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

Nadia is a sole trader who incorporates her business as Nadia Ltd, transferring all assets to the company in return for shares. She is the only shareholder and director. Soon after, Nadia Ltd owes her 80,000 for a loan she made. Which statement about the position is correct?

Nadia can be a creditor of Nadia Ltd. The company is a separate legal person distinct from its sole shareholder, so she can lend money to it, hold a debt against it, and remain a shareholder at the same time.

  1. ANadia cannot be a creditor of the company because she owns all of it
  2. BThe company is a separate legal person, so Nadia can be a creditor of Nadia Ltd as well as its shareholderCorrect
  3. CThe loan is void because a person cannot contract with their own company
  4. DThe debt is automatically converted into shares

Explanation

Separate legal personality means the company and its owner are distinct persons, so a member can lend to, contract with and be a creditor of the company. This follows the principle in Salomon v A Salomon & Co. The assertion that she cannot contract with her own company is wrong.

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