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IAI Actuarial Core Principles · Business Management · Separate legal personality, directors' duties, shareholders and partnerships

Ms Priya is the managing director and holder of 99% of the shares of Priya Life Services Pvt Ltd. She lends the company Rs 50 lakh, secured by a valid charge on the company's assets. The company later goes into liquidation. Which statement is correct on the effect of separate legal personality?

Priya can rank as a secured creditor. The company is legally distinct from her, so it can owe her a debt and give her a valid charge over its assets, even though she controls 99% of the shares and is a director.

  1. APriya's loan is void because a person cannot be both a member and a creditor of the same company
  2. BPriya may rank as a secured creditor, since the company is a distinct person capable of owing her a debtCorrect
  3. CPriya's loan is treated as share capital because she holds 99% of the shares
  4. DPriya cannot enforce the charge because she is a director
  5. The charge is valid only if the other 1% shareholder consents

Explanation

Because the company is a separate legal person, it can borrow from and grant security to its controlling shareholder, who can be a secured creditor with priority over unsecured creditors. The Salomon principle supports this. Absent fraud or other statutory defects, her status as director or majority owner does not invalidate the debt or charge.

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