Skip to content

ACCA Applied Skills · Corporate and Business Law (Global) · Corporations and legal personality

Lena owns 99% of the shares in Orchid Ltd and lends the company 80,000 secured by a valid floating charge. Orchid Ltd later enters insolvent liquidation owing 150,000 to unsecured trade creditors. Assuming the charge is valid and properly registered, what does the principle of separate personality imply about Lena's position?

Lena can be a secured creditor. Because Orchid Ltd is a separate legal person, it can owe money to its controlling shareholder and grant her a valid charge, which ranks ahead of unsecured trade creditors despite her 99% ownership.

  1. AShe cannot be a secured creditor, because she is a shareholder
  2. BShe can be a secured creditor, because the company is a separate person that can owe her moneyCorrect
  3. CHer charge is void, because a shareholder cannot lend to her own company
  4. DShe must rank equally with the trade creditors, because she controls the company

Explanation

Under Salomon v Salomon, a controlling shareholder can also be a creditor and hold security, since the company is a distinct legal person. Her valid charge gives her priority over unsecured creditors. Option D is wrong because control does not remove the security.

Did you get it right without looking?

One question tells you little. A timed set on Corporations and legal personality shows your real accuracy, how long you take and where you lose marks.

Practise Corporations and legal personalityFree diagnostic mock

More Corporations and legal personality questions