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CA Intermediate · Corporate and Other Laws · Incorporation of Company and Matters Incidental Thereto

Dhruv holds 100% shares in Lotus Traders Pvt Ltd, a company he formed. The company's sole business involves a fraudulent scheme in which Dhruv used the company to evade a pre-existing contractual obligation to Kiran, who now sues. The court examines the separate legal personality of the company. Which approach reflects the correct legal position?

The court may lift the corporate veil where a company is used as a device to evade existing obligations or perpetrate fraud, and hold the controlling person liable. Separate personality is the general rule but is not absolute, and lifting the veil is not limited to public companies.

  1. AThe court must respect the separate personality in all cases since Salomon's principle is absolute
  2. BThe court may lift the corporate veil where the company is used as a device to evade legal obligations or commit fraud, treating Dhruv as the real party liableCorrect
  3. CThe court can lift the veil only if the company is a public company
  4. DThe court can lift the veil only on the Registrar's application

Explanation

Separate personality is the general rule, but courts may disregard it where the company is a sham or used to perpetrate fraud or evade obligations. The doctrine is not limited to public companies, and a Registrar's application is not required. Treating Salomon as absolute ignores the recognised exceptions.

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