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CA Foundation · Business Laws · The Companies Act, 2013

Deepak, already bound by a contract to sell his land to Rohit, forms Deepak Realty Pvt Ltd, of which he and his wife are the only shareholders, and transfers the land to it to avoid performing the contract. Rohit sues. How will the court most likely treat the company?

The court will likely lift the corporate veil. The company was formed only as a device to escape Deepak's existing contract with Rohit, so its separate personality is disregarded and the obligation, including specific performance, can be enforced against the company.

  1. AAs a separate person, so Rohit has no remedy against the company
  2. BAs a sham used to evade an obligation, so the veil may be lifted and specific performance enforced against the companyCorrect
  3. CAs void, so the company is dissolved automatically
  4. DAs an agent of Rohit

Explanation

Courts lift the corporate veil where a company is formed merely as a device to evade an existing legal obligation, as in Gilford Motor Co. v. Horne and Jones v. Lipman. Here the company was created to avoid Deepak's contract, so the court can disregard the separate personality and compel performance. Treating the company as separate would let fraud succeed.

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