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

Vikram Gupta is the sole shareholder and director of Gupta Exports Pvt Ltd. He transfers company funds to himself to settle a personal loan, and a creditor of the company seeks to recover its dues from Vikram personally, alleging the company was used to commit fraud. Which statement best reflects the law on lifting the corporate veil?

The corporate veil may be lifted where the company is used as a device to commit fraud or evade obligations. Separate personality is the general rule, but not an absolute shield, so Vikram can be made personally liable for the fraudulent diversion of funds.

  1. AThe veil cannot be lifted under any circumstances once a company is incorporated
  2. BThe veil can be lifted by a court only where the company has more than 200 members
  3. CThe veil can be lifted only when the company's name has been struck off the register
  4. DThe veil may be lifted where the corporate personality is used as a device to commit fraud or evade obligations, so Vikram can be held personally liableCorrect

Explanation

Separate personality is the general rule, but courts disregard it where the company is a mere cloak or sham used for fraud or improper conduct. The Act also imposes personal liability for fraudulent conduct. No rule limits lifting of the veil to companies with over 200 members or to struck-off companies. The first option wrongly treats the principle as absolute.

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