Lifting the Veil: the Statutory Grounds

The liability that follows is precisely defined and is worth stating precisely: it is several, not joint; it is for the whole debts contracted during that period, not a rateable share; and it attaches only to debts contracted during that time, so earlier and later debts stay the company's alone. The One Person Company is outside the section's mischief altogether, since one member is its lawful complement under s.3(1)(c).

Section 464: the outsized unregistered association

Section 464(1) prohibits the formation of any association or partnership of more than such number of persons as may be prescribed for carrying on a business with the object of acquisition of gain, unless it is registered as a company under this Act or formed under some other law. The proviso caps the prescribable number: it shall not exceed one hundred. Sub-section (2) exempts a Hindu undivided family carrying on business, and an association or partnership of professionals governed by special Acts. Sub-section (3) makes every member of an association carrying on business in contravention personally liable for all liabilities incurred in the business.

The provision is often taught as an oddity. It is better understood as the mirror image of the whole subject: where an enterprise is large enough that outsiders need the protections of registration, publicity of constitution, filed accounts, a register of members, the law will not let it stay unregistered, and the price of defiance is exactly the liability incorporation would have limited. It is a veil provision in the strict sense, since it strips a liability shield from those who tried to have the substance of a company without its form.

Two examination points. The number is prescribed by rule, not by the section, so an answer states the cap of one hundred from the proviso and says the operative figure is prescribed, which is where the sibling books' recorded trap about attributing rule figures to sections bites. And the exemptions are structural: an HUF is a creature of personal law with its own liability rules, and professional partnerships are policed by their own governing Acts.

The other three, in one place

Each has its own chapter, but an examination question on statutory lifting expects all five, so hold them together here.

Section 7(7). Where a company has been got incorporated by furnishing false or incorrect information or representation, or by suppressing any material fact, or by any fraudulent action, the Tribunal may, on application, pass orders regulating the management including changes in the memorandum and articles, or direct that the liability of the members shall be unlimited, or direct removal of the name from the register, or order winding up, or pass such other orders as it thinks fit. The power is discretionary, judicial and aimed at the moment of birth: the veil is removed because it was obtained by deceit. [Incorporation and Its Conclusiveness] works the provision.

Section 251. Where an application for removal of the company's name under s.248(2) is made to evade the liabilities of the company or with intent to deceive creditors or defraud any other persons, the persons in charge of the management are, notwithstanding the dissolution, jointly and severally liable to any person who suffered loss, and punishable for fraud under s.447. [Striking Off and Its Safeguards] works it.

Section 339. If in the course of winding up it appears that any business of the company has been carried on with intent to defraud creditors or for any fraudulent purpose, the Tribunal may on the liquidator's or a creditor's or contributory's application declare that any person who was a director, manager or officer, or any person knowingly a party to the carrying on of the business in that manner, shall be personally responsible without any limitation of liability for such debts as the Tribunal directs. [Delinquency and Public Examination] works it.

A worked example

Sunrise Textiles Limited is a public company formed by seven subscribers. Over 2024 four of them transfer their shares to the remaining three, so from 1 March 2025 the company has three members. The board, aware of the position, continues trading. On 20 October 2025 the company buys yarn worth twenty lakh rupees from Vaidya Fibres on credit, and in January 2026 it defaults. Vaidya Fibres sues the three members personally.

Work the section, element by element. Membership fell below seven on 1 March 2025, element one. The company carried on business while so reduced, element two. Six months from 1 March 2025 expired on 1 September 2025, so the grace period had passed when the yarn was bought, element three. The three were members after that date, element four. They knew, being also the directors who resolved to continue, element five. So s.3A attaches: each is severally liable for the whole of the twenty lakh rupee debt, and Vaidya Fibres may sue any one of them for all of it.

Vary it twice, because that is how the section is examined. First, suppose the yarn had been bought on 20 July 2025, inside the six months: no liability under s.3A, the debt is the company's alone, and the creditor is left to the company's assets. Second, suppose one of the three is an elderly investor abroad who never learned of the transfers: she fails the cognisance element and escapes, though the other two remain severally liable for the whole. Notice that in neither variation does the company cease to exist or its own liability disappear; s.3A adds defendants, it does not remove one.

Distinctions

What it does NOT mean

These do not make the company disappear. In every case the company remains liable; the section adds personal defendants. A student who writes that s.3A "dissolves the company's separate personality" has overstated it.

Knowledge is not presumed under s.3A. Cognisance is an express element and must be pleaded and proved.

Section 464 does not outlaw large partnerships as such. It outlaws unregistered ones formed for gain above the prescribed number, and expressly spares HUFs and professional partnerships governed by special Acts.

Quick revision

Section 3A: public below seven, private below two, business continued more than six months, member during that later period, cognisant; then several liability for the whole debts contracted then. Section 464: no unregistered association for gain above the prescribed number, cap of one hundred in the proviso, HUF and professionals excepted, contravening members personally liable, s.464(3). Section 7(7): incorporation by false information; Tribunal may declare members' liability unlimited, alter management, remove the name or wind up. Section 251: strike-off sought to defraud; managers jointly and severally liable and punishable under s.447. Section 339: fraudulent conduct of business in winding up; personal unlimited responsibility for directed debts. Control and common ownership appear nowhere.

Test yourself

1. A private company has one member for eight months and incurs a debt in month seven. Is the member liable under s.3A? Yes, if cognisant: membership is below two, business continued beyond six months, and the debt was contracted after the grace period, so several liability for the whole debt attaches. Note the contrast with a One Person Company, where one member is the lawful complement and s.3A is not engaged.

2. Does s.464 fix the maximum number of persons in an unregistered association? No: the number is prescribed by rules; the section's proviso only caps what may be prescribed, at one hundred. Stating a figure as if it came from the section is the classic error.

3. Which statutory ground operates at the moment of incorporation, and what orders may follow? Section 7(7): where incorporation was obtained by false or incorrect information or suppression, the Tribunal may regulate management, alter the memorandum and articles, declare members' liability unlimited, remove the name, or order winding up.

4. Two directors apply to strike the company off so that a decree-holder cannot execute. Which provision answers, and with what consequence? Section 251: the managers become jointly and severally liable for loss caused notwithstanding dissolution, and are punishable for fraud under s.447.

5. Why is the absence of "control" from the statutory list significant? Because it shows Parliament never treated control or common ownership as a reason to disregard personality, which supports the judicial insistence, in Balwant Rai Saluja v. Air India Ltd., that ownership and control alone are not enough to pierce.