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) Reforms of the historical doctrine of capital maintenance and the use of solvency
test as a replacement to protect creditors; and
c) Circumstances justifying piercing of corporate veil in relation to creditors‟
protection, particularly when the company is insolvent and the remedies accorded
by the law to them.
3.2 Relationship between Limited Liability and Separate Legal Entity in the
Legal and Economic Literature
The decision in Salomon v Salomon & Co Ltd 2 created a revolution in the area of
corporate law which was never intended by the legislation. The concept was developed
purely for convenience to overcome the difficulty associated with the law of partnership,
which later was extended to limiting the liability of shareholders. The decision ruled that
a one-man company was not an abuse of the Companies Act and the company, A
Salomon Ltd, was different from Salomon an individual. The decision was criticised to
have gone too far. 3 The principle has been described as inadequately justified in terms of
principle and policy as well as inadequate for doctrinal purposes of decision-making. 4
Scholars grappled to fit the principle within the existing framework of the common law
and statute law where recognition of principles of law has been made on the basis of
analogy, metaphor or fiction. 5
The principle in Salomon has in effect acted to the prejudice of creditors which was never
intended by the legislature. The decision was described as „calamitous‟ by Professor Sir
Otto Kahn-Freund because the courts while developing fiduciary principles to protect
2 [1897] A.C. 22.
3 John Farrar „Corporate Personality ' in John Farrar (ed) Company and Securities Law (Thompson
Brookers, Wellington 2008 ) at 74.
4 John Farrar “Frankenstein Incorporated or Fools‟ Parliament? Revisiting the Concept of the Corporation
in Corporate Governance” (1998) 10 Bond LR 142 at 147 [Frankenstein].
5 John Farrar Corporate Governance in Australia and New Zealand (Oxford University Press, Melbourne
2001) at 55 ; see also comments in (1897) 13 LQR 6
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