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CA Intermediate · Corporate and Other Laws · Incorporation of Company and Matters Incidental Thereto

Anita holds 40% of the shares of Greenfield Ltd and is also its managing director. In a transaction, she used the company as a sham to evade a legal obligation to her former employer, whom she was bound not to compete with. The employer sues the company. A court is most likely to apply which doctrine?

The court is most likely to lift the corporate veil. The company was used as a device to evade an existing legal obligation, so its separate personality will be disregarded and the person behind it dealt with. Indoor management and constructive notice do not address misuse of the corporate form.

  1. ADoctrine of indoor management, protecting outsiders
  2. BDoctrine of constructive notice, binding the employer to the memorandum
  3. CLifting the corporate veil, because the company was used as a device to evade an existing legal obligationCorrect
  4. DDoctrine of ultra vires, rendering the company's incorporation void

Explanation

Courts lift the corporate veil where the company is formed or used as a sham or cloak to avoid legal obligations. Here Anita used the company to evade a non-competition obligation. Indoor management protects outsiders dealing with a company in good faith, which is not the issue. Constructive notice and ultra vires concern the contents of public documents and the company's powers, not misuse of separate personality.

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