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ACCA Applied Skills · Corporate and Business Law (Global) · The formation and constitution of a company

Kessler owns all the shares in Kessler Haulage Ltd and is its sole director. He transfers a valuable warehouse to the company in exchange for shares, then lends the company money secured by a floating charge over its assets. The company becomes insolvent. Which statement is correct, following the principle in Salomon v A Salomon & Co Ltd?

Kessler can rank as a secured creditor under a validly created charge. Under Salomon, a company is a separate legal person even if one individual owns and controls it, so being sole shareholder and director does not stop him from also being the company's creditor.

  1. AThe charge is invalid because Kessler controls the company and cannot be both owner and secured creditor
  2. BKessler is automatically liable for all company debts because he was the sole shareholder and director
  3. CThe court must disregard the company's separate personality because it is a one-person company
  4. DKessler can rank as a secured creditor under a validly created charge, since the company is a separate person from himCorrect

Explanation

In Salomon, the House of Lords held that a validly incorporated company is a separate legal person even if one person owns and controls it. The same person can therefore be both shareholder and secured creditor, provided the charge is validly created. The veil is lifted only in limited cases such as fraud or sham use, none of which is stated here.

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