Ex parte Gore and Others NNO

• Jurisdiction: South Africa
• Judge: Binns-Ward J
• Judgment Date: 13 February 2013
• Citation: 2013 (3) SA 382 (WCC)
• Docket Number: 18127/2012
• Hearing Date: 14 December 2012
• Counsel: JA Newdigate SC for the applicants.
• Court: Western Cape High Court, Cape Town

Binns-Ward J: A

[1] The order set out at the end of these reasons for judgment was made on 14 December 2012. It was made in terms of s 20(9) of the new Companies Act (Act 71 of 2008). [1] I indicated at the time that I would provide reasons for the order later. [2] Those reasons now follow. B

[2] The order granted the relief sought by the liquidators of 41 companies to permit certain of the assets of those companies to be dealt with as if they were the property of the holding company. The relief that had been asked for entailed selectively disregarding the separate personalities of a number of companies in a group of companies and treating their C residual assets (that is, the assets remaining after the payment of the secured creditors and 'trade creditors' of each company) as the assets of the holding company for the purposes of settling what have been described as the 'investors' claims'. The essential basis for the application was the allegation that the relevant business of the group was conducted through the holding company, with little or no regard to the D distinction between that company's legal personality and that of its subsidiaries. The founding papers asserted that the application was brought under the common law, alternatively in terms of s 20(9) of the Companies Act 2008.

[3] The application was described on the court roll as being one for the E 'piercing of the corporate veil' — a familiar term in this context, locally and in the English common-law jurisdictions, before the introduction of s 20(9) of the new Companies Act. Some might suggest that 'lifting' the veil was the more appropriate label in the circumstances. Staughton LJ offered the following basis for a distinction in Atlas Maritime Co SA v Avalon Maritime Ltd, The Coral Rose (No 1) [1991] 4 All ER 769 (CA) F at 779:

'To pierce the corporate veil is an expression that I would reserve for treating the rights or liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, on the other hand, should mean to have regard to the G shareholding in a company [in other words, to its controllers] for some legal purpose.' [Emphasis supplied.]

In Pioneer Concrete Services Ltd v Yelnah (Pty) Ltd (1986) 5 NSWLR 254 (SCNSW) at 264, Young J described 'lifting the corporate veil' as meaning '(t)hat although whenever each individual company is formed H

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A a separate legal personality is created, courts will on occasions, look behind the legal personality to the real controllers'.

[4] A broad consideration of the case law in several jurisdictions impels the conclusion that nothing really turns on the labels, despite the B documented debate therein about nuances in the terminology. [3] Indeed, the inconsistent and often confusing employment of the expressions 'piercing', or 'lifting', or 'looking behind' the veil lends support to Van Heerden JA's expressed wariness about the use of 'the veil' metaphor altogether. [4] What is entailed on any approach, whether it be called a 'piercing' or a 'lifting', is a fact-based determination by the courts in C certain cases, to disregard some or all of the characteristics of separate legal personality that statute law ordinarily attributes to a duly incorporated company. [5] Juristic personality is a legal fiction [6] (or a 'figment of law' as it has on occasion been referred to) [7] and thus, when the circumstances of a particular case make it appropriate to do so — inevitably D in matters in which the concept has been used improperly, in a manner inconsistent with the rationale for the creation and maintenance

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of the legal fiction — courts will disregard it. [8] Interestingly, in A circumstances to be discussed presently, the UK Supreme Court recently left open the question of whether, in the absence of statutory provision, the courts in that jurisdiction truly possess the power to 'pierce the corporate veil'. It is evident, however, that, irrespective of the answer to the question, the courts there have acted in many matters over the years B assuming that they do possess the power. [9] The basis upon which this has been done here and in various foreign jurisdictions will be considered later in this judgment.

[5] The applicants were all liquidators of one or more companies which formed part of a group of companies, referred to in the papers as 'the C King Group'. The overall holding company was King Financial Holdings Ltd (KFH), which is also in liquidation, and the liquidators of which are also amongst the 39 applicants.

[6] KFH's shares were held by three groups of shareholders, namely the trustees of the Adrian King Beleggings Trust, the Paul King Beleggings Trust and the Stephen King Beleggings Trust, respectively. The King D Group was effectively managed and owned by the eponymous King brothers, Adrian, Paul and Stephen. The shareholding trusts were so-called family trusts set up for the benefit of the respective King brothers and their families. The King brothers were directors of KFH and

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A most of its subsidiaries. At all times — even after the 'share conversion' scheme referred to below — the King brothers retained a majority of the KFH shares and exercised control of the group.

[7] From about 2004 the King brothers used the companies in the group B to conduct business in the provision of financial services by way of marketing investments in commercial and residential immovable properties in the manner to be described below. In early 2008 their activities attracted the attention of the Financial Services Board (FSB), which conducted a search and seizure operation at the address from which the business of the group was carried on. The FSB inspection report that C followed spoke to widespread irregularity in the conduct of the business of the group and was one of the factors that precipitated the subsequent winding-up of the companies in it. The liquidators also commissioned an investigation by accountants PricewaterhouseCoopers (PwC) into the receipt and allocation of investments by the companies in the group.

D [8] The investigations established that the affairs of the group were in material respects conducted in a manner that maintained no distinguishable corporate identity between the various constituent companies in the group. The entire group was operated, in effect, as one entity through the holding company. Funds solicited from investors were transferred by E the controllers of the holding company between the various companies in the group at will, with no effectual regard to the individual identity of the companies concerned, and with grossly inadequate record-keeping. The investigations bore out the admission by the King brothers that they 'treated all their companies as one'. It is thus perhaps no cause for surprise that the King brothers expressly purported to carry on the F business of financial service provider in the name of KFH, notwithstanding that the only company in the group that was registered as a financial service provider in terms of the applicable legislation was King Services (Pty) Ltd; KFH's letterhead even misrepresented that it was a licensed financial service provider.

G [9] Investments solicited by the King Group were structured predominantly in the form of a purchase by the investor of shares in a member of the group, the shares being acquired from another member of the group. The acquisition of the shares was coupled with the contemporaneous extension of a loan by the investor concerned to the company of which H he was becoming a shareholder; the concept being that the shares could not be dealt with other than together with the related loan account. All but a nominal amount of the investment comprised of money lent by the investor to the company in which he purchased share/s. The companies in which investments were ostensibly made on this basis were property I owning entities.

[10] Initially, the King Group used a number of companies to hold already developed commercial properties. Most of these companies bore variations of the name 'Edrei', for example 'Edrei 1' or 'Edrei 13'. The Edrei companies were held by intermediate companies in the group structure. It was from these intermediate companies that the investors J ostensibly purchased shares in the property-holding entities. It was

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represented to investors that the loans made by them to the A property-holding entities would be secured, but no security was in fact provided.

[11] At a later stage the King Group extended its ventures to the development of commercial and residential properties. This area of enterprise was conducted mainly through entities in the group bearing the 'Kingvest' or 'Zelpy' names. Investments into the Kingvest or Zelpy B companies were structured in essentially the same manner as those into the Edrei companies.

[12] As a consequence of the dishonest and chaotic administration of the affairs of the King Group of companies by the King brothers, the C liquidators of the constituent companies have encountered serious difficulty in identifying the relevant corporate entities against which the individual investor-creditors might have claims. To illustrate: a creditor might have been under the impression that he had invested in company A, and might even have been issued with documentation that purported to confirm as much, but the flow of funds might indicate a quite different D reality. In many cases the documentation purporting to evidence an investment was so ineptly prepared that it did not identify into which company the particular investment ostensibly was being made. The invested funds were in fact 'allocated' by the management of the King Group into whichever company it saw fit, which, in effect, meant any...