Unsecured creditors believe that James and the Headlines Ltd are the same
It was fairly clear the law tested, in this case, is Salomon v. Salomon & Co, which sets the precedent for the formation of a company. In f Salomon v Salomon & Co [1897] AC 22, Mr. Salomon carried a leather business as a sole trader and later incorporated the business into a company where the shareholders were his kid and wife and Mr. Salomon was the managing director of the company. The business did not go well, and the company was put under insolvent liquidation. The unsecured creditors, suppliers, and other stakeholders sued Salomon on the premise that Salomon and the company were the same business entity. Unfortunately, the ruling of the company did not favor them because the court held that Salomon and the company were separate entities as the incorporation of the company led to the creation of the company as an artificial person with a capacity to be sued on its own name. The liquidators alleged that Salomon was an agent of the company and was, therefore, liable for the debts of the company. The court using the law on the Company Act on the formation of what constituted a company, made a candid and landmark ruling that considered a company a separate and legal entity from its owners. Based on Salomon V. Salomon case law, the company, the company, is a distinct entity from its owner and can enter a contract on its own because it is considered an artificial person with the capacity to sue or be sued or enter contracts.
Therefore, one mistake that the unsecured creditors are making is to believe that James and the Headlines Ltd are the same. This company was formed in compliance with the regulations of the Companies Acts and, therefore, is a separate person from its owner. The ruling in Salmon vs. Salmon confirmed a company has an artificial person and a separate entity from its owners. Under Incorporation law, the company is considered a separate legal entity from its members. A company has a separate entity from its owners who has the ability to own property, incur debt, and borrow money on its own. Therefore, unsecured creditors are wrong to consider James, and the company has one thing.
Other characteristics of the company that distinguishes it from the original owners
The unsecured creditors should be paid before debts due to James. Advise the Unsecured creditors whether they can require the liquidator to pay them in priority to James
Unsecured creditors are those who have not been granted security from the company. There is a distinction between secured creditors and unsecured creditors as secured creditors are those granted securities from the company and are often considered above others in the compensation hierarchy with the legal right over company assets. Unsecured creditors do not have the same security when it comes to recouping losses when there is an instance of insolvency. If creditors are to be paid in order of priority, secured creditors that hold a fixed or floating charge are to be paid first over the asset of the business. Secured debtors have a legal right or charge over company property that put them on top of the ladder. Therefore, once the insolvency practitioner has received their legal fee, the secured creditors are the next in line.
The fixed charged creditors are given priority as they receive direct charge over a specific asset of the company that prevents a company from selling its property or assets without receiving the permission of the charge holder. In most cases, this is done to ensure those whose assets are held by the company receive their payments. In most cases, the fixed charge is placed on the machinery, and if the company wishes to sell the machinery, the company must seek the permission of the charged holder to sell the machine. The following are the guideline for paying company debts in case of involuntary liquidation. The hierarchy of distribution of a company’s assets in liquidation is strictly enforced by the courts. Any secured creditors are offered the first priority to the assets, but only after the flowing are met: The costs, charges, and expenses of the company are paid. After expenses and costs are paid, the wages and salaries of the employees. After meeting the two, the unsecured creditors can get their due paid.
Therefore, it is clear that secured creditors cannot be compensated before James gets compensated in case he had to get salaries as an employee of the company. The unsecured creditors have no legal claims in law to force their payments to be made the head of James because employee salaries come ahead of unsecured debtors. Order of priority must be respected, and it bars the unsecured creditors from feeling that they should be compensated ahead of James, who is the director of the company. Once creditors with fixed charges are compensated, then floating charge creditors are compensated, and the last people to be compensated are preferential creditors. Preferential creditors are offered their shares. Based on these criteria, James deserves to be given priority in the compensation ladder then the unsecured creditors will receive their compensation thereafter.