ExpertHard2 marksMultiple Choice
Syllabus D: The formation and constitution of business organisationsSection ACorporate and Business Law
ACCA · Question 13 · Syllabus D: The formation and constitution of business organisations
The courts will generally uphold the principle of separate corporate personality. However, the 'corporate veil' may be pierced in certain exceptional circumstances. In which of the following situations is the court most likely to pierce the veil?
The courts will generally uphold the principle of separate corporate personality. However, the 'corporate veil' may be pierced in certain exceptional circumstances. In which of the following situations is the court most likely to pierce the veil?
Answer options:
A.
Where a company is a wholly-owned subsidiary of another company.
B.
Where the company was formed specifically to evade an existing legal obligation.
C.
Where the company is experiencing temporary cash flow insolvency.
D.
Where a director holds the majority of the voting shares.
How to approach this question
Identify the specific legal exception to the Salomon principle regarding the evasion of liabilities.
Full Answer
B.Where the company was formed specifically to evade an existing legal obligation.✓ Correct
The principle of separate corporate personality (Salomon v A Salomon & Co Ltd) is strictly upheld. The Supreme Court in Prest v Petrodel clarified that the veil may only be pierced under the 'evasion principle'—when a company is used to evade an existing legal obligation of its controller (e.g., Gilford Motor Co Ltd v Horne).
Common mistakes
Believing the veil can be pierced simply in the interests of justice or because a parent company controls a subsidiary.
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