Prasad incorporated an OPC to run his new start-up in May, 2021. OPC borrowed 50 Lakhs to meet its long term fund requirements and 25 lakh to meet…

According to Section 2 (62) of the Companies Act,2013, a One Person Company (OPC) means a Company which has only one person as a member. A Company is a separate legal entity distinct from its member and enjoys limited liability. Separate Legal Entity: When a Company is registered, it is clothed with a legal personality. Its existence is distinct and separate from that of its members. Limited Liability: The liability of the members of the Company is limited to the extent of the nominal value of shares held by them. In no case, the shareholders can be asked to pay anything more than the unpaid value of their shares. The liability of OPC’s sole member is limited to the extent of unpaid share capital, if any. In the instant case, OPC failed to pay its debts to NBFC. Assets of the company were insufficient to pay the outstanding debts. According to above provisions, we can conclude that: (i) If the NBFC proceeded against the personal assets of Prasad only on the ground that he is the only shareholder and hence liable for its debts: Prasad will not be personally liable to pay the outstanding debts of the NBFC merely on the ground that he is the only shareholder of the OPC because the debts of the OPC are its own and the OPC enjoys limited liability. Creditors cannot proceed against the personal assets of the member merely because he is the sole shareholder. Therefore, the NBFC cannot proceed against the personal assets of Prasad only on the ground that he is the sole shareholder. (ii) If the NBFC proves that the One Person Company was formed for fraud and cheating: Where a Company is incorporated or carried on with intent to defraud Creditors or for any fraudulent purpose, the “Doctrine of Lifting of Corporate Veil” applies and the Corporate Veil can be lifted. In such cases, the protection of limited liability is withdrawn and the member can be held personally responsible for the debts of the company. Accordingly, if the NBFC proves that the OPC was incorporated for fraudulent purposes, the protection of limited liability can be withdrawn and Prasad would be liable to pay the outstanding debts of NBFC and his personal assets can be used to settle the outstanding liabilities.