Holding a director personally liable
for actions of their company
Legal term: "piercing the corporate veil"

Directors often use the separate legal personality created by their company to get away with unacceptable debt and bad decisions. Here we discuss circumstances in which a director can be personally liable.

Navigate: Litigation > Holding a director liable

Litigation Menu

Piercing the corporate veil

Private companies are regarded in our law as separate legal entities from the people who incorporate them and who work for them. This means that the person who starts and directs a company, despite being the company owner, is regarded as being a separate and distinct legal person from the company. This is a legal fiction and largely a public policy decision to encourage commerce, encourage risk-taking and to allow people to work for companies without the fear of being liable for the company's liabilities.

In principle therefore, one cannot normally sue a director for the liabilities of the company they run - even though, in reality, it was the director who made the decision which resulted in the liability.

Piercing the corporate veil can succeed only under certain circumstances.

Piercing the corporate veil requires an application in terms of Section 20(9) of the Companies Act, asking the Court to disregard the separate juristic personality of the company from its director(s).

Common Scenarios

Common scenarios where a commercial client may want to pierce the corporate veil:

Failure to pay debts - A Service Provider, having rendered its services to its Client, is dismayed to find the Client cannot pay for the services. Feeling slighted, the Service Provider business wonders whether they can hold the director of the Client personally liable - after all, they shouldn't have contracted for the services if they couldn't afford it.

Theft of consignment stock? A materials manufacturer has allowed a smaller retailer shop to hold its stock on consignment, and only pay after receiving payment from the consumer. In the meantime, the retailer has sold the stock but failed to pay over to the manufacturer, claiming the stock has not been sold yet. Can it be viewed as fraud, or theft?

Billing for services never rendered - A client contracts the services of a marketing company to manage its social media. Later, noticing the poor marketing performance, the client notices that the marketing company has been billing it for over a year for services which it has never once rendered.

Malicious damage to company - a shareholder of a company, embroiled in a dispute with his other shareholder, finds that his counterpart has moved company clients, assets and finances into another company shell in an attempt to dilute the value of the disputed shares.

These scenarios do not necessarily qualify for such an application. There needs to be an unconscionable abuse of the company's juristic personality.

Requirements for piercing the corporate veil

Piercing the veil requires an application to the High Court in terms of Section 20(9) of the Companies Act 71 of 2008. This application asks the Court to disregard the separate legal personality of the company and instead hold the director personally liable. Section 20(9) require that there be an "unconscionable abuse of juristic personality of the company as a separate entity".

In such a case, the Court may then declare that the company is to be deemed not to be a juristic person, and therefore that the director in question is liable for the company's unconscionable conduct.

There is no hard and fast set of circumstances which will result in a successful application, but case law shows that the following circumstances may warrant it. Usually there needs to be some form of conduct which is unconscionable, going further than simply bad business or financial acumen. It may be necessary to prove elements of fraud and/or dereliction of fiduciary duty to succeed with a Section 20(9) application.

Fraud or Misrepresentation - If the company is used to commit fraud or deceive creditors, courts might pierce the veil to hold individuals accountable.

Failure to comply with fiduciary responsibilities - Companies are required to follow certain formalities, such as holding regular meetings, maintaining proper records, and keeping personal and corporate finances separate. If these formalities are ignored, it might indicate that the corporation is merely an alter ego of its owners.

No real alter ego - When a company director intertwines their personal affairs with that of the company, for example mixing personal and business finances - the company becomes a front for the director's personal dealings.

Insolvency - If a company is insolvent and its owners continue to operate the business as if it were solvent, especially in a way that harms creditors, the veil might be pierced to ensure that the individuals behind the company are held accountable.

Misuse of company - If the company is used as a shell to circumvent legal obligations, such as avoiding taxes or liability for illegal activities, the veil may be pierced.

Injustice or Unfairness - Courts may pierce the veil in cases where maintaining the separate corporate existence would result in an unjust or unfair situation, such as when a company’s actions lead to personal harm or financial loss that should be addressed.

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.

Commercial Law | Litigation | Corporate Governance | Structuring

Get the Legal Advantage for your business.