IAI Actuarial Core Principles · Business Management · Separate legal personality, directors' duties, shareholders and partnerships
Arjun Sharma, a director, transfers the valuable assets of his debt-ridden company, Sharma Logistics Ltd, to a new company he controls, solely to defeat a creditor's pending decree. The creditor asks the court to disregard the corporate structure. Which approach is a court most likely to take?
A court is most likely to lift the corporate veil. Separate legal personality is not absolute, and where a company is used as a device to evade an existing legal obligation or defraud a creditor, the court looks through the structure to the persons behind it.
- ALift the corporate veil, as the separate entity is being used as a device to evade existing legal obligationsCorrect
- BRefuse to lift the veil, because separate personality is absolute and never set aside
- CDissolve both companies automatically without any hearing
- DTreat the creditor as a shareholder of the new company
- Hold only the company's auditor liable for the transfer
Explanation
Courts lift the veil where the company form is a sham or used to evade existing obligations or defraud creditors. Separate personality is strong but not absolute. Automatic dissolution and making the creditor a shareholder have no legal basis.
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