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CHAPTER 3 LITERATURE SURVEY - AN OVERVIEW OF THE MAIN
3.1 Introduction
THEMES
The premise of this thesis is that when a company is insolvent, its shareholders have the
incentive to continue trading as they have everything to gain and nothing to lose because
they are protected by the principle of limited liability. Thus, the principle of limited
liability creates a perverse incentive for the company to continue trading. The common
law has been very reluctant to depart from this principle and statutes have taken the
initiative to impose personal liability on directors for debts of the company if it continues
trading during insolvency.
In conjunction with limited liability, another important principle, separate legal entity,
has emerged. This principle shields a person who is responsible for the management of
the company from liability because any action is deemed to be the act of the company
and not the individual who makes decisions. This principle is first enunciated in the case
of Salomon v Salomon & Co Ltd. 1
This chapter provides a general background of the thesis and explores the legal
development of directors‟ liability to creditors in Malaysia and other countries such as the
UK, New Zealand and Australia. The literature traces the relationship between limited
liability and separate legal entity and looks at the inadequacy of separate legal entity to
support the existing company structures. The literature on these areas is abundant in
relation to the laws in the UK, New Zealand and Australia but there is dearth of
discussion in respect of Malaysia.
The literature relevant to this thesis is divided into three main themes:
a) Relationship between limited liability and separate legal entity in the legal and
1 [1897] A.C. 22.
economic literature;
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