Hard2 marksMultiple Choice

Corporate and Business LawSection BSyllabus DBusiness OrganisationsMTQ

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SCENARIO 3: HarvestDrone Ltd and CropYield PLC wish to form a joint venture to develop AI-driven tractors. They want the new entity to have limited liability, but they want to maintain absolute secrecy over the joint venture's financial accounts, preventing competitors from seeing their R&D spend.

Which business structure should they choose to achieve BOTH limited liability and complete financial secrecy?

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ACCA · Question 53 · Corporate and Business Law

SCENARIO 3: HarvestDrone Ltd and CropYield PLC wish to form a joint venture to develop AI-driven tractors. They form 'AgriAI Ltd'. CropYield PLC transfers highly toxic chemical assets to AgriAI Ltd to avoid environmental liability. When a spill occurs, the Environment Agency tries to sue CropYield PLC directly, arguing AgriAI Ltd is just a sham to evade existing legal obligations.

Will the court 'pierce the corporate veil' to hold CropYield PLC liable?

Answer options:

No, the principle in Salomon v Salomon provides absolute protection in all circumstances.

Yes, because the company was used as a sham or facade to evade an existing legal obligation.

No, because CropYield PLC is a corporate shareholder, not an individual.

Yes, because parent companies are always liable for the torts of their subsidiaries.

How to approach this question

Apply the 'evasion principle' exception to the doctrine of separate corporate personality.

Full Answer

B.Yes, because the company was used as a sham or facade to evade an existing legal obligation.✓ Correct

While Salomon v Salomon establishes separate legal personality, the courts will 'pierce the corporate veil' in very limited circumstances. Following Prest v Petrodel Resources Ltd, the 'evasion principle' applies: the veil can be pierced if a person is under an existing legal obligation or liability, and they deliberately interpose a company under their control to evade or frustrate that obligation. Transferring toxic assets to a shell company to avoid existing environmental liability fits this exception.

Common mistakes

Believing the corporate veil can never be pierced, or conversely, that it can be pierced simply because it is 'fair' to do so.

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Practice the full ACCA LW — Corporate and Business Law Practice Exam 4

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