The most important concept that flows from the incorporation of a company is that of limited liability whereby the shareholders tend to be liable only to the unpaid amounts of shares and so the company as a separate legal entity is held accountable for its own debts.
Corporate personality has been in use for a long period of time but the area of law developed when small businesses used the notion so as to create limited liability. The turning point of corporate personality was the decision of Salomon v Salomon1. In Salomon, a leather merchant incorporated a company and completed the formalities by appointing his family members as shareholders which was a requirement of the Companies Acts at that point in time. In his personal capacity, he appointed himself as managing director and subsequently purchased the sole trading business. The main concern was the over valuation of the business placed by him, but this was mainly due to his confidence in the success of the business. The company subsequently went in to liquidation and a liquidator was appointed by the court who in turn evaluated that the company was a sham and had been used as an instrument to defraud creditors. The Court of Appeal accepted the evaluation of the liquidator, however, the House of Lords reversed the decision stated that the Court of Appeal had used a moralistic approach and went on to say it was irrelevant that some of the shareholders were used merely to fulfill a technicality and so the use of corporate personality could be made by any person who intended to pursue what was his own business and thus the company set up in this case found to be a separate legal entity and not an agent or trustee of the person controlling it.2
The case set a cornerstone for the doctrine of separate legal entity and separated the company from its shareholders. This concept has