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a liability only to the extent of the unpaid amount of their value of shares in the
company. When limited liability was first introduced, there had been sustained
resistance 21 but it has survived till today. It continues to exist because of the need to
encourage contributions of capital from the public in order to finance extensive
investments, while at the same time not exposing their entire personal wealth. 22
5.2.1 Separate Legal Entities
In 1897, the House of Lords pronounced a decision which later became the
foundation of modern company law, and the implication of such decision is still a
major debate among legal scholars. 23 The impact of limited liability was not fully
realised until the decision in Salomon v Salomon & Co Ltd, 24 where the court
recognised a one-man company. 25 Lord Macnaghten, in a famous judgment held:
The company is at law a different person altogether from subscribers…; and
though it may be that after incorporation the business is precisely the same as
it was before, and the same persons are managers, and the same hands receive
the profits, the company is not in law the agent of the subscribers or trustee
for them. Nor are the subscribers, as members, liable in any shape or form,
except to the extent and manner provided in the Act. 26
21 Adam Smith in his book The Wealth of Nations (733-758) wrote that principle would allow a third
party to manage public‟s money and who would then use it negligently and profusely-W.R Cornish
and G.de.N Clark Law and Society in England 1750-1950 (Sweet & Maxwell, London, 1989) at
247.
22 Ibid; see also Otto Kahn-Freund “Some Reflections on Company Law Reform” (1944) 7 MLR 54
at 54.
23 Kahn-Freud above n2. The writer described the decision in Salomon v Salomon Co Ltd as a
calamitous one which changed the intended purpose of corporate personality from being to enable
capitalists to embark on risky adventure without shouldering personal liability to allowing a sole
trader taking advantage to set up limited company even though no risk and outside capital were
involved.
24 [1897] A.C. 22.
25 Gower above n4 at 85.
26 [1897] A.C. 22 at 51.
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