IAI Actuarial Core Principles · Business Management · Separate legal personality, directors' duties, shareholders and partnerships
Kiran Pharma Pvt Ltd is formed by Mr Kiran only after he signs a non-compete covenant with his former employer, which bars him personally from soliciting its clients. Immediately after, he incorporates the company, which solicits those same clients, claiming the company is a different person not bound by the covenant. In which situation would a court most plausibly disregard the corporate veil?
A court may disregard the corporate veil where the company is a sham or device created to evade an existing personal legal obligation, such as a non-compete covenant. Small size, losses or related directors alone do not justify lifting the veil.
- AWhere the company was set up as a sham or device to evade an existing personal legal obligationCorrect
- BWhere the company is small and has few shareholders
- CWhere the company has made a loss in its first year
- DWhere the company's directors are all related to each other
- Where the company has only a single class of shares
Explanation
Courts lift the veil where a company is used as a façade or sham to avoid an existing obligation, as in the covenant-evasion scenario. Small size, family directors, losses or one share class do not by themselves justify ignoring separate personality.
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