Circumventing Veil Piercing: Possible Delictual Liability of a Holding Company to a Creditor of its Insolvent Subsidiary

• Jurisdiction: South Africa
• Published date: 16 August 2019
• Date: 16 August 2019
• Author: Richard Stevens
• Pages: 93-106

93

CIRCUMVENTING VEIL PIERCING: POSSIbLE

DELICTUAL LIAbILITY OF A HOLDING

COMPANY TO A CREDITOR OF ITS INSOLVENT

SUbSIDIARY

Richard Stevens

BA LLB LLM LLD

Senior lecturer, University of Stellenbosch*

1 Introduction

The decision in Aron Salomon v A Salomon & C o Ltd1 still c onrms the

most fundament al aspect of company law more than a ce ntury af ter the

decision was handed down, namely the pr inciple of limited liability i n a

company. In terms of this pri nciple the contractua l creditors of the company

can only look to the company for the payment of the compa ny’s debts and not

to the shareholders of the company. Liability is therefore on the contr actual

party of the creditor. This principle has also now been codied in the new

Companies Act 71 of 2008.2 The traditiona l approach to hold a shareholder

liable for the obligations of the company of which he or she is a shareholder is

the piercing of the corporate veil do ctrine, or to argue that the company is t he

agent of the shareholder, or that the subsidiary a nd the holding company were

in fact a part nership.3

This art icle will, however, explore the possibility of holding the holding

company liable for the losses suffered by a contr actual cred itor of the

subsidiary of the holding company. The art icle does not intend to investigate

whether the holding company is liable for the debt of the subsidiar y to the

creditor but whether the relevant cred itor has an independent delict ual action

against the holding company for the loss it suf fered due to the actions of the

holding company. In this regard the ar ticle only deals with a delictual a ction

based on pure economic loss which the c reditor suffered in t he context of

a letter of comfort which was issued by t he holding company to a creditor

of its subsidiary. The article therefore does not deal w ith the piercing of the

corporate veil doct rine. The context of the article is that a creditor lent money

to a subsidiary company. The holding company, instead of issu ing a guarantee

for that debt, issues a letter of comfor t to the creditor of its subsidiary. The letter

of comfort either states that it is t he (current) policy of the holding company

to ensure that its subsidi ary meets its obligation s or that it is the (current

and futur e) policy of the holding company to ensure that it s subsidiary meet s

* I would like to tha nk Prof Max Loubse r for his valuable comme nts

1 [1897] AC 22 (HL)

2 S 19(2) of the Companies Act

3 D Milo “The Liabi lity of the Holding Com pany for the Debts of its Sub sidiary: Is Salomo n still Alive and

Well?” (1998) 115 SALJ 318 323-333

(2013) 24 Stell LR 93

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