AIBE III 2012 Question 82

A is an executive director and the majority shareholder of XYZ Private Limited. A borrows Rs. 25,00,000/- from BCD Bank and invests such money in additional shares of XYZ Private Limited, increasing A's stake in XYZ Private Limited to approximately seventy-five per cent. As A is unable to repay the debt to BCD Bank, BCD Bank proceeds against the assets of A and XYZ Private Limited for recovery of the monies borrowed by A. Which of the following Statements most accurately applies the principle below?

1. A BCD Bank will be successful in its proceeding against XYZ Private Limited because such money borrowed by A was utilized for the benefit of XYZ Private Limited.
2. B BCD Bank will not be successful in its proceeding against XYZ Private Limited as XYZ Private Limited has not directly borrowed any money from BCD Bank. Official answer
3. C BCD Bank will be successful in its proceeding against XYZ Private Limited because the corporate veil will be lifted by the judiciary, as A is an executive director on the board of XYZ Private Limited.
4. D BCD Bank will be successful in its proceeding against XYZ Private Limited because the corporate veil will be lifted by the judiciary, but it can only recover monies equivalent to A's seventy-five per cent shareholding.
5. E BCD Bank will not be successful in its proceeding against XYZ Private Limited as A does not hold a hundred per cent stake in XYZ Private Limited.