The director of 'ToxicDisposal Ltd' deliberately creates a new company, 'CleanEarth Ltd', solely to transfer assets away from ToxicDisposal Ltd to avoid paying a massive environmental fine.

What legal action can the courts take in this specific scenario?

Answer options:

The courts cannot intervene because Salomon v Salomon established absolute separate legal personality.

The courts can 'pierce the corporate veil' because the new company is being used as a facade or sham to evade an existing legal obligation.

The courts will automatically dissolve both companies without a hearing.

The courts will hold the shareholders liable, but not the director.

How to approach this question

Recognize the scenario as an attempt to evade an existing liability using a corporate structure. This triggers the 'evasion principle' exception to separate legal personality.

Full Answer

B.The courts can 'pierce the corporate veil' because the new company is being used as a facade or sham to evade an existing legal obligation.✓ Correct

While the principle of separate legal personality (Salomon v Salomon) is strong, the courts will 'pierce the corporate veil' in limited circumstances. Specifically, under the 'evasion principle', the veil can be pierced if a person is under an existing legal obligation or liability and deliberately evades it by interposing a company under their control.

Common mistakes

Believing the corporate veil can never be pierced, or conversely, believing it can be pierced simply in the interests of justice (which the Supreme Court rejected in Prest).

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