PATEL J: The
applicant herein presently holds certain equipment attached by him
pursuant to execution of judgment in Barnsley
v Harambe
Holdings
HC6651/10. The judgment creditor obtained an arbitral award in
September 2010 for the payment by Harambe Holdings of arrear salary
amounting to US$61,879. After the registration of the award with this
Court, the notice of seizure and attachment of the equipment in
question was issued in October 2010.
The claimant is a wholly owned
subsidiary of Harambe Holdings. However, it asserts that the seized
property belongs to it and not to Harambe Holdings. The judgment
creditor disputes this on the basis that the judgment debtor is
inseparable from its subsidiaries and that any separation within the
Harambe Holdings Group is deceitful.
On these facts, the principal
issue for determination is whether the Harambe Holdings Group is a
single entity or whether it should be separated for purposes of civil
liability and execution.
The Arguments
Mr.
Bvekwa
submits that the claimant is a separate company controlled by Harambe
Holdings as its subsidiary. If Harambe Holdings were claiming the
seized property, it would be possible to lift the corporate veil
against it as it is a shareholder in the claimant. However, the veil
cannot be lifted in the converse situation presently under
consideration. What the judgment creditor should have done is to
first apply for the veil to be lifted and, if it succeeded in so
doing, it could then seize the assets of the subsidiary company. In
interpleader proceedings, the property of the subsidiary entity
cannot be seized without a court order lifting the corporate veil.
Mr.
Kawonde
counters that the veil should be lifted because the claimant is a
vehicle through which Harambe Holdings carries out its operations.
The judgment creditor was employed by the latter as its Chief
Engineer, deployable to serve any entity within the Harambe Holdings
Group, including the claimant. All the Group subsidiaries are located
together at the same address with Harambe Holdings. Moreover, various
documents (including letters, brochures and annual returns, as well
as newspaper articles and the pleadings in Case No. HC5756/10) all
demonstrate that the claimant is an integral entity within the
Harambe Holdings Group. The claimant's plea is merely a ruse to
avoid attachment so as to defeat the judgment creditor's just
claim.
Lifting or Piercing the
Corporate Veil
The
cardinal principle of company law, as enunciated in Salomon
v Salomon
& Co Ltd
[1897] AC 22 (HL) and Dadoo
Ltd & Others
v
Krugersdorp Municipal Council
1920 AD 530 at 550, is that a company is a separate entity distinct
from its members. Nevertheless, there are well established exceptions
to the principle grounded in policy considerations. As was held in US
v Milwaukee
Refrigerator Transit Co
(1905) 42 Fed 247 at 255:
“…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 has been regularly adopted and consistently followed in our
law. See Lategan
& Anor NNO
v Boyes
& Anor
1980 (4) SA 191 (T) at 200-201; Van
Niekerk
v
Van Niekerk & Ors
1999 (1) ZLR 421 (S) at 427; Mawere
v Minister
of Justice
2005 (1) ZLR 317 (H) at 327.
In
Cape
Pacific Ltd
v Lubner
Controlling Investments (Pty) Ltd & Ors
1993 (2) SA 784 (C) at 816-818, it was observed 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 in those cases where the idea of the
corporate entity had been used as a subterfuge and to observe it
would work an injustice….
In cases of fraud, whether
actual or constructive, 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 organised or maintained 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.”
On
appeal in Cape
Pacific Ltd
v Lubner
Controlling Investments (Pty) Ltd & Others
1995 (4) SA 790 (AD) at 803-804, the notion of equity was reaffirmed
as follows:
“It
is undoubtedly a salutary principle that our Courts should not
lightly disregard a company's separate personality, but should
strive to give effect to and uphold it. To do otherwise would negate
or undermine the policy and principles that underpin the concept of
separate corporate personality and the legal consequences that attach
to it.
But where fraud, dishonesty or
other improper conduct (and I confine myself to such situations) is
found to be present, other considerations will come into play.
The need to preserve the
separate corporate identity would in such circumstances have to be
balanced against policy considerations which arise in favour of
piercing the corporate veil.…And a court would then be entitled to
look to substance rather than form in order to arrive at the true
facts, and if there has been a misuse of corporate personality, to
disregard it and attribute liability where it should rightly lie.
Each case would obviously have to be considered on its own merits.”
The exceptions to the general
principle have been extended beyond the realm of fraudulent or
improper conduct to the situation where a single economic entity owns
all the shares in its subsidiaries and controls every aspect of their
operations.
Thus,
in DHN
Food Distributors Ltd
v London
Borough of Tower Hamlets
[1976] 3 All ER 462 (CA) at 467, it was stated as follows:
“Professor
Gower in his book on company law says:
'there
is evidence of a general tendency to ignore the separate legal
entities of various companies within a group, and to look instead at
the economic entity of the whole 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. These
subsidiaries are bound hand and foot to the parent company and must
do just what the parent company says.…
This group is virtually the
same as a partnership in which all the three companies are
partners.…The three companies should, for present purposes, be
treated as one, and the parent company, DHN, should be treated as
that one.”
The rationale for this
extension, as I perceive it, is that where the operations of an
economic group are so close as to be virtually indivisible,
considerations of policy tend to militate against any legal
separation of its integral units, for to do so would be to perpetuate
an essentially corporate fiction.
Of course, this may not
invariably be the case, but the equities would certainly favour such
an approach in dealings at arms length with innocent outsiders.
Disposition
The
undisputed facts in
casu
are these;
The claimant is a wholly owned
subsidiary of Harambe Holdings and all the subsidiaries within the
Group are located together at the same physical address.
The judgment creditor was
employed by the Group and was deployable to serve any entity within
the Group, including the claimant.
The relevant documentary
evidence amply demonstrates that the claimant is an integral entity
within the Group. To all intents and purposes, the claimant is
effectively a vehicle or instrumentality through which Harambe
Holdings carries out its bakery operations.
On these facts, it seems to me
that the claimant's assertion of ownership over the seized assets
is nothing more than a subterfuge designed to defeat the judgment
creditor's claim, which claim is uncontroverted and is undeniably a
just one.
Even in the absence of any
fraudulent or other improper motive, the overarching control
exercised by Harambe Holdings over its subsidiaries clearly justifies
the treatment of the Group as a single economic entity for the
purpose of enforcing a debt incurred by any unit within the Group,
particularly where the creditor, as in this case, is a former senior
employee who was engaged to serve the entire Group.
The remaining question is
this:
Is
it procedurally necessary for a judgment creditor to have obtained a
prior court order lifting the corporate veil before attempting to
attach the property of a subsidiary company?
Mr.
Bvekwa
was unable to cite any case authority in support of this proposition.
In advancing the counter-proposition that there is no such condition
precedent, Mr. Kawonde
relies upon the following passage in the later Cape
Pacific
case, supra,
at 805-806:
“In
principle, I see no reason why piercing of the corporate veil should
necessarily be precluded if another remedy exists.…
If the facts of a particular
case otherwise justify the piercing of the corporate veil, the
existence of another remedy, or the failure to pursue what would have
been an available remedy, should not in principle serve as an
absolute bar to a court granting consequential relief.…
Whatever laxity or 'fault'
there may have been on the part of the appellant in failing to pursue
its rights under the doctrine of notice pales into insignificance
compared to the impropriety of Lubner's conduct. Yet respondents
seek to rely upon such failure to deny the appellant relief.
Policy considerations dictate
that they should not be permitted to do so.
In the circumstances the
appellant's failure to pursue its remedy under the doctrine of
notice does not in my view operate as a bar to the relief it seeks.”
While these observations may
not be directly pertinent to the question at hand, they certainly
fortify the principle that mere procedural technicalities should not
be allowed to frustrate or impede the effective satisfaction of a
just claim.
In any event, I see no logic
or practical reason in requiring the judgment creditor to institute
fresh proceedings in this Court to pierce the corporate veil in
circumstances where those proceedings would entail the same
conclusion that I have reached earlier.
In the result, the claimant's
position cannot be sustained.
Its prayer for an order
declaring the attached assets as belonging to it and for stay of
execution is hereby dismissed.
The applicant is ordered and
authorised to proceed with the warrant of execution. The claimant
shall pay the costs of the applicant and those of the judgment
creditor.
V. Nyemba & Associates,
applicant's legal practitioners
Bvekwa & Associates,
claimant's legal practitioners
Kawonde & Company,
judgment creditor's legal practitioners
