o such existence the right of the company to sue and be sued in its own name, hold its own property and liable to any debts that are accrued(Rose et al 2009).
The main provision of this concept is limited liability (that is the liability of the shareholders is restricted only to the unpaid amount of their shares) for shareholders and therefore the debts of the company are restrained to the legal entity of the company. (Ridley 2009)
The concept evolved when small businesses began to avail the use of such corporate form and this was done in the landmark decision of Salomon v Salomon1 where Mr. Salomon, a leather merchant formed a company which included his wife, five children and himself (this was done to fulfill the requirement of shareholders as per the Companies Act prevailing at that time). He appointed himself as the managing director of the company and subsequently purchased the sole trading business. However the valuation placed on the business being purchased was not fair, but this was due to his confidence in the business and not due to any mala fide intentions. The business was valued at 39,000 pounds of which 10000 were paid by issuance of debentures plus 20,000 shares at 1 pound each and 9000 pounds in cash. After a certain period the company went into insolvent liquidation and a liquidator was appointed by the court. The liquidator evaluated that the company was a sham and a mere agent of Mr. Salomon and went on to conclude that he should be held personally liable to the debts of the company. The House of Lords reversing the decision of the Court of Appeal, which was a moralistic approach, stated that the fact that some of the shareholders were holding shares so as to fulfill a technicality was irrelevant and so the procedure which had been laid down by the Companies Act could be used by any person who in reality wanted to carry on what was in reality his own business. The Court further went on to state that if a company had been formed in accordance