Bargaining Council for the Furniture Manufacturing Industry, Kwazulu-Natal v UKD Marketing CC and Others (DA 2/11) [2012] ZALAC 24; [2013] 2 BLLR 119 (LAC); (2013) 34 ILJ 96 (LAC) (20 August 2012) per Davis JA [Waglay DJP and Jappie JA concurring]

The Labour Appeal Court (LAC) disallowed the appeal and upheld the judgment of Molahlehi J in the Labour Court.  The Bargaining Council failed to prove that the unbundled entity in the furniture sector was required to register with the Council.  This meant it fell outside its scope and that its collective agreements did not apply.

The LAC also held that a corporate veil will only be lifted or pierced if the corporate entity is obviously a façade to perpetrate fraud or dishonest practices.

This did not apply as the new entity was unbundled for genuine operational requirements.

A punitive costs order on the scale as between attorney and own client was made against the Council because the inner workings, business model and financial statements of the unbundled entity had been made to a direct competitor.

Background

The appeal was against a judgment of Molahlehi J who refused an application by the appellant for an order that the first respondent was obliged to have:

  • registered with the appellant in terms of clause 17 of the main collective agreement promulgated in Government Gazette No 18896 of 18 May 1998;
  • complied with the various terms of that agreement, including clause 26 thereof, and the various other collective agreements in the furnishing industry within the Kwazulu-Natal Province in respect of the said period;
  • kept records provided for in clause 20 of the main collective agreement; and
  • paid to the appellant the amounts provided for in clauses 13 and 16 of the main collective agreement and clause 13 of the appellant’s provident fund and mortality benefit association collective agreement; and
  • paid its employees the wages prescribed by clauses 2 and 16 of the main collective agreement.

Excerpts

[19] Later Mr Premraj was described as a ‘charismatic leader who is in full control of his staff and business’.  But, in the very same document, the following appears as a description of the new business strategy:

‘This new business strategy was in line with Government’s philosophy of job creation and Black Economic Empowerment. Bengy resolved to restructure his entire business based on the principle of empowerment and job creation.

He Empowered his staff by sharing profits and assisted then in becoming the employers in their own right. Mr Premraj empowered his production staff and allowed them to form their own companies, which are now contracted to UKD. The benefit of this restructuring enabled the creation of job opportunities for more people. Employees formed their own companies and started contracting to UKD Marketing to manufacture UKD Marketing to manufacture modular kitchens on a piece meal basis.

The benefit of the restructuring to UKD is a fixed labour cost per unit produced. The benefit to these subcontractors is the distribution of wealth as they now participate in profit sharing… UKD has now engaged thirteen subcontractors to produce kitchen components each with its own staff, machinery and infrastructure and quality control standards.’

[20]      In summary therefore, when all of this evidence is read and analysed as a whole, it did not provide a sufficient basis to enable this Court to conclude that, notwithstanding no direct explanation on the part of respondents, appellant’s version was more probable than not.  To the contrary, there is no justification, on the probabilities, to have concluded that the various proprietorships and close corporations did not operate for their own account or that it could be said that first respondent had any financial interest therein.

In particular, the uncontroverted evidence was that there were close corporations registered as employers with UIF, some were VAT vendors duly registered with SARS, the various respondents hired and fired employees, paid their wages, made statutory deductions and regulated the hours of work of those who were so employed.  The evidence certainly did not suggest that these respondents were not entitled to assume additional work outside of that which was required in terms of orders which had been procured by first respondent.

Lifting the corporate veil

[21] It is now possible to examine appellant’s argument about lifting the corporate veil.  In Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd [1995] ZASCA 53; [1995] 2 All SA 543; 1995 (4) SA 790 (A) at 803 D Smalberger JA noted that:

‘[o]ver the years it has come to be accepted that fraud, dishonesty or improper conduct could provide grounds for piercing the corporate veil.’

At 803 G He warned that

‘it is undoubtedly a salutary principle that our Courts should not likely disregard a company’s separate personality but should strive to give effect to and uphold it.  To do otherwise would negate and undermine the policy and principles that underpin the concept of separate corporate personality and the legal consequences that attached to it.’

At 803 H The learned judge of appeal then went on to say that, where fraud dishonesty or other improper conduct was to be found, then further considerations would influence the overall assessment as to whether the corporate veil should be pierced.  In this connection, the court would proceed to examine the substance rather than the form of the adopted structure in order to determine whether there has been a misuse of corporate personality which would justify it being disregarded.

Smalberger JA then noted that fraud or improper conduct was not the only basis by which the corporate veil could be lifted.

Citing Gower (The Principles of Modern Company Law (5ed at 133)) at 804 C

‘it also seems clear that a company can be a facade even though it was not originally incorporated with any deceptive intentions; what counts is whether it has been used as a facade at the time of the relevant transactions.’

[22] In this case, the relevant transactions appear to be between first respondent and a range of other entities which are owned by persons at arm’s length from the members of first respondent.  Furthermore the conduct of the balance of the respondents, particularly in the manner in which they are registered for VAT, pay necessary amounts pursuant to their obligations as employers such as UIF, and when it cannot be established that, in the event of excess capacity, these other respondents are not entitled to take on further orders, does not provide the evidential basis to disregard a company’s separate personality, particularly when the authorities consider that this decision should only be taken in rare cases.

Cape Pacific Limited at 803 H.  In these proceedings, appellant has not made out a case which would justify conflating the entire structure and operation as set out in the minute of 28 September 2006 into a business conducted, organised and operated solely and exclusively by first respondent.  Yet, if the corporate veil cannot be so lifted, then that is the only plausible conclusion to be arrived at by this court.

Costs

[23]      The court a quo made a punitive costs order on the scale as between attorney and own client as a mark of displeasure by the court of the conduct of the appellant in disclosing the inner workings, business model and financial statements of the respondents to Mr Neethling, who was a direct competitor of first respondent. Mr Neethling himself had testified that it was an extremely competitive market where “there is a tremendous scrap to get your piece of pie”.  Accordingly, it must have been to his considerable benefit to obtain figures relating to the costs of respondents’ operation and to examine files and financial statements, invoice minutes of meetings and detailed information regarding the running of his competitors’ business operation.  These do not appear, in my view, to be any basis by which to disturb this particular order of the court a quo.