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

Pedro owns 99% of the shares in Alta Ltd and lends the company 200,000 secured by a floating charge over its assets. Alta Ltd later goes into insolvent liquidation. Following the principle in Salomon v Salomon, what is the position of Pedro's charge?

The charge is valid and Pedro ranks as a secured creditor. Alta Ltd is a separate legal person, so a controlling shareholder can lend to it and take security, as Salomon v Salomon confirms, provided the charge was properly created.

  1. AIt is void because he is the controlling shareholder
  2. BIt is valid, and he can rank as a secured creditor as the company is a separate personCorrect
  3. CIt is valid only if the other 1% shareholder consented
  4. DIt ranks behind all unsecured creditors because he is a member

Explanation

Because the company is a separate legal person, a member can also be its creditor, including a secured creditor. Pedro's control does not invalidate a properly created charge. Option D confuses membership with ranking, which is determined by security.

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