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The corporate veil and liability of company directors

Incorporating a company provides certain protection to its directors from personal liability. This is known as “the corporate veil”. However, this veil can be lifted. Our courts consider the substance of matters rather than just their legal form – this means that the courts will not allow a legal entity to be used to perpetrate fraud, crime or improper purpose. In such cases, the directors and others in a company may be held personally liable for the debts of the company.

The general rule is that the courts will “lift the corporate veil” where circumstances show that the company is used as a disguise to hide the real facts, or where controlling shareholders are merely using the company to promote their private interests.

Case law has shown that directors can be held personally liable in the following instances:

1. Where a person had signed a restraint of trade with her previous employer, then formed a company as a front to circumvent the restraint of trade. The courts upheld the restraint of trade against both the director and her company.

2. Where members of a CC operated it without proper bookkeeping, and, when it suited them, ignored the CC’s separate legal identity. The CC was liquidated and the members were held liable for its debts.

In summary, the courts will lift the corporate veil if a company is used to mask fraudulent or illegal operations, or if directors or shareholders treat the company’s assets as their own.

Business owners should be aware that they bear a heavy burden as directors, members or shareholders. They must operate their businesses with utmost fiduciary responsibility and in compliance with the law.

Maybery Inc. advises companies on various commercial law matters, as well as other areas of law. For assistance, contact Maybery Inc. at or (012) 004 1296.

Please note that this article represents a brief summary of commercial law, and is therefore meant for informative purposes only and does not constitute legal advice. For full legal advice on your commercial matter, please contact us to arrange a consultation.


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