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ACCA Applied Skills · Corporate and Business Law (Global) · Business, political and legal systems

Tarn Ltd, a company limited by shares, was formed by Vikram, who transferred his existing business to it and receives all the shares. Vikram is also the only director. The company later contracts to buy goods and then cannot pay. Which statement is most accurate?

Vikram is not liable merely because he controls the company. Tarn Ltd has separate legal personality, so it is the contracting party, owns its own assets and bears its own debts, even though Vikram holds all the shares. Only exceptional cases such as fraud allow the veil to be lifted.

  1. AThe company is the contracting party and owns its assets, so Vikram is not liable for the debt merely because he controls the companyCorrect
  2. BVikram is automatically liable because a one-person company is treated as a sole trader
  3. CVikram may take the goods as his own property because he owns all the shares

Explanation

Under the Salomon principle, a company is distinct from its members even where one person owns all the shares and controls it. The company is party to the contract and owns its property. Courts lift the veil only in exceptional cases such as fraud or sham. Shareholders do not own the company's assets, so option 2 is wrong.

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