Airport Cold Storage (Pty) Ltd v Ebrahim and Others

• Jurisdiction: South Africa
• Judge: Griesel J
• Judgment Date: 22 May 2007
• Citation: 2008 (2) SA 303 (C)
• Docket Number: 3181/06
• Hearing Date: 30 April 2007
• Court: Cape Provincial Division
• Counsel: RD van Helden for the plaintiff MR Khan for the defendants

Griesel J:

[1] The plaintiff in this matter, Airport Cold Storage (Pty) Ltd, was a creditor of a close corporation known as Sunset Beach A Trading 232 CC (Sunset Beach or the corporation), which traded under the name and style of Global Foods. During the period March to June 2005 the plaintiff sold and delivered imported meat products and frozen vegetables to the corporation on open account. On 12 B August 2005, when the corporation was placed into provisional liquidation by order of this court, a balance of R278 377,19 remained owing, according to the plaintiff's calculations.

[2] The provisional order was made final on 27 September 2005. The plaintiff duly proved a claim against the corporation in C liquidation for the amount outstanding. It received no dividend in the liquidation, however, since the corporation had no assets.

[3] The plaintiff thereupon launched the present action, seeking to hold the first and second defendants personally liable for such debt in terms of the provisions of the Close Corporations Act 69 of D 1984 (the Act). It is common cause that the first defendant, Mr Nizaar Ebrahim (Mr Ebrahim Jnr), who is the son of the second defendant, Mr Abbas Ebrahim (Mr Ebrahim Snr), was the sole member of Sunset Beach and was also its manager and in control of its business at all relevant times. The plaintiff alleges that Mr Ebrahim Snr was 'an employee, manager and/or officer of the corporation'. The third E defendant is the liquidator of Sunset Beach, but no relief is claimed against him and he played no part in these proceedings as a litigant. I will accordingly refer to the first and second defendants collectively as 'the defendants', save where it is necessary to refer to either of them individually. F

[4] The plaintiff's claim is based on three alternative statutory causes of action:

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First, the plaintiff relies on the provisions of s 64(1) of the Act, alleging that 'during the period March to August 2005, the business of the corporation was carried on recklessly or for fraudulent G purposes or with the intent to defraud the creditors of the company'.

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In the alternative, the plaintiff alleges that the incorporation and use of the corporation by the defendants constituted 'a gross abuse of the juristic personality of the corporation as a separate entity' in violation of the provisions of H s 65 of the Act.

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The final alternative claim is directed against the first defendant alone, based on the provisions of s 63(h) of the Act, which holds a member of a close corporation personally liable, jointly and severally with the close corporation, for debts incurred by the corporation 'where the office of accounting officer of the corporation is vacant for a period of six months'. I

[5] On the evidence presented in this matter it is clear that the three individual causes of action are in fact inextricably intertwined and form part, to a greater or lesser extent, of one composite complaint of abuse of the separate juristic personality of Sunset Beach by the defendants. I J

Griesel J

accordingly propose dealing with the matter on that basis and proceed to consider the legal requirements A for this cause of action before examining the factual allegations advanced in support thereof.

Abuse of juristic personality

[6] One of the most fundamental consequences of incorporation is that a close corporation - just like a company - is a juristic entity separate from its members. B Incorporation also entails 'limited liability' of members, with the result that they are generally not liable for the debts of the corporation. Furthermore, the assets of a corporation are the exclusive property of the corporation itself and not of its members. [1] In the locus classicus on this topic, Salomon v Salomon & Co Ltd, [2] Lord MacNaghten said the following with regard to some of the motives for C incorporation:

Among the principal reasons which induce persons to form private companies . . . are the desire to avoid the risk of bankruptcy, and the increased facility afforded for borrowing money. By means of a private company a trade can be carried on with limited liability, and without exposing the persons interested in it in the event of failure D to the harsh provisions of the bankruptcy law.

[7] In the sphere of companies, the directors and members of a company ordinarily enjoy extensive protection against personal liability. However, such protection is not absolute, as the court has the power - in certain exceptional E circumstances - to 'pierce' or 'lift' or 'pull aside' 'the corporate veil' and to hold the directors personally liable for the debts of the company. [3]

[8] According to Blackman: [4] F

Veil piercing takes at least two forms. Firstly, there are cases where the court disregards the company and treats the members as if they had been acting in partnership (or where the company has a single member, as if he had been acting on his own behalf), with the consequence that they are, for example, held to be the owners of property otherwise owned by the company, or to be personally liable for its debts and other liabilities. G

[This is said to be the most frequently stated consequence of veil piercing.] Secondly, there are those cases where obligations incurred by shareholders in their personal capacity are treated as if they were incurred by the company. For present purposes, only the first form of veil piercing needs to be considered. H

[9] Whatever form it takes, veil piercing is an 'exceptional procedure', [5]

Griesel J

and, as pointed out by Scott JA in Hülse-Reutter and Others v Gödde, [6] a court has no general A discretion simply to disregard the existence of a separate corporate identity whenever it considers it just or convenient to do so. However, the circumstances in which a court will disregard the distinction between a corporate entity and those who control it are 'far from settled': B

Much will depend on a close analysis of the facts of each case, considerations of policy and judicial judgment. Nonetheless what is, I think, clear is that as a matter of principle in a case such as the present there must at least be some misuse or abuse of the distinction between the corporate entity and those who control it which results in an unfair advantage being afforded to the latter. [7] C

(My emphasis.)

[10] In The Shipping Corporation of India Ltd v Evdomon Corporation and Another [8] Corbett CJ required proof of 'an element of fraud or other improper conduct in the establishment or use of the company or the conduct of its affairs' before a court can pierce the corporate veil. D

[11] This requirement of fraud or other improper conduct finds resonance in the provisions of s 65 of the Act, [9] where the legislature, with regard to close corporations, has created a statutory remedy 'which is equivalent to (the court's) jurisdiction at common law to ''pierce the corporate veil'' in relation to a E company'. [10] Liability under this section depends on a finding of 'gross abuse of the juristic personality of the corporation as a separate entity'. However, no attempt has been made in the section to indicate the facts or circumstances that would qualify as a gross abuse of the juristic personality of the corporation as a separate entity. The courts are required, in other words, to give content to the open-ended concept of 'gross abuse', based on the F facts of each particular case. This exercise does not take place in a vacuum, however, and it is axiomatic that the principles and categories developed with regard to piercing the corporate veil in the context of company law will serve as useful guidelines in this context. G

Griesel J

[12] The starting point is that veil piercing will be employed 'only where special circumstances exist indicating that it [ie the A company or close corporation] is a mere façade concealing the true facts'. [11] Fraud will obviously be such a special circumstance, but it is not essential. In certain circumstances the corporate veil will also be pierced 'where the controlling shareholders do not treat the company as a separate entity, but instead B treat it as their ''alter ego'' or ''instrumentality'' to promote their private, extra-corporate interests': [12]

Although the form is that of a separate entity carrying on business to promote its stated objects, in truth the company is a mere instrumentality or business conduit for promoting, not its own business or affairs, but those of its controlling shareholders. For all C practical purposes the two concerns are in truth one. In these cases there is usually no intention to defraud although there is always abuse of the company's separate existence (an attempt to obtain the advantages of the separate personality of the company without in fact treating it as a separate entity). [13] D

[13] Against this background, I turn to consider whether the plaintiff has established that the defendants have in fact abused the separate juristic personality of the close corporation in question.

Evidence E

[14] The evidence presented on behalf of the plaintiff consists, firstly, of a substantial body of documentary evidence contained in exh A, B, C and F. Apart from various invoices and accounts, it includes a certified transcript of the proceedings at an insolvency enquiry into the affairs of Sunset Beach, held at the magistrates' court in Wynberg during November and December 2005. [14] The record F was received as prima facie evidence of the proceedings recorded therein, in accordance with the provisions of s 68(1) of the Insolvency Act 24 of 1936.

[15] In addition, the plaintiff also presented viva voce evidence by its managing director, Mr Patrick Gaertner; an accounting G expert, Mr Derek Hanslo; as well as a representative from the liquidator's office, Mr Johan Theron. The defendants, in...