Legal Personality
Legal personality is a legal concept that affects the existence of a
company.
Incorporation vs. Registration
It is important to distinguish between incorporation and registration,
and the effect thereof on a company's legal personality.
Legal Status
The legal status of a company needs to be understood after incorporation,
but before registration.
Limited Liability
Limited liability and the practical implications of separate legal
personality is an important concept in entrepreneurial law.
Lifting the Corporate Veil 🎭
The common law concept of lifting the corporate veil with reference to
case law needs to be understood, as well as the statutory adoption of the
common law concept of lifting the corporate veil.
Cape Pacific v Lubner Case
The Cape Pacific v Lubner case is relevant to the doctrine of "lifting the
veil."
The case involved:
Lubner: A businessman.
LCI: A company owned by a Trust, with Lubner as a trustee.
GLI: A company with Lubner as a 100% shareholder.
Lubner owned shares called Findon shares, which controlled an
apartment in Clifton. For tax reasons, Lubner sold these shares to LCI, who
later sold them to Cape Pacific. Lubner's family was upset by the sale
because they lost access to the Clifton apartment.
Lubner tried to get out of the sale, but Cape Pacific obtained a court order
for LCI to hand over the Findon shares. In a last-ditch effort, LCI sold the
Findon shares to GLI.
,Cape Pacific applied to have LCI held in contempt, but LCI claimed it no
longer had control of the shares, making performance an impossibility.
Cape Pacific then launched a case against LCI, GLI, and Lubner, seeking to
lift the corporate veil.
The initial court dismissed Cape Pacific's case, but an appeal was
launched. The Supreme Court of Appeal (SCA) stated that courts should
not lightly disregard a company's separate personality. However, in cases
of fraud, dishonesty, or other improper conduct, the need to
preserve the separate corporate identity must be balanced against policy
considerations favoring piercing the corporate veil.
The SCA found that Lubner misused both LCI and GLI, effectively using
them as his alter egos in their dealings with the Findon shares. The court
concluded that policy considerations strongly suggested that the
corporate veil should be pierced to reveal Lubner as the true "villain."
Key points from the SCA's decision:
Courts generally need to find an element of fraud or other improper
conduct to pierce the corporate veil.
The need to preserve corporate identity should be balanced against
policy considerations in cases of fraud or dishonesty.
The corporate veil can be pierced when a company is used as an
alter ego for fraudulent or improper dealings.
Types of Companies 🏢
The 2008 Companies Act provides for two principal types of companies:
Profit companies
Non-profit companies
A company is considered a profit company if it is incorporated for the
purpose of financial gain for its shareholders. The Act does not restrict the
maximum number of shareholders in a profit company. There are four
types of for-profit companies: public company, state-owned enterprise
(SOC), personal liability company, and a private company.
Other types of companies include external companies and domesticated
companies.
,State-Owned Enterprise (SOC)
A state-owned enterprise (SOC) is a national government business
enterprise that falls within the meaning of a state-owned enterprise under
the Public Finance Management Act, or is owned by a municipality. An
SOC provides goods or services in accordance with ordinary business
principles and is financed mostly from sources other than tax or statutory
money.
Interesting Fact: Municipalities owe Eskom a staggering amount of money,
which poses a serious risk to Eskom's financial stability.
Company Formation 📝
Procedural steps need to be followed in the incorporation of a company as
well as the registration process.
Pre-incorporation contracts ✍️
The legal effects of registration of a company and pre-incorporation
contracts should be explained.
Ultra Vires Doctrine 🚫
The ultra vires doctrine relates to the capacity and representation of a
company.
In terms of common law, a contract is ultra vires the company when the
conclusion of the transaction is beyond its legal capacity. In other words,
if a company's principal business is catering, it would be outside the
company's capacity to buy an expensive yacht on behalf of the company.
The ultra vires doctrine is based on the understanding that a company
exists in law only for the purpose for which it was incorporated. According
to the ultra vires doctrine, when an act on behalf of the company falls
outside its main and ancillary objects, the company does not exist in law
and, consequently, such an act is not binding on the company.
Such an act is described as an ultra vires act. In the catering example
mentioned above, it would be within the scope of the principal business
(intra vires) for the company to purchase a refrigerator that it needs for
catering.
, Whether a particular contract falls within the capacity and powers of the
company is a question of fact. If the main purpose of the company was to
carry on the business of a hotel, it is clear that acts necessary to achieve
this purpose, for example, the purchasing of furniture and the hiring of
staff, are INTRA VIRES.
Impact of the Companies Act 2008
It is important to understand the impact of the Companies Act 2008 on
the ultra vires and constructive notice/knowledge doctrines.
Representation 🎭
REPRESENTATION relates to a person acting under the company's
authority. If a company gives an agent authority to act on its behalf, the
agent possesses actual authority and will bind the company in acts which
fall within the scope of the mandate given to him or her.
Estoppel
A company may also be bound to contract on the basis of estoppel where
a person purporting to conclude a contract on its behalf lacked the actual
authority, express or implied, but the other party to the contract had been
misled by the company into believing that he or she did have authority.
This is called ostensible or apparent authority. In other words, a
company may be liable to a bona fide third party if it is represented by
someone who does not have actual authority, and where the company
allows such a person to represent the company as if that person did have
authority.
ToyZ Ltd Example
The Memorandum of Incorporation of ToyZ Ltd states that the company
only has the power to sell toys. The board of directors of ToyZ Ltd decides
to buy a luxury yacht on behalf of the company.
(a) Will the contract of purchase and sale be valid?
Yes. Section 19(1)(b) of the Companies Act provides that a company has
all the legal capacity and the powers of a natural person, except to the
extent that a juristic person is incapable of exercising any such power, or
the company's Memorandum of Incorporation provides otherwise.
Therefore, the capacity of a company is no longer limited by its main or
Legal personality is a legal concept that affects the existence of a
company.
Incorporation vs. Registration
It is important to distinguish between incorporation and registration,
and the effect thereof on a company's legal personality.
Legal Status
The legal status of a company needs to be understood after incorporation,
but before registration.
Limited Liability
Limited liability and the practical implications of separate legal
personality is an important concept in entrepreneurial law.
Lifting the Corporate Veil 🎭
The common law concept of lifting the corporate veil with reference to
case law needs to be understood, as well as the statutory adoption of the
common law concept of lifting the corporate veil.
Cape Pacific v Lubner Case
The Cape Pacific v Lubner case is relevant to the doctrine of "lifting the
veil."
The case involved:
Lubner: A businessman.
LCI: A company owned by a Trust, with Lubner as a trustee.
GLI: A company with Lubner as a 100% shareholder.
Lubner owned shares called Findon shares, which controlled an
apartment in Clifton. For tax reasons, Lubner sold these shares to LCI, who
later sold them to Cape Pacific. Lubner's family was upset by the sale
because they lost access to the Clifton apartment.
Lubner tried to get out of the sale, but Cape Pacific obtained a court order
for LCI to hand over the Findon shares. In a last-ditch effort, LCI sold the
Findon shares to GLI.
,Cape Pacific applied to have LCI held in contempt, but LCI claimed it no
longer had control of the shares, making performance an impossibility.
Cape Pacific then launched a case against LCI, GLI, and Lubner, seeking to
lift the corporate veil.
The initial court dismissed Cape Pacific's case, but an appeal was
launched. The Supreme Court of Appeal (SCA) stated that courts should
not lightly disregard a company's separate personality. However, in cases
of fraud, dishonesty, or other improper conduct, the need to
preserve the separate corporate identity must be balanced against policy
considerations favoring piercing the corporate veil.
The SCA found that Lubner misused both LCI and GLI, effectively using
them as his alter egos in their dealings with the Findon shares. The court
concluded that policy considerations strongly suggested that the
corporate veil should be pierced to reveal Lubner as the true "villain."
Key points from the SCA's decision:
Courts generally need to find an element of fraud or other improper
conduct to pierce the corporate veil.
The need to preserve corporate identity should be balanced against
policy considerations in cases of fraud or dishonesty.
The corporate veil can be pierced when a company is used as an
alter ego for fraudulent or improper dealings.
Types of Companies 🏢
The 2008 Companies Act provides for two principal types of companies:
Profit companies
Non-profit companies
A company is considered a profit company if it is incorporated for the
purpose of financial gain for its shareholders. The Act does not restrict the
maximum number of shareholders in a profit company. There are four
types of for-profit companies: public company, state-owned enterprise
(SOC), personal liability company, and a private company.
Other types of companies include external companies and domesticated
companies.
,State-Owned Enterprise (SOC)
A state-owned enterprise (SOC) is a national government business
enterprise that falls within the meaning of a state-owned enterprise under
the Public Finance Management Act, or is owned by a municipality. An
SOC provides goods or services in accordance with ordinary business
principles and is financed mostly from sources other than tax or statutory
money.
Interesting Fact: Municipalities owe Eskom a staggering amount of money,
which poses a serious risk to Eskom's financial stability.
Company Formation 📝
Procedural steps need to be followed in the incorporation of a company as
well as the registration process.
Pre-incorporation contracts ✍️
The legal effects of registration of a company and pre-incorporation
contracts should be explained.
Ultra Vires Doctrine 🚫
The ultra vires doctrine relates to the capacity and representation of a
company.
In terms of common law, a contract is ultra vires the company when the
conclusion of the transaction is beyond its legal capacity. In other words,
if a company's principal business is catering, it would be outside the
company's capacity to buy an expensive yacht on behalf of the company.
The ultra vires doctrine is based on the understanding that a company
exists in law only for the purpose for which it was incorporated. According
to the ultra vires doctrine, when an act on behalf of the company falls
outside its main and ancillary objects, the company does not exist in law
and, consequently, such an act is not binding on the company.
Such an act is described as an ultra vires act. In the catering example
mentioned above, it would be within the scope of the principal business
(intra vires) for the company to purchase a refrigerator that it needs for
catering.
, Whether a particular contract falls within the capacity and powers of the
company is a question of fact. If the main purpose of the company was to
carry on the business of a hotel, it is clear that acts necessary to achieve
this purpose, for example, the purchasing of furniture and the hiring of
staff, are INTRA VIRES.
Impact of the Companies Act 2008
It is important to understand the impact of the Companies Act 2008 on
the ultra vires and constructive notice/knowledge doctrines.
Representation 🎭
REPRESENTATION relates to a person acting under the company's
authority. If a company gives an agent authority to act on its behalf, the
agent possesses actual authority and will bind the company in acts which
fall within the scope of the mandate given to him or her.
Estoppel
A company may also be bound to contract on the basis of estoppel where
a person purporting to conclude a contract on its behalf lacked the actual
authority, express or implied, but the other party to the contract had been
misled by the company into believing that he or she did have authority.
This is called ostensible or apparent authority. In other words, a
company may be liable to a bona fide third party if it is represented by
someone who does not have actual authority, and where the company
allows such a person to represent the company as if that person did have
authority.
ToyZ Ltd Example
The Memorandum of Incorporation of ToyZ Ltd states that the company
only has the power to sell toys. The board of directors of ToyZ Ltd decides
to buy a luxury yacht on behalf of the company.
(a) Will the contract of purchase and sale be valid?
Yes. Section 19(1)(b) of the Companies Act provides that a company has
all the legal capacity and the powers of a natural person, except to the
extent that a juristic person is incapable of exercising any such power, or
the company's Memorandum of Incorporation provides otherwise.
Therefore, the capacity of a company is no longer limited by its main or
