ACCA Applied Skills · Corporate and Business Law (Global) · Corporations and legal personality
Greenfield Ltd is a company validly incorporated in its home jurisdiction. Its sole shareholder and director, Amara, personally signs a contract in the company's name to buy equipment for the business. Which statement best describes the effect of incorporation on the contract?
The company is the contracting party and is liable on the contract. Incorporation creates a separate legal person, so Amara, though sole shareholder and director, is not personally bound when she contracts properly on the company's behalf.
- AThe company is the contracting party and is liable on the contract, not Amara, as the company has separate legal personalityCorrect
- BAmara is the contracting party because a sole shareholder cannot be separate from the company
- CThe contract is void because a company cannot contract with its own director
Explanation
On incorporation a company becomes a legal person separate from its members (Salomon v Salomon). A contract made in the company's name by its authorised director binds the company, not the shareholder personally. Being a sole shareholder does not remove separate personality.
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