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

Ravi was sued for breach of a covenant not to solicit his former employer's customers. He then set up Quill Ltd, controlled by himself, purely to take over those customers and avoid the covenant. Which course is a court most likely to take?

A court would likely lift the veil and treat Quill Ltd as a device to evade Ravi's existing covenant, granting an injunction against the company as well. Separate personality is not allowed to shield a company formed as a façade to avoid obligations.

  1. ATreat Quill Ltd as a separate person and allow the solicitation, since it is not a party to the covenant
  2. BLift the veil and treat the company as a device to evade Ravi's existing obligation, granting an injunction against it tooCorrect
  3. CWind up Quill Ltd automatically, because incorporation to avoid contracts is prohibited
  4. DHold that the covenant ends because Ravi is now a company director

Explanation

Where a company is formed as a sham or façade to evade an existing legal obligation, courts may disregard its separate personality (Gilford Motor v Horne; Jones v Lipman). The injunction can therefore extend to Quill Ltd. Option A ignores the evasion principle.

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