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

Marta is the controlling shareholder and managing director of Orion Ltd. She lent Orion Ltd 200,000 secured by a valid fixed charge over its property. Orion Ltd later goes into insolvent liquidation. Another unsecured creditor argues that Marta's loan should be ignored because she controlled the company. Which statement is correct?

Marta can enforce her security as a secured creditor. Orion Ltd is a separate legal person, so a controlling shareholder may also lend to it and take valid security, ranking ahead of unsecured creditors against the charged property.

  1. AMarta is a separate person from Orion Ltd and can enforce her valid security as a secured creditorCorrect
  2. BMarta cannot be a creditor of a company she controls, so her security is void
  3. CMarta's loan ranks equally with the unsecured creditors because she is a shareholder

Explanation

Salomon v Salomon held that a controlling shareholder can also be a secured creditor of the company, as the two are distinct legal persons. Marta's valid charge therefore gives her priority over unsecured creditors in respect of the secured property. Being a shareholder does not downgrade a properly created security.

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