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CS Executive · Company Law and Practice · Introduction to Company Law

Meridian Textiles Pvt Ltd was incorporated by Mr. Rao, who holds 99% of its shares. The company borrows from a bank and later cannot repay. The bank has no allegation of fraud or sham. Which statement best reflects the legal position on lifting the corporate veil?

The company is a separate legal person, so the bank can proceed only against the company. Heavy shareholding or default alone does not lift the veil; courts do so only for fraud, sham transactions or improper use of the corporate form.

  1. AThe bank can sue Mr. Rao personally because he holds nearly all the shares
  2. BThe company is a separate legal person, so the bank can proceed only against the company absent fraud or improper useCorrect
  3. CThe veil is lifted automatically whenever a company defaults on a loan
  4. DThe bank can recover from Mr. Rao's personal assets because a private company has unlimited liability

Explanation

A company has a separate legal personality from its members, even where one person holds almost all the shares. The veil is lifted only in exceptional cases such as fraud, sham or improper conduct. Mere default or heavy shareholding is not enough, so the option suggesting personal liability is wrong.

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