We are all aware of business entities like a company; but why do people use companies to operate their business affairs? One of the obvious answers to that question, is that people use a company in order to separate their personal affairs and their business affairs.
In terms of Section 19(1)(a) and (b) of the Companies Act 71 of 2008, from the date and time that the incorporation of a company is registered, as stated in its registration certificate, the company is a juristic person, which exists continuously until its name is removed from the companies register in accordance with this Act and has all of the legal powers and capacity of an individual.
In simple terms, once a company is incorporated, it has the same status as any other person in our law. In South African law, human beings are natural people and entities like companies, are artificial or legal or juristic people. Hence, once incorporated, a company becomes a juristic person and can do most things that a natural person can do, like enter into business transactions.
It does happen, that when people do business with companies, that they require the natural people behind the company to take on the responsibilities of the company. In the property industry, a very common example would be where a company mortgages a property and the bank providing the funding only provides the funding on condition that the shareholders and/or directors of the company sign surety for the company. In the event that the company cannot repay the debt, the sureties would then be required to do so.
Section 20(9) of the Companies Act makes provision for the piercing of the corporate veil. This means that in certain instances, the natural people involved with the company cannot hide behind the veil created by the juristic person. Section 20(9) of the Companies Act says:
Section 20(9)
If, on application by an interested person or in any proceedings in which a company is involved, a court finds that the incorporation of the company, any use of the company, or any act by or on behalf of the company, constitutes an unconscionable abuse of the juristic personality of the company as a separate entity, the court may—
(a) declare that the company is to be deemed not to be a juristic person in respect of any right, obligation or liability of the company or of a shareholder of the company or, in the case of a non-profit company, a member of the company, or of another person specified in the declaration; and
(b) make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a).
This means that a natural person may very well become responsible for the acts of a company.
Interestingly, the PPRA’s Code of Conduct, likewise foresees the possibility of a property practitioner (PP) using a company as a front.
Regulation 34.2.1.6 says that a property practitioner shall not through the medium of a company, close corporation or third party, or by using such company, close corporation or third party, or by using such company, close corporation or third party as a front or nominee do anything which would not be permissible for him to do if he were operating as a property practitioner. A prime example would be where a PP wishes to buy a client’s property that they have just listed but doesn’t want the client to know that it is the PP that is buying the property. The PP presents an offer from a company, of which the PP is one of the shareholders, and does not disclose this fact to the seller.
Regulation 34.3.1.7 says that a PP may not accept any mandate or instructions for work in respect of immovable property if his interest therein would compete with his obligations towards an existing client in respect of the same immovable property without first disclosing such interest in writing to such client, and
Regulation 34.3.3 says that no estate agent shall purchase directly or indirectly for himself, or acquire any interest in, or conclude a lease in respect of, any immovable property in respect of which he has a mandate, without the full knowledge and consent of the person who conferred the mandate, or sell or let his own immovable property or any immovable property in which he has any direct or indirect interest, to any prospective purchaser or lessee who has retained his services, without that purchaser or lessee having full knowledge of his ownership of, or interest in, such immovable property.
The Code of Conduct is hence very clear about potential conflicts of interest and what to do in the event of such possible conflicts.
Next week we will discuss a very interesting case dealing with a PP using a company in an unacceptable manner and how the Court pierced the corporate veil.
You are welcome to email me on graeme@cpmd.co.za.
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