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CS Executive · Company Law and Practice · Introduction to Company Law

Mr. Iyer, a director, formed Kaveri Traders Pvt Ltd solely to dodge a contractual covenant not to compete with his former employer, then carried on the same business through the company. A court is asked to restrain the company. Which ground would justify lifting the veil?

The ground is that the company was used as a mere cloak or sham to evade an existing legal obligation. Courts disregard separate personality when the corporate form is a device to avoid a binding covenant or liability.

  1. AThe company has few members
  2. BThe company was used as a mere cloak or sham to evade an existing legal obligationCorrect
  3. CThe company has a registered office in a different state
  4. DThe company has not declared dividends

Explanation

Courts lift the veil where a company is created as a device to avoid an existing legal obligation. The other grounds, such as few members, location of office or no dividends, have no bearing on improper use of the corporate form.

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