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CA Foundation · Business Laws · The Companies Act, 2013

Ravi and Sunil, two friends, incorporate Greenleaf Traders Pvt Ltd and transfer their business to it. Ravi holds 99% of the shares. The company takes a loan from a bank in its own name and fails to repay it. Which statement correctly describes the position under company law?

The bank can sue only the company. A company is a separate legal entity from its members, so the loan is the company's debt. Ravi's 99% shareholding does not make him personally liable unless he gave a guarantee or the corporate veil is lifted.

  1. AThe bank can sue only the company, because it is a separate legal entity from its membersCorrect
  2. BThe bank can recover directly from Ravi, since he holds almost all the shares
  3. CThe bank can sue Ravi and Sunil in equal shares, as they are the founders
  4. DThe bank has no remedy, because a private company cannot borrow without personal guarantees

Explanation

A company is a separate legal person distinct from its members (Salomon principle). The debt is the company's, so the bank's claim lies against the company and its assets. Holding 99% of the shares does not make Ravi personally liable. Personal liability arises only if he gave a guarantee or the corporate veil is lifted, which is not stated here.

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