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The implication of the decision is that the shareholders and the company are two
distinct entities. Any act done is the company‟s act and not the shareholders. This
doctrine is also known as the separate legal entity or veil of incorporation. It is
worthwhile to note that „limited liability‟ and „separate legal entity‟ are two different
concepts and can exist independently of one another.
As mentioned earlier, limited liability is a concept where a shareholder is only liable
to contribute up to the amount unpaid on their shares in the event that the company
becomes insolvent. On the other hand, separate legal entity refers to the company as
another entity; separate from its shareholders. As such, the principle allows directors,
managers and those involved in the management of the company to be insulated
from liability since the company will be the one responsible for the liability.
Cases have illustrated that judges are reluctant to depart from this principle since it
was first enunciated in Salomon‟s case. The courts have safeguarded this principle
for a long time 27 and only in certain circumstances would the courts depart from it. It
provides an opportunity for those managing the company to swindle or exploit the
company‟s assets since it would enable those in control of the company to hide
behind the veil of incorporation. Directors are tempted to use the company‟s assets in
an attempt to maximise shareholders‟ profits. 28
When the company is financially sound, the directors‟ actions may not have any
significant bearing on creditors because they would still be repaid. However, when
the company‟s finances are in jeopardy, directors will be trading with creditors‟
money and that has caused concerns for creditors. 29 In this circumstance, directors
27 See Lee v Lee’s Air Farming Ltd [1961] 1 AC 12; Macaura v Northern Assurance Co Ltd [1925]
AC 619.
28 Traditionally courts have interpreted directors to owe duty to shareholders. See Re Smith and
Fawcett Ltd [1942] 1 All ER 542; Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286.
29 Ian M Ramsay “Holding Company Liability for the Debts of an Insolvent Company: A Law and
Economic Perspective” (1994) 17 UNSWLJ 520 at 522.
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