Piercing the corporate veil – old metaphor, modern practice?

• Jurisdiction: South Africa
• Published date: 16 August 2019
• Date: 16 August 2019
• Pages: 1-16
• Citation: (2017) 3(1) JCCL&P 1
• Author: The Rt Hon Lady Justice Arden DBE

1

PIERCING THE CORPORATE

VEIL – OLD METAPHOR,

MODERN PRACTICE?*

THE RT HON LADY JUSTICE ARDEN DBE†

Member of the Court of Appeal of England and Wales

ABSTRACT

This article seeks to elucidate the doctrine of piercing the corporate

veil. It does so by comparing South African law, where there is a new

statutory power for courts to set aside the separate legal personality

of the company, and United Kingdom (UK) company law, where

the doctrine has been developed over time in case law. The article

distinguishes between the ‘minimalist’ approach to the doctrine

taken by UK law with the more ‘maximalist’ approach taken by

South African law.

I INTRODUCTION

This article concerns the doctrine in company law of ‘piercing the

corporate veil’. The title reflects the fact that in this area we use at

least one metaphor. The expression, ‘piercing the corporate veil’, is

a metaphor. We also use the word ‘person’ as part of the description

of the nature of a company. Thus, a company is a legal person.

What that means is that a company has a ‘juristic personality’, or a

personality in law, which is separate from that of its shareholders or

directors.

When we refer to ‘piercing the corporate veil’, what we mean is a

set of legal techniques used to set aside the separate legal personality

of a company and make some other person, who dominates the

company but who is not otherwise liable in respect of a wrong that

the company has committed, liable in respect of that wrong, This

might, for example, occur when a court imposes ‘enterprise liability’;

that is, liability on a parent company for the acts of a subsidiary that

* I would like to express my thanks to Professor Michael Katz, chairman of

ENSafrica, for his help researching South African law in preparation for the

lecture in Johannesburg in August 2015, on which this article is based. The views

expressed in this article are, however, my own, and are subject to any argument

that may be presented to me in my judicial capacity.

† MA, LLB (Cantab), LLM (Harvard).

(2017) 3(1) JCCL&P 1

© Juta and Company (Pty) Ltd

2(2017) 3 (1) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

it (the parent company) has directed. That liability may be either

instead of, or as well as, that of the company.

It is unusual only to have a metaphor to describe a set of legal

techniques. The use of a metaphor carries with it dangers. Metaphors

are inexact. The great American judge, Benjamin Cardozo, gave the

following warning about using metaphors, which I would endorse:

‘The whole problem of the relation between parent and subsidiary

corporations is one that is still enveloped in the mists of metaphor.

Metaphors in law are to be narrowly watched, for starting as devices

to liberate thought; they end often by enslaving it. We say at times

that the corporate entity will be ignored when the parent corporation

operates a business through a subsidiary which is characterized as an

“alias” or a “dummy.” … Dominion may be so complete, interference

so obtrusive that by the general rules of agency the parent will be a

principal and the subsidiary an agent.’1

There are many different types of veil piercing. There is legal veil

piercing, where statute provides for some liability of the company to

be imposed on shareholders or directors. An example of this is s 214

of the UK’s Insolvency Act 1986 when the court has found that there

has been wrongful trading, as defined under that section. Legal veil

piercing is relatively rare. Then there is judicial veil piercing, when the

courts, without any statutory mandate, find that some dominating

figure behind a company is liable for its debts. There is also voluntary

veil piercing, where a third party agrees to be liable for a company’s

liabilities; as where a director guarantees that he or she will be liable

for the company’s borrowings (such as bank loans). Finally, there is

reverse piercing, where the court makes an order requiring a third party

to return some asset to the company against which the claimant has

some claim.

In these examples of legal, judicial or voluntary veil piercing, the

object is to enlarge the company’s assets. There is, however, another

form of reverse veil piercing where the object is to extract assets of

a company and vest them in some other person whose assets the

claimant seeks to enlarge. This used to be possible in England and

Wales where a former wife was seeking a divorce settlement from her

husband, who had put his assets into corporate vehicles to escape his

personal obligation to provide moneys to his spouse. As we shall see,

veil piercing is in general no longer possible in this situation under

UK law.

1 Berkey v. Third Avenue Railway 244 N.Y. 84, 94, 155 N.E. 58, 61 (N.Y. 1926).

© Juta and Company (Pty) Ltd