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IAI Actuarial Core Principles · Business Management · Separate legal personality, directors' duties, shareholders and partnerships

Rohan Mehta is the sole shareholder and managing director of Mehta Textiles Pvt Ltd, a validly incorporated company. The company enters into a supply contract with Kavya Traders and later fails to pay the invoices. Kavya Traders wishes to sue. Which statement best reflects the principle of separate legal personality under Indian company law?

Kavya Traders must sue the company. Under separate legal personality the company, not its sole shareholder, is the contracting party and bears the liability. Owning all the shares does not make Rohan personally liable for the company's debts beyond any unpaid share capital.

  1. AKavya Traders must sue the company, because the contract is with the company and not with Rohan personallyCorrect
  2. BKavya Traders can sue Rohan directly, because he owns all the shares
  3. CKavya Traders can choose to sue either Rohan or the company, since a sole shareholder is the company
  4. DKavya Traders has no remedy, because a one-person company cannot be sued
  5. Kavya Traders can sue Rohan only if he signed the contract as an individual and the company was not yet incorporated

Explanation

A company is a legal person distinct from its members, as established in Salomon v Salomon. The contract is made by the company, so the company is the party liable. A shareholder's liability is generally limited to any unpaid share capital, even if he holds all the shares.

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