Liabilities of Anne and Mary for Actions Taken by Jane and Sarah

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Business and
Corporation Law

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Answer-1
I: Issue
There are two issues which are raised in this case. The first issue is
whether the restraint of trade clause is violated by David that is formed
with Nu Shampoo Pty Ltd? The second issue is whether a lawsuit can be
filed by Standard Bank in order to impose the obligation of $100,000 on
David?
L: Law
The provisions regarding governance of companies are given under
the
Corporations Act 2001 (Cth) which is key legislation in Australia. As
per its provisions, corporations are separate legal entities which are
separate in the eyes of the law than compared to their members and
directors (CSU LAW504 Modules, 2019, Topic 14). This is a major principle
regarding corporations which result in limiting the liability of its members
towards its debts and liabilities. The provisions regarding this principle
were given by the court in the case of
Salomon v Salomon & Co Ltd (1897)
AC 22. While evaluating the liability of the company and its members, the
evaluation of the judgement of this case is crucial. It was provided by the
court that the company has a separate entity from its shareholders and
directors despite the fact that it is operated by a single person. Thus, this
principle resulted in limiting the liability of the members of the company
based on which they cannot be held personally liable for its debts or
liabilities (Bourne, 2016). However, this is not an absolute rule, and the
liability of the company can be imposed on its directors or shareholders by
the court in many cases.
A good example was given by the court in the case of
Gilford Motor
Co Ltd v Horne [1933] Ch 935. This is a relevant judgement because the
court overlooked the principle of the separate legal entity of the company
that provided a corporate veil to protect the members and directors of the
company. The court provided its judgement based on the doctrine of the

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lifting of the corporate veil and imposed a penalty on the shareholders. In
this case, the plaintiff was restraint from trade by his former employer
based on a contractual relationship. The plaintiff avoided this rule by
incorporating a company in which he was a major shareholder, and the
company was engaged in the business practices that were similar to the
business of the former employer of the plaintiff (Schall, 2016). In the
lawsuit, the plaintiff provided that the company has a separate entity from
him due to which he has not violated the contract. However, the court
lifted the corporate veil to hold the plaintiff liable for violating the
contractual term by providing that the principle of the separate legal
entity cannot protect those who engage in dishonest or illegal practices.
A: Application
In this case study, David is restrained from engaging in similar
business practices for a period of five years by Nu Shampoo. In order to
avoid this liability, David has formed the company, Hair-Glo Pty Ltd, in
which he is a major shareholder. Monica who holds 1 per cent of the
remaining shares of the company did not engage in the running of the
company and its operations are conducted by David as the Operations
Manager. It is clear that the sole purpose of the formation is this company
is to avoid the contractual obligation imposed on David, and he is trying to
avoid the clause of restraint on trade by relying on the separate entity of
the company. Applying the principles of
Gilford Motor Co Ltd v Horne case,
it can be seen that the court is likely to lift the corporate veil in order to
determine the reason for the formation of the company.
Since David holds 99 per cent of the shares and he is also
responsible for running the operations of the company, the court can
decide that he has formed the company to avoid the contractual
obligations which are imposed on him by the contract which he formed
with his former employer. Thus, he is likely to be held liable for violating
the clause of restraint of trade based on which he cannot rely on the
defence of the separate legal entity of the company, and the court can
impose a penalty on him to compensate Nu Shampoo Pty Ltd. On the