Footwear Trading CC v Mdlalose  5 BLLR 452 (LAC)
Division: Labour Appeal Court, Johannesburg
Case No: JA2/04
Before: Nicholson, Judge of Appeal
Appeal in terms of section 166 of the LRA
Company law Piercing corporate veil Court will in appropriate circumstances look beyond company’s corporate identity when seeking to identify true employer Requirements restated.
Employer Identification of Companies with common directors and staff deemed coemployers where same directors effectively control activities of each entity Controlling entity jointly and severally liable for complying with award.
Section of the LRA considered:
Section 213 (definition of “employee”)
After the respondent was dismissed, she referred a dispute to the CCMA and obtained an award requiring her former employer, Fila (Pty) Ltd, to pay her compensation. The appellant was not a party to the arbitration proceedings. After that, the respondent applied to the Labour Court for an order making the arbitration award an order of court against Fila. Fila informed the Court that it did not oppose the application “in principle”, but stated that it was dormant and that the appellant had taken over certain of its assets. Fila also informed the Court that the respondent’s position had become redundant and that it had offered to retrench her on four weeks’ notice, with two weeks’ severance pay. In response, the respondent filed supplementary papers in which her former employer was identified as “Fila South Africa (Pty) Limited t/a Footwear Trading CC”. The respondent then sought an order declaring the appellant and Fila to have been her “coemployers” and as such jointly and severally liable to comply with the award. The appellant filed an answering affidavit stating that Fila was a separate juristic entity, and that it merely performed administrative functions for Fila. The Labour Court made the award an order of court, and declared Footwear jointly and severally liable with Fila for complying with the order. The appellant contended inter alia that the Labour Court had erred by finding on the facts that it had been a “coemployer” of the respondent.
The Court noted that the appellant’s name appeared on a number of documents pertaining to the disciplinary and arbitration proceedings. In other documents, a “hybrid” combination of the names of the two companies appeared. This created confusion. The Court noted further that since there is no definition of “employer” in the LRA, an employer’s identity is to be gleaned from the definition of “employee”, as defined ie a person who “received service” from another. While a registered company is a legal person distinct from the members who compose it, in certain circumstances a company’s
Page 453  5 BLLR 452 (LAC)
separate personality will be disregarded and liability fixed elsewhere for ostensible acts of the company. The Court held that, at best for the appellant, the facts demonstrated that the real power of decisionmaking and the ability to pay wages vested in it. Under such circumstances, the company or person(s) who had control of the undertaking should be regarded as the employer.
The Court observed further that juristic personality is frequently abused. Where a corporation is a mere alter ego or conduit of another person, legal personality may be disregarded. While the corporate veil is normally lifted to identify the shareholders or individuals who are the true perpetrators of a company’s acts, it may also apply in situations where companies and close corporations are “juggled around like puppets to do the bidding of the puppet master”. The respondent could be forgiven for concluding that the names of the appellant and Fila were used interchangeably whenever the guiding spirits so moved. Thus, although the appellant and Footwear were separate legal entities, the effect of the conduct of the appellant’s managing member and his staff was to make them joint or coemployees.
The Court held further that by virtue of its numerous representations that it and Fila were coemployers the appellant was estopped from denying that it was the respondent’s employer.
As to the fact that the appellant had not participated in the conciliation and arbitration proceedings, the Court noted that the same personnel represented both entities and they must accordingly have been aware of the proceedings. It would therefore be unconscionable to allow them to disavow knowledge of the proceedings at this stage.
The appeal was dismissed.
- The respondent was dismissed from her employment on or about 8 September 2000. She referred an unfair dismissal dispute to the Commission for Conciliation, Mediation and Arbitration (the “CCMA”) for conciliation and then arbitration. A Commissioner of the CCMA arbitrated the dispute and found in the respondents favour. The employer party was cited in the referral to the CCMA as Fila (Pty) Limited (“Fila”).
- The Commissioner found that the dismissal was both substantively and procedurally unfair and ordered that the respondent be reinstated from the date of her dismissal and be paid the remuneration she would have been paid between the date of her dismissal and the last date of the arbitration. He ordered the reinstatement to be effective as form 14 May 2001.
- It is common cause that the appellant Footwear Trading CC (“Footwear”) was not a party to the proceedings. On 24 May 2001 the respondent, as applicant, filed an application under notice of motion in which she cited in the heading Fila South Africa (Pty) Limited as the respondent and sought an order making the arbitration award of the CCMA Commissioner an order of Court as against Fila alone, in the order she sought relief also in the form of compensation from the date of her dismissal 8 September 2000 to the last day of the arbitration that is 20 April 2001 in the sum of R 7 700. In the heading and body of the founding affidavit, however, she identified the respondent as “Fila South Africa (Pty) Limited/Footwear Trading CC”.
Page 454  5 BLLR 452 (LAC)
- Fila replied to the application in terms of section 158(1)(c) of the Labour Relations Act 66 of 1995 (“the Act”) by filing a notice instead of an answering affidavit. In the notice the following points were made:
- Fila did not in, principle oppose the application that the arbitration award be made an order of the Labour Court;
- Fila was dormant, and that Footwear had taken over certain assets of Fila but had not taken it over as a going concern in terms of section 197 of the Act;
- the position of Mdlalose had become redundant and that Fila had offered to retrench her on the basis that she would be paid four weeks wages in lieu of notice plus two weeks wages as severance compensation.
- The employee thereafter filed a further “supplementary affidavit” in which the heading of the affidavit was changed and the respondent was now identified as “Fila South Africa (Pty) Limited t/a Footwear Trading CC”. In the supplementary affidavit, the employee sought an order declaring Footwear and Fila to be her co employers, and declaring them to be jointly and severally liable to comply with the arbitration award.
- It was alleged in this application that both Fila and Footwear employed the respondent on 15 September 1998, that Footwear instituted disciplinary action against her and that Footwear Trading faxed a pre arbitration minute to Newu, the union. It was also alleged that Footwear requested the CCMA to subpoena a party to give evidence during the arbitration and that the owners and directors of Fila and Footwear were the same. The two entities carried on business at the same address, that the name of Fila and Footwear appeared on the respondent’s payslips and that the two parties were refusing to reinstate the respondent.
- In response to the supplementary affidavit, Footwear filed an answering affidavit alleging that Footwear and Fila were two separate entities. Proof thereof was attached by supplying documentation from the Registrar of Close Corporations. It was further alleged in the answering affidavit that Footwear was not a party at any stage to the initial referral nor to the arbitration proceedings, that there was no section 197 (Act 66 of 1995) transfer nor had that been relied upon by the respondent in her papers, and that Footwear merely carried on certain administrative functions for Fila.
- The nature of the administrative arrangements between Footwear and Fila were explained in terms of which it was alleged that the administrative costs were charged to Fila South Africa (Pty) Limited. An allocation schedule was put up to show how labour costs were in fact charged by Footwear to Fila. Footwear also denied that there was any employment relationship between the parties.
- The respondent filed a replying affidavit in which numerous additional and new allegations were made for the first time in support of the averment that Footwear and Fila were coemployers. The replying affidavit boldly alleged that Fila and Footwear were one and the same entity a submission that had as its aim presumably the piercing of the corporate veil, a point that the court a quo did not determine.
- The general rule is that the applicant has to make out his case in his founding affidavit (Director of Hospital Services v Mistry 1979 (1) SA 626 (A); Shepherd v Mitchell Cotts Seafreight (SA) (Pty) Ltd 1984 (3) SA 202 (T); GNH Office Automation CC and another v Provincial Tender Board and others 1996 (3) All SA 87 (Tk)).
- The court has discretion whether or not to allow an applicant to supplement his founding affidavit in reply, but will not allow the rules to tyrannise the court and put form above substance (Registrar of Insurance v Johannesburg Insurance Co Ltd (1) 1962 (4) SA 546 (W)). The appellant did not seek the opportunity to file further affidavits to deal with these issues when the matter was argued in court on 20 September 2002 and part heard it was not adjourned to a later date nor do the facts, which will appear hereinafter persuade me to strike the averments and facts out.
- The matter came before the Labour Court where Ndlovu AJ, firstly, made the arbitration award an order of court in terms of section 158(1)(c) of the Act as against Fila, and, secondly, declared Footwear to be jointly and severally liable with Fila in terms of complying with the court order.
With leave of the court a quo Footwear appeals to this Court against the second part of the order.
- Ndlovu AJ found that it was an instance where the respondent alleged that two separate independent corporate entities were owned by the same persons, operated in the same or virtually the same business activity, used the same staff complement, on the same premises and the same machinery, equipment and stationery. The court held that as a result of this conduct of Fila and Footwear confusion was not only
foreseeable but it was certain to arise, most likely to the detriment and prejudice of innocent third parties involved in commercial or legal dealings with either of these entities.
- On this basis the court a quo concluded that there were deliberate malpractices which caused confusion the minds of employees and required the protection of the Labour Court. The court a quo concluded that Fila and Footwear indeed operated in such a way as to create a genuine impression in the eyes of the general public that the two entities were one and the same business operation. They were consequently coemployers of all employees employed either of them. For these reasons the order was granted.
- Mr Boda submitted, on behalf of the appellant, that there were two issues in this appeal, firstly, whether factually the court a quo’s finding that Footwear was a coemployer of the employee was correct, and, secondly whether in view of the provisions of section 191 of the Act it was competent for the court to declare Footwear liable to satisfy the award in circumstances where it was not party to the initial conciliation and arbitration proceedings. Mr Maluleke, a trade union official, appeared for the respondent.
- Mr Boda submitted that the court a quo‘s finding that Footwear was the coemployer of the respondent was wrong. He pointed out further that the court a quo did not regard the matter as one where a corporate entity
abused its legal personality status and sought the court’s leave to pierce the corporate veil. The court also did not regard the joinder or declarator as arising from remedies provided for in section 197 of the Act.
- Mr Boda argued on appeal that a dispute of fact as to whether there was an employment relationship between the appellant and the respondent was clearly raised in the answering affidavit. He submitted that Footwear explained the relationship between it and Fila and that it merely performed administrative functions for Fila. He maintained that there was nothing untoward about an administrative agency conducting business from the same premises as its principal or about a commercial relationship of this kind.
- Mr Boda submitted, correctly in my view, that the court a quo was required in these circumstances to apply the test set out in PlasconEvan Paint Ltd v Van Riebeeck Paints (Pty) Ltd 1984 (3) SA 623 (A) to the effect that the matter has to be determined on the appellant’s papers. He submitted that on this version the appellant denied the existence of an employment relationship squarely and explained that it was an administrative relationship with Fila more particularly that it merely performed administrative functions for it. The problem with this argument is that the respondent filed a number of affidavits that disputed this assertion more especially documents to which I will refer in a moment that showed that on many occasions the employer was shown to be Footwear or that the two entities were joint or coemployers.
- As I have indicated, the court a quo found that an impression had been created that Footwear was the co employer of the employees. Mr Boda submitted that the finding that there was confusion was not an unequivocal finding that Footwear Trading CC was indeed an employer of the respondent. I would point out that the notion that Fila traded as Footwear gains some credence from the title of the supplementary affidavit.
- The first point to be made is that Footwear did not clarify the fact that it was merely performing administrative functions and never was the employer or coemployer. Had that been the position namely that Footwear never was the employer or coemployer its name should never have appeared on documentation where one would expect that of the employer to appear. The name of Footwear, without any reference to Fila, appears on the following documents:
- respondent’s payslip for October 1999, when on appellant’s version she worked for Fila, as required by section 33 of the Basic Conditions of Employment Act 75 of 1997 (the “BCEA”);
- the notification to appear at a disciplinary hearing on 1 September 2000;
- a letter by Footwear written by DJ Strydom dated 7 March 2001 to expedite the arbitration proceedings in respect of respondent;
- a letter by Footwear written by DJ Strydom dated 13 March 2001 to the CCMA to ask for subpoenas to be issued for the arbitration;
- reminder dated 22 March 2001 concerning the same subpoenas;
(f ) a transcript of the disciplinary enquiry dated 27 March 2001 concerning respondent by DJ Strydom; and
(g) lists of union employees with trade union deductions for the months of April, June, July, August, October, December 1999, January, February, March, April, May, June, July, August, September 2000, some of which have the accompanying cheques bearing the name of Footwear.
- Against that evidence, we have the following documents that reveal Fila as the employer:
- A cheque dated 23 May 2001 in the sum of R7 700 for respondent’s arrear wages after the arbitration award; and
- A schedule dated June 2000 showing personnel under the heading of Footwear but showing respondent as employed by Fila.
- Apart from these documents, there are others that are issued from Footwear and Fila jointly as though they are coemployers, without any indication that one is the administrative body and the other the real employer, namely:
- A staff purchase/advertising requisition dated 21 May 1999;
- The 1997 Collective Wage Agreement that refers to the parties as Newu (the trade union) and “Fila South Africa (Pty) Ltd (Footwear Trading CC) hereinafter referred to as the employer”; and
- The addendum to the 1998 Collective Agreement referred to the same employer.
- As if matters were not sufficiently confusing as to who the employer(s) was (were) there are instances where a hybrid form of the two companies is utilised, namely:
- A list of senior employees entitled “Fila Footwear Trading”;
- An Employment Equity Report form that refers to Trading and Fila SA (Pty) Limited’; and
- “Footwear Trading” in a summary of a disciplinary hearing held on 11 May 2000.
- In determining who is (are) the true employer(s) it is of course necessary to bear in mind that the term “employer” is not defined in either the BCEA or the Act. An employer is therefore to be gleaned by reference to the definition of “employee” ie any person who “receives services” from another. Employers come in a range of juristic personae from incorporated companies, closed corporations, partnerships or individuals.
- It is trite law that a registered company is a legal persona distinct from the members who compose it (see
Dadoo Ltd and others v Krugersdorp Municipal Council 1920 AD 530 at 550).
- A court is justified in certain circumstances in disregarding a company’s separate personality in order to fix liability elsewhere for what are ostensibly acts of the company. This is generally referred to as lifting or piercing the corporate veil. In determining whether or not it is legally appropriate in
given circumstances to disregard corporate personality, one must bear in mind, that
“the fundamental doctrine that the law regards the substance rather than the form of things a doctrine common, one would think, to every system of jurisprudence and conveniently expressed in the maxim plus valet quod agitur quam quod simulate concipitur” (see Dadoo Ltd and Others v Krugersdorp Municipal Council (supra at 547).
- I do not believe it is unkind to stigmatise the juristic machinations of the appellant in the above scenario as corporate ducks and drakes. I am aware that situations may arise where an employer is “an empty legal shell stripped of its assets” while the real power of decisionmaking and the ability to pay wages rests with another company or person. At best for the appellant that is the situation here. Under such circumstances a foreign academic has argued that “the company or other person or persons who (have) control of the undertaking in which the worker is employed” should be regarded as the employer (see Hepple ‘The Crisis in EEC Labour Law (1987) 16 ILJ (UK) 77 more especially at 113).
- There have been a number of decisions in the old Industrial Court and the Labour Courts that deal with this issue. I will consider a few of them. In Camdons Realty (Pty) Ltd and another v Hart (1993) 14 ILJ 1008 (LAC) the court held that substance and not form was determinative. The appellant had engaged the employee to work for a company to be formed, B. An employment contract was eventually signed between the employee and B. In subsequent proceedings brought by the employee against the appellant, the appellant took the point that B, and not it, was the employer. The Labour Appeal Court found that B was merely a legal shell and that it was the appellant who provided work for the employee.
- In PPWAWU v Lane NO as Trustee of Cape Pallet CC (In Liquidation) and another (1993) 14 ILJ 1366 (IC), it was found that the liquidation of a close corporation and the simultaneous creation of a second one to take its place was a deceptive device used, amongst other things, to get rid of part of the workforce without having to retrench them. It seems clear that the present section 197 was created to deal with such a situation. The court was accordingly prepared to hold the reconstituted close corporation liable for the dismissal of the employees.
- Similarly, in Viljoen v Wynberg Travel (Pty) Ltd NH 11/2/9388 (unreported only referred to in Current Labour Law (1993) at 8) it was held that the business of a close corporation was so enmeshed with that of the respondent company, that the respondent could be regarded as the real employer of the applicant.
- In Board of Executors Ltd v McCafferty  7 BLLR 835 (LAC) the respondent had initially been employed by one component of a group, but he was later transferred to another, while his salary continued to be paid by yet another. When the respondent was dismissed by the company to which he had been transferred, the company which had paid his salary was cited as the respondent in the industrial court. On appeal, that company denied it was the respondent’s employer. The court held that it was
not necessary for the purposes of establishing an employment relationship formally to pierce the corporate veil.
- The court accepted that the components of the group were separate legal entities, but took the view that it was possible for an employee to have more than one employer. At the time of the termination of the respondent’s employment, one subsidiary of the group had borne administrative responsibility for payment of his salary and benefits, another had exercised direct powers of supervision and control over the minutiae of his daily tasks and yet another, the appellant, had continued to record ongoing employment.
- The appellant company had the ultimate power to determine whether the respondent could remain a party to the bilateral interchange of employment and which had decided to terminate it. The appellant (Board of Executors Ltd) was accordingly deemed the respondent’s employer.
- The abuse of juristic personality occurs too frequently for comfort and many epithets have been used to describe the abuse against which the Courts have tried to protect third parties, namely puppets, shams, masks and alter ego. However, the general principle underlying this aspect of the law of lifting the veil is that, when the corporation is the mere alter ego or business conduit of a person, it may be disregarded. The lifting of the veil is normally reserved for instances where the shareholders or individuals hiding behind the corporate veil are sought to be responsible. I do not see why it should not also apply where companies and close corporations are juggled around like puppets to do the bidding of the puppet master in this instance Mr Stanley Kotkin.
- The respondent does rely on piercing of the corporate veil and in the replying affidavit asks the court to “uplift the corporate veil and order Stanley Kotkin and Footwear Trading CC to reinstate” the respondent.
The relief sought does not however envisage that Kotkin must personally reinstate the respondent.
- The rule concerning lifting the veil has been adopted by the Courts in cases where the idea of the corporate entity has been used as a subterfuge and also where to observe it would work an injustice.
- In Wallersteiner v Moir; Moir v Wallersteiner and others  3 All ER 217 (CA), Dennin MR was prepared to treat various companies through which the appellant, Dr Wallersteiner, had operated as if they were “just puppets of Dr Wallersteiner”. At 1013 of the judgment, Lord Denning held as follows:
“He controlled their every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of them. Transformed into legal language they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the Court should pull aside the corporate veil and treat these concerns as being his creatures for his doings he should be, and is, responsible.”
- The present respondent can be forgiven for concluding that Footwear and Fila were used interchangeably whenever their guiding spirits (more particularly Mr Stanley Kotkin, the managing member of Footwear and director and shareholder of Fila) felt so moved.
- I therefore conclude that Fila and Footwear were separate legal personalities but the effect of the machinations of Kotkin and his staff was such that they were in effect joint or coemployers. To the extent that the appellant would like it otherwise it is estopped from denying that fact by virtue of the numerous representations that were made that either Footwear was the employer or Footwear and Fila were joint employers. The principles of estoppel are well established in our law. In Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration 1977 (4) SA 310 (T) the Court at 335A said that estoppel arises where there has been some representation of fact upon the faith of which the other party acted to his prejudice or detriment.
- Mr Boda argued that estoppel was not properly raised by the employee in the proceedings nor were the requirements of estoppel dealt with or satisfied. He submitted that the employee never alleged that there was any confusion created about the identity of her employer. The facts speak for themselves as the respondent originally cited Fila as the employer and when the point was opportunistically taken by the appellant she was forced to join Footwear and ask for the reinstatement order to be made applicable to it.
- Mr Boda submitted that Footwear was prejudiced as it did not participate in the conciliation and arbitration proceedings before the CCMA. I have already referred to the documents where Footwear wrote letters concerning admission of facts and subpoenas on its letterheads that illustrate that it was well aware of the proceedings. The same personnel represent both legal entities and would have come to know of the conciliation and arbitration proceedings in their capacity as staff of Fila anyway. It would seem to me to be unconscionable to allow them to disavow knowledge gained when acting as employees of Fila.
- In the premises I make the following order: The appeal is dismissed with costs.
The following cases were referred to in the above award
Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration
|1977 (4) SA 310 (T)
Board of Executors Ltd v McCafferty  7 BLLR 835 (LAC)
|Camdons Realty (Pty) Ltd and another v Hart (1993) 14 ILJ 1008 (LAC)
|Dadoo Ltd and others v Krugersdorp Municipal Council 1920 AD 530
|Director of Hospital Services v Mistry 1979 (1) SA 626 (A)
GNH Office Automation CC and another v Provincial Tender Board and others  3 All SA 87 (Tk)
PlasconEvan Paint Ltd v Van Riebeeck Paints (Pty) Ltd 1984 (3) SA 623 (A) 456
PPWAWU v Lane NO as Trustee of Cape Pallet CC (In Liquidation) and another (1993) 14 ILJ 1366 (IC)
Registrar of Insurance v Johannesburg Insurance Co Ltd (1) 1962 (4) SA 546 (W)
Page 461  5 BLLR 452 (LAC)
Shepherd v Mitchell Cotts Seafreight (SA) (Pty) Ltd 1984 (3) SA 202 (T) 455
Viljoen v Wynberg Travel (Pty) Ltd, unreported case no NH 11/2/9388 458
Wallersteiner v Moir; Moir v Wallersteiner and others  3 All ER 217 (CA)