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ACCA Applied Skills · Corporate and Business Law (Global) · Corporations and legal personality

Dario was bound by a contract not to compete with Hale and not to solicit Hale's clients. To get round this, Dario formed Tero Ltd, which solicited those clients. A court finds that Tero Ltd was set up solely to evade Dario's existing obligation. Which course is the court most likely to take?

The court is likely to lift the veil and restrain Tero Ltd. A company formed solely as a device to evade an existing legal obligation, here a non-competition and non-solicitation covenant, will not be allowed to shelter behind separate personality.

  1. ATreat Tero Ltd as separate, because it was validly incorporated
  2. BLift the veil and restrain Tero Ltd, because it is a device to evade an existing legal obligationCorrect
  3. COrder Tero Ltd to be wound up for being a partnership
  4. DHold Hale liable for the costs of incorporation

Explanation

Courts will disregard the separate personality of a company used as a façade to evade an existing legal obligation, as in Gilford Motor v Horne. Valid incorporation (option A) does not protect a company formed for that purpose. The remedy is directed at the evasion, not at the company's form.

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