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CS Executive · Company Law and Practice · Legal Status and Types of Registered Companies

Meera forms Sunrise Traders Pvt Ltd only to evade a contractual non-compete covenant she gave to her former employer, and uses the company to run the same competing business. A court may disregard the company's separate personality because the company is being used to:

The court may lift the veil because the company was formed as a device or cloak to avoid an existing legal obligation, namely the non-compete covenant. Incorporation cannot be used to evade obligations, so the court looks at the real persons behind the company.

  1. Araise capital cheaply
  2. Blimit the liability of members in the ordinary course
  3. Cavoid an existing legal obligation, as a sham or cloakCorrect
  4. Dobtain the status of a private company

Explanation

Courts lift the veil where a company is a mere device, sham or cloak to avoid an existing legal obligation, as in Gilford Motor Co v Horne. Raising capital or limiting liability are legitimate uses of incorporation. Option D is just a normal feature and not a ground.

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