate veil should be lifted
as prayed for by the plaintiff. He, in fact, conceded that the second defendant
was the alter ego of the first defendant. He did not mention the third
defendant.
Per
contra, it is contended by counsel
for the plaintiff that the shares in the company are all owned by the second
and third defendants and that therefore judgment should be entered against all
the defendants jointly and severally.
It
is a fundamental and trite principle of law that a registered company is a
legal persona in its own right and endowed with its own separate legal persona
which is distinct from its shareholders. See Salomon v Salomon & Co. Ltd
[1887] A.C. 22.
It
is also settled law that in certain exceptional circumstances where the company
is controlled in terms of activities and decisions by another person the courts
have allowed the corporate veil to be lifted to reveal the real person behind
the company. I will respectfully refer to a passage by MARGO J in Gering v
Gering & Anor 1974 (3) S.A. 358…, where the learned judge stated -
“There
are three companies, apart from Lauren Lyn (Pty) Ltd, in which the first
defendant has a 100 per cent interest in the shareholding. It is true that, in
the case of these companies, their records are not, stricto sensu, in the
possession, custody or control of the first defendant in his personal capacity.
However, on the facts, these companies are his creatures and his instruments.
He is conducting business through them, or holding assets through them, and,
they are separate juristic personalities, they are in substance merely part of
the machinery by which he alone conducts his business affairs.”
In
certain cases courts have gone as far as stating that a company is the agent of
the controlling shareholder. In the English case of Wallersteiner v Moir (No.
1) (1974) 3 All ER 217 (CA) LORD DENNING had this to say….,-
“I
am prepared to accept that the English concerns - those governed by English
company law or its counterparts in Nassau or Nigeria – were distinct legal
entities. I am not so sure about the Liechtenstein concerns such as Rothschild
Trust, the Cellpa Trust or Stawa AG. There was no evidence before us of
Liechtenstein law. I will assume too, that they were distinct legal entities,
similar to an English limited company. Even so, I am quite clear that they were
just the puppets of Doctor Wallersteiner. He controlled their every movement.
Each danced to his bidding. He pulled the strings. No one else got within reach
of them. Transformed into legal language they were his agents to do as he
commanded. He was the principal behind them. I am of the opinion that the court
should pull aside the corporate veil and treat these concerns as his
creatures-for whose doings he should be and is responsible. At any rate, it was
up to him to show that anyone else had a say in their affairs and he never did
so…,.”
I
have been urged by the plaintiff's counsel to enter judgment against all three
defendants jointly and severally. This is, however, despite a concession from
counsel that the third defendant played a minimal role in the affairs of the
first defendant. The extent of her shareholding in the company was not
established in evidence.
I
did not hear counsel for the defendants argue against the lifting of the
corporate veil.
The
second defendant was candid enough to admit that he was the alter ego of the
first defendant. The evidence of the extent of personal control of the company
on his part could not be disputed. He controlled its finances. He personally
responded to the offer to tender from the plaintiff. He attended the meetings
with the representatives of the plaintiff to decide the terms and conditions of
the contract. He signed the contract for the supply of the vehicles to the plaintiff. He wrote every single letter that was
addressed to the plaintiff regarding the contract. He personally made
commitments to assist the plaintiff in disposing of the Ford trucks at a good
price when they would have been delivered in an effort to persuade the
plaintiff into purchasing alternative vehicles from Willowvale Motor Industries
because the first defendant had not delivered in terms of the contract.
More
telling, however, is the manner in which the money deposited into the first
defendant's bank was treated by him - if I accept the contention by him that a
billion dollars was deposited into an investment account of the company to
secure the value of the deposit. Although he was quizzed on the whereabouts of
the billion dollars the second defendant was unable to state how much was in
the investment account; his response being that he would have to check with the
bank.
It
is not in dispute that the second defendant drew cheques in his personal name
against the account into which the purchase price paid by the plaintiff was
deposited. It is further not in dispute that within a week from the date of
such money being deposited almost the entire amount had been consumed. When the
purchase price was deposited the account held an amount of $177,107,578=64.
After the deposit the balance shot to $1,864,607,578=64. By 11 December 2006
the balance in the account stood at $218,294,649=64. Of the amount withdrawn
from the account $2,200,000= went into the second respondent's account. The
evidence adduced by the investigator of the plaintiff was to the effect that
the defendants purchased an immovable property and a motor vehicle from the
deposit. It cannot be gainsaid that the entire amount has been consumed but the
vehicles have not been purchased.
The
first defendant itself has no assets and it is obvious from an examination of
the transactions on the bank account that it is the vehicle through which the
second defendant mobilized funds with which to enhance his estate. The two
million odd dollars that he paid himself soon after the plaintiff deposited
money into the business account of the second defendant cannot be justified.
The second defendant was unable to explain why this money had been paid to him.
It
is worth noting that in the summary of evidence filed on behalf of the
defendants that the contention is made that there is nothing prohibiting the
first defendant from accessing or investing any money paid into the business
account. It is also not disputed that an amount of $180 million was used from
the account to pay for a property in Marlborough, although it is contended that
the purchase of the property had been planned well before the plaintiff paid
any money into the account. The point is made that the $180 million constitutes
the 10 per cent deposit that the defendants had paid to the plaintiff in terms
of the contract.
It
is very obvious that the second defendant did not differentiate between himself
and the company and he felt clearly that whatever was in the account of the
company belonged to him to deal with as he pleased. In fact, he admitted that
the company was solely his and his counsel described the company as his alter
ego. It is only appropriate, therefore, that the corporate veil be lifted where
he is concerned and that whatever liability may found to attach to the company
should also attach to the second defendant.
The
third defendant's position in relation to the activities of the company is not
so clear.
She
did not attend and give evidence on her own accord despite the fact that an
order was sought against her jointly with the first and second defendants.
The question
exercising my mind is whether or not the plaintiff is entitled to obtain an
order against the third defendant jointly with the other two.
She
is, undoubtedly, a shareholder, although the extent of her shareholding in the
first defendant has not been stated. She chose not to enlighten the court.
In
its declaration, the plaintiff made the averment that the purchase price paid
by it had been diverted by the second and third defendants and used in
purchasing luxury items such as vehicles. Specific mention of an immovable
property in Marlborough was made. The purchase was not denied nor was it denied
that it was purchased for the second and third defendants. Apart from the issue
of the properties purchased with the funds belonging to the plaintiff there is
no other reason advanced before me justifying my uplifting the corporate veil.
Is
this sufficient reason in the absence of control on the part of a defendant?
The
authorities from this jurisdiction that I was referred to do not touch on this
aspect of the dispute and in my research I was able to find a South African
case which may assist me in determining whether or not the corporate veil
should also be lifted in relation to the third defendant. I wish to quote, with
respect, a few excepts from the judgment
of LE ROUX J in Lategan & Anor NNO v Boyes & Anor 1980 (4) S.A. 191. At
200E-F the learned judge stated -
“In
his admirable work, Modern Company Law, L.C.B GOWER devotes a full chapter [Chap
10] to the subject 'Lifting the Veil' (3ed at 189-217). He deals with it as
exceptions to the principle of Salomon v Salomon & Co 1897 AC 22 (HL),
which finally enshrined the sanctity of a separate corporate personality distinct
from its members.”
And
at 200H-201C he stated:
“I
was also referred to an interesting article in the Tydskrif vir Heden-daagse
Romeins Reg vol 30 (1967) at 216 et seq by M. L. BENADE, where the author
pleads for a more realistic view of corporate identity in South Africa to bring
it in line with the 'positive' approach of American courts, which may be summed
up in the words of JUDGE SANBORNE in US v Milwaukee Refrigerator Transit Co
(1905) 42 Fed 247 at 255, where he held that a company should be seen as an
entity:
'but
when the notion of a legal entity is used to defeat public convenience, justify
wrong, protect fraud or defend crime, the law will regard the corporation as an
association.'
This
approach appears to be in line with that in modern England (as sketched by GOWER
(supra)) and is based on common sense and a developed sense of equity. An
excellent example is afforded by the case of Gilford Motor Co v Horne 1933 Ch
935 (CA) where the defendant, who was a former employee of the plaintiff, had
contracted with the latter not to approach its customers. He promptly formed a
company and it proceeded to contravene the contract. The court interdicted both
the defendant and the company which it described as a device with a stratagem,
a mere cloak and a sham, which it considered an instrument in the defendant's
hands.”
And
further on at 210F-H the learned judge concluded -
“A
true precedent for this principle does exist in our case law, namely the case
of Orkin Bros Ltd v Bell 1921 TPD 92,
where the Directors of a company were held personally liable to a seller who
sold goods to a company at the instance of its Directors when they knew the
company to be in insolvent circumstances and completely unable to pay for the
purchase and it appeared that the sole purpose of the transaction was to
diminish the personal liability of the Directors under a contract of
suretyship. This was held to constitute a fraud on the seller and he obtained
judgment against the Directors personally.
I
have no doubt that our courts would brush aside the veil of corporate identity
time and again where fraudulent use was made of the fiction of legal
personality. In the present case, however, there is no evidence that the second
defendant fraudulently failed to mention the position of the sureties…,.”
The
authorities are agreed that where there has been fraudulent or improper use of
a company a court is entitled to disregard the separate corporate personality
of a company and pierce the veil.
The
first defendant herein was the vehicle through which the second and third
defendants acquired property to enhance their estate. The two are husband and
wife and although the title of the immovable property was not produced to court
there was no denial from the defendants to the allegations in the declaration
that the plaintiff's purchase price had been used to buy luxury items for
themselves. The improper use of the money paid towards the purchase of the
vehicles is evident from the manner in which the account was virtually depleted
within a week of almost the entire sum. No reasonable explanation was
forthcoming from the second defendant and the third defendant offered no
explanation at all. An allegation of fraud is serious and it would have been in
the interests of all the defendants if the third defendant had come to court to
try and dispel the accusations by the plaintiff on the alleged use of the
money. I can therefore only go by the bank account submitted to the court which
showed improper usage of the money deposited by the plaintiff into the first
the defendant's bank account.
It
would not be uncharitable to describe the first defendant as a shell. It has no
assets in its own name, this much being admitted by the second defendant. It
operates a bank account which is at the sole disposal of the second defendant
to deal with as he pleases. He does as he pleases with money in the account,
which apparently is the only asset that could be said to be in the name of the
company. But that said, even the money does not remain long in the account as
it is utilized almost as soon as it is credited to the account; and such usage
is not in the business of the company but for the benefit of its shareholders.
It does not have on its books any of the vehicles it tendered to supply. It
actually required payment in full of the purchase price in advance from the
plaintiff in order to source for the vehicles and once that payment was made
the second defendant dealt with it in a manner that would result in the
enhancement of the estate of the second and third defendants.
This
is an example of a fiction of separate corporate entity of a registered
company. The second and third defendants, in the manner in which they make use
of the first defendant, might as well have described themselves as a
partnership as that is in effect what they are. The enterprise that is the
first defendant is a mere tool for their exclusive use. In my view, the company
exists for the convenience of its shareholders. The fiction of a separate
corporate entity does not in fact exist in this case and it would only be just
and proper for me to order that the corporate veil be lifted and judgment
entered against all the defendants including the third defendant who is clearly
benefitting from the existence of the company.
In my view, the plaintiff has therefore
established a proper case for the lifting of the corporate veil in relation to
both the second and the third defendants.