Company

Directors
 Who is a director (cont..)
• A company director is a person appointed , usually by the members of a
company , to manage the company on their behalf.
• In terms of section 197(1) a director includes an alternate director and a
person who is a member of a committee of a board of a company or an
audit committee of a company, irrespective of whether or not the person is
also a member of the company’s board.
• In other words a person that is not formally appointed as a director of a
company may be deemed to be a director if he or she occupies the position
of a director with or without lawful authority.
 Appointment of Directors
Initial Appointment of Directors
• The first directors of a company are the incorporators of the
company, and such persons serve as directors of the company until
the minimum number of required directors has been appointed. [see
section 195(7]
• Persons disqualified from being appointed as Company directors –
[see section 200]
 Duties of Directors (cont…)
• The duties of directors arise from four different sources .
• Namely, their employment contracts(if any), the company’s
constitution (MOI) , the Companies and Other Business Entities Act
and the common law.
• At common law directors are subject to fiduciary duties to exercise
their powers bona fide (in good faith ) and for the benefit of the
company.
• They also have the duty to exercise their powers with care and skill.
Common law Duties of Directors (cont…)
• The New Companies Act has codified directors’ fiduciary duties.
• The codified duties include duties similar to the common law
fiduciary duties and the duty of directors to perform their functions
with reasonable care and skill.
 Common law Duties of Directors (cont..)
The newly codified Common law duties of directors in the COBE Act of 2019 are :
• The Duty of Care and Business Judgement Rule (section 54)
• The Duty of Loyalty (section 55)
• Duty to disclose Conflict of Interest (section 57)
• Duty to act fairly as between shareholders of the company [section 195(5)(f)]
• The duty to act in the interests of the company’s employees [Section 195 (5)(b)]
• The duty to account [Section 195(6)]
• Read sections 54,55, 57 , 195 and section 211
Fiduciary Duty and the duty of care, skill and diligence.

• A fiduciary duty is the legal responsibility to act solely in the best

interest of another party.
• The fiduciary duty and the duty of care, skill and diligence entail that
the director has the duties to act in good faith for a proper purpose and
in the best interests of the company.
• To determine whether a director is acting with the required degree of
care and skill, a director must pass both an objective test and a
subjective test.
• An objective test is applied to determine what a reasonable director
would have done in the same circumstances.
 Fiduciary Duty and the duty of
care, skill and diligence (cont…)
• The Subjective test is also applied in that the general knowledge, skill and experience of
the director in question are taken into account.
• For example a director who is a chartered accountant will therefore need to be more
skilful when it comes to the company’s financial affairs than a director who is an electrician
by trade.
• Atlas Organic Fertilizers v Pikkewyn Guano 1981(2) SA 173 a director gave notice of his
intention to the leave the company. He was to be a director of the company he was going to
join. During the period he was serving notice, he enticed the employees of the company he
intended to leave , so that they could leave and join his new company. The court was of the
opinion that his intentions were not bona fide to the company’s interests.
 The Business Judgement Rule

The business judgement rule is a presumption that in making a

decision , the directors of a corporation acted on an informed basis , in
good faith and in the honest belief that the action taken was in the best
interest of the company.
The Rule mostly applies in determining the procedural aspects of the
director’s decision or the decision making process and only in
exceptional cases is it invoked to review the merits of their decision.
 The Business Judgement Rule
(cont…)
Like the Companies Act in South Africa, the COBE Act of 2019 introduced the
business judgement rule. [section 54 (4)]
• A director is regarded as having acted in the best interests of the company
and with the required degree of care, skill and diligence if the director:
• does not have a personal interest in the subject of the judgement.
• took reasonable steps to become informed about the matter.
• honestly believes when the judgement is made, that it is in the best
interests of the company.
 Duty of Loyalty
• Section 55 of the COBE Act states that the responsibilities in executing this duty include but are not limited to :
i. Not to use property of the entity for personal benefit or for the benefit of another person other than the entity;
ii. Not to disclose confidential information of the entity or not to use it for personal benefit or for the benefit of
another person other than the entity;
iii. To communicate to the board or members at the earliest practicable opportunity any essential information;
iv. Not to abuse one’s position in the entity for personal benefit;
v. Not to compete with the interests of the entity
vi. Not to accept a benefit from a third party for doing or not doing the foregoing;
vii. Not to knowingly cause harm to the entity & to serve the interests of the entity in all transactions.
 Duty to disclose Conflict of Interest
(section 56- 57)
• A conflict of interest means any financial or other interest which will actually or
potentially impair a director’s objectivity and his ability to act independently or
which creates an unfair advantage for, or in favour of, any third party by virtue of an
existing relationship with the conflicted director.
• A conflict of interest implies more than individual bias, there must generally be
financial or other relationship interest which could directly influence the director’s
behaviour.
• A director who fails to take the requisite steps to avoid or terminate a situation
where he has a conflict of interest may be liable for breach of his fiduciary duty, in
addition to the civil and criminal penalties imposed in the section.
 Duty to disclose Conflict of Interest
(section 56- 57)
• Section 57 places an obligation on a director, officer or manager to
disclose conflict of interest in a matter that is to be considered in a
board meeting that he or an associate has personal financial interest.
• Any person referred to in section 55 who fails to comply with this
section breaches this section & shall be guilty of a criminal offence
and also liable to a civil penalty.
• Read section 195 (5) (a)-(f)
 Duties and liabilities of directors
• Directors ( and prescribed officers) will be liable in accordance with the principles
of the common law relating to breach of fiduciary duty, for any loss , damages or
costs sustained by the company as a consequence of any breach of duty by him
• to disclose a personal financial interest
• to avoid conflict of interest
• to act in good faith
• to act in the best interests of the company
• Read Section 197 (2) of the Act
 Number of Directors
• A private company with more than one and fewer than ten shareholders
shall have two or more directors.
• A private company with ten or more shareholders shall not have less
than three directors
• A public company shall have not less than seven and not more than
fifteen directors
• See section 195 (1)
Can an MOI vary the provisions of the Act in respect of directors?
 The Corporate Veil
• According to section 19, upon incorporation a company or a PBC
becomes a body corporate when the Registrar issues a certificate of
incorporation. This means that a company develops the capacities and
powers of a natural person with full legal capacity and is regarded as a
separate legal entity form its members.
• Salomon v Salomon Co Ltd was the first case to establish the
principle that a company is a separate legal person distinct from its
shareholders and directors ; and shareholders are in principle not
liable for the debts and liabilities of the company.
 Exceptions to the principle of separate
legal personality
• There are some instances, however ,where the
courts have pierced the corporate veil.
• When the corporate veil is pierced, the
protection afforded to the shareholders &
directors is removed, the focus then shifts
from the company to the natural person
behind it or in control of its activities as if
there were no division between such a person
and the company.
• In a such a case personal liability is attributed
to someone who misuses or abuses the
principle of corporate personality.
 Piercing the corporate veil
• When the courts pierces the veil, it treats the liabilities of the
company as those of its shareholders or directors, & disregards the
corporate personality of the company.
• Piercing the veil ought to be used as a remedy of last resort. It should
not be resorted to if another remedy on the same facts could
successfully be employed in order to administer justice between the
parties.
 Instances where the courts have pierced the corporate veil

i. To perpetrate Fraud
ii. For Dishonest /improper purpose (abuse of corporate principle)
iii. To evade a contractual obligation
- In explaining these instances students must use case law.
When will the courts pierce the corporate veil ?
• The law is not settled with regards to the circumstances in which it is permissible to pierce the corporate
veil because each case involves a process of enquiry into its own unique facts.
• In Le’BergoFashions CC v Lee & Another, the first respondent Lee, had signed a restraint of trade
agreement in her personal capacity not to compete with the applicant ,but had then used her company,
the 2nd respondent, of which she was the sole shareholder & director, to compete with the applicant. The
company had not been a party to the restraint of trade agreement,
• the question before the court was, whether the restraint of trade obligation could be imposed on
the company.
• The court found that Lee had effectively carried on the business of the company. In their daily activities,
Lee and the company had acted as one persona, and by her conduct and business activities she had not
treated the company as a separate entity but merely as an instrumentality or conduit for promoting her
business affairs. This was sufficient to sustain an argument that Lee had been guilty of improper conduct
in using the company as a façade behind which she engaged in business in breach of the restraint of trade
agreement.
 Gilford Motor Co Ltd v Horne [1933] Ch
935
• Mr Horne was a former managing director of Gilford Motor Home Co Ltd (Gilford).
• His employment contract prevented him from attempting to solicit Gilford’s customers in the event that
Horne left Gilford’s employ.
• Horne was fired and he subsequently set up a competing company which undercut Gilford’s prices.
• Gilford did not have any legal restraints upon Horne’s company, only Horne himself.
• Gilford commenced proceedings against Horne individually, claiming that Horne’s company was an
attempt to evade legal obligation (not soliciting customers).
• The English Court of Appeal held that the company was set up to evade Horne’s contractual obligations.
• The Court “pierced the corporate veil” and ordered an injunction against Horne.
• Courts can “pierce the corporate veil” if a company is simply a mere device to evade legal obligations,
though this is only in limited and discrete circumstances
Another illustration of how courts disregarded the separate legal personality of a company is the
, Jones v Lipman[1962]1WLR case .

Lipman had concluded a contract to sell and to Jones . Thereafter Lipman asked to be released
from the contract and Jones refused , stating that if necessary he would sue for specific
performance . Pending the completion of the sale Lipman formed a company , of which he and a
clerk of his solicitor were the sole shareholders and directors and conveyed the land to the
company inorder to defeat Jones’sright to specific performance.

The court ordered specific performance against both Lipman & the company. The court
described the company as a sham or a mask of Lipman and held that the company was used as a
device by Lipman inorder to evade his contractual obligation. The court consequently held that
the remedy of specific performance could be granted in this case.
 Piercing the corporate veil cont…
• In most instances the courts uphold the separate existence of a company despite the
arguments that they shouldn’t do so.
• There must be compelling reasons for a court to ignore separate legal existence of a
company. But the grounds on which courts will pierce the corporate veil have been
difficult to state with certainty.
• The position has not been reached in our law where it is possible to state with any
degree of accuracy the circumstances in which the court will pierce the veil.
• In Cape Pacific Ltd v Lubner Controlling Investments and Others 1995 (4) SA the
appellate Division laid down a few general principles relating to the common law
instances of piercing the veil:
 Piercing the corporate veil cont…

• A court has no general discretion simply to disregard a company’s separate legal

personality whenever it considers it just to do so.
• There is no set of categories of instances governing when a court will pierce the veil, each
case must be decided on its own facts which, once determined, are of decisive importance.
• Where there is fraud and dishonesty or other improper conduct, a balancing approach
must be adopted where the concept of separate legal personality must be weighed against
those principles in favour of piercing the veil.
• Even if a company was legitimately established and operated but is later misused, the
corporate veil may nevertheless be pierced.
 Piercing the corporate veil cont…
• Where the veil is being used to justify a wrongful act or protect fraud e.g.
where a person is using the company to do what he cannot do himself ,
Le’Bergo Fashions Case.
• Where the veil is being used to run away from a contractual or legal
obligation , Jones case.
• There must be atleast some misuse or abuse of the distinction of principle
between the corporate entity and those who control it which results in an
unfair advantage being afforded to those who control the corporate entity.
 Cattle Breeders Farm (Pvt) Ltd v Veldman (2)1973(2)RLR 261

• Veldman was the owner of Cattle Breeders Farm (Pvt ) Ltd . He and his wife lived in
a company house which they considered their matrimonial home. A matrimonial
dispute arose and Veldman decided to evict his wife from the company house. The
wife objected arguing that the property was her matrimonial home and the
husband at common law had a duty to provide her with suitable accommodation as
his wife. Veldman ,used the company to try and evict his wife from the property on
the grounds that the company had a right to evict her since it owned the house.
• The court held that the company was nothing more than a façade behind which the
husband had control and possessed no greater rights to eject the wife than the
husband had.
 Piercing the corporate veil (cont…)
• In Contract Hauliers (Pvt) Ltd v Close Proximity Enterprises (Pvt) Ltd & Another (2017)
ZWBHC15, a Bulawayo case before Judge Makonese…
• The Plaintiff (Contract Hauliers Pvt Ltd) made payment of the sum of US$33000 to the 1 st
defendant (Close Proximity Enterprises Pvt Ltd) for 30000 litres of fuel . The 2 nd defendant
(Gregory Joseph) represented the 1st defendant at all material times in the entire transaction,
undertook to deliver the fuel within 3days from the date of payment.
• Payment was effected on the 1st defendant’s bank account but fuel was not supplied in terms
of the agreement , Plaintiff confronted the 2nd Defendant on numerous occasions who gave a
string of excuses until he eventually revealed that he had paid a 3 rd party in Harare who had
diverted the fuel elsewhere. 2nd defendant indicated that he had reported the matter to the
police.
 Piercing the corporate veil (cont…)
• The issue before the court, was whether the 2 nd defendant was to be held jointly and
severally liable with the 1st defendant.
• The Plaintiff stated that as far as he was concerned the 1 st defendant executed all its
functions through the medium of the 2 nd defendant. Gregory Joseph was the managing
director, salesman, he was the face of the 1 st defendant. 1st defendant owned no property
in its name & shareholders were the 2 nd defendant and his wife. In essence the 1 st
defendant was the “alter-ego” of the 2nd defendant.
• It was held that there was no proof that the company enjoyed a separate legal existence.
The 2nd defendant was the company himself, he employed no secretary, no accountant &
no salesman. And the 2nd defendant’s constant use of the words “me” and “my” in his
testimony was indicative of the fact that he and the 1 st defendant were just but one
entity. He should be in all circumstances held liable. The court was entitled to pierce the
corporate veil in order to cure the injustice.
 Piercing the corporate veil (cont…)
• Makonese J further stated that exceptions to the rule of separate legal personality of a company
arise in the following instances:
• The Company is clearly a sham
• The Company is a mere puppet
• There is fraud being perpetrated
• There is misrepresentation which was made .
• The company is the director’s alter ego.
• There is a failure to observe corporate formalities.
• The defendant had benefited unjustly.
• Alter-ego refers to a legal doctrine whereby the court finds a corporation lacks a separate identity
from an individual or corporate shareholder, resulting in injustice to the corporation’s debtors.
 Ratio-decidendi

• 1 defendant was 2 defendant ‘s alter ego. He was and is the company. There was
st nd

no board of directors to run the affairs of the company. 2 defendant was the
nd

managing director & the salesman. He was answerable to no one but himself.
• 2 defendant operated 1 defendant as a tool of trade & never treated it separately.
nd st

He operated it from his residence.

• He made false misrepresentation that he could supply fuel within 72hours of
payment. The misrepresentation turned out to be false and caused financial
prejudice.
• 2 defendant was literally gambling with plaintiff’s money & tossing it for luck or
nd

some fortune.
 Piercing the corporate veil in terms of the
COBE Act
Instances where statutes may be used to pierce the corporate veil:
1. In terms of s83 (2), where a company trades with no members for more than 6 months ,any person
who willingly causes it to do so will be liable, jointly and severally with the company for all its debts.
2. In terms of s197 (3) , a director of a company may be held liable in accordance with principles of
common law relating to the breach of fiduciary duty ,for any loss, damages or costs sustained by the
company as a consequence of the breach by the director of a duty contemplated in section
54,55,56,57,195(4),195(5)&195(6)
3. Where a prospectus includes any untrue statement, any person who authorised the issue of the
prospectus shall be guilty of an offence and liable to a fine s108-109.
4. For the purposes of investigating operations of a company the veil may be lifted in terms of s39-43.
Piercing the corporate veil in terms of the
COBE Act
5.Interms of s30(3),section penalises any person who, acting on behalf
of the company or PBC, Fails to comply with the requirement of the
format of business letters shall incur personal liability for the debt
incurred by the company as a result of the said non-complaint letter.
6.Interms of s223 ,members or shareholders of company may apply to
the court arguing that, the company affairs are handled in an oppressive
or prejudicial manner.