Liability of Partners in Partnership Law

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Business and
Corporation Law

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Answer 1
Issue
The issue presented in this case is whether Nu Shampoo Pty Ltd can
file a lawsuit against David based on the fact that he violated the restraint
of trade clause? Another issue is whether David can be held liable by the
Standard Bank to pay for $100,000 owed by the company?
Law
After its information, a company gains its legal personality. It
becomes a legal person that has separate rights and liabilities than
compared to its members. It is referred as an artificial person that has the
capacity to form a contractual relationship and hold property under its
name (Kershaw, 2012). The operations of the company are managed by
its directors who are responsible for taking business decisions on its
behalf, and they comply with the guidelines of the
Corporations Act 2001
(Cth). The shareholders are also considered as the owners of the
company; however, they are not personally bound for its liabilities. This
principle was established by the court in the case of
Salomon v Salomon &
Co Ltd (1897) AC 22. The provisions regarding the rights and legal entity
of a company were given in this case. It was held in this case that the
company has a separate legal entity due to which the members of the
company have limited liability, and they cannot be held personally liable
for its debts or actions (CSU LAW504 Modules, 2019, Topic 14).
However, there are many scenarios in which the court provided that
this principle can be overlooked to impose a legal obligation on the
members of the company rather than the enterprise itself. This is
generally the case when the legal position is misused by directors or
shareholders of the company. In this regards, a relevant judgement was
given in
Gilford Motor Co Ltd v Horne [1933] Ch 935. While providing this
judgement, the court applied the principle of the lifting of the corporate
veil to separate the identity of the company from its owners. In this case,

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a legal obligation was imposed on the plaintiff to make sure that he did
not engage in any business activities which are similar to his previous
employer. In order to avoid this term of restraint of trade, the plaintiff
incorporated a company which was engaged in similar business practices
as his former employer. A lawsuit was filed against the plaintiff for
violating the terms of the restraint on trade. While providing its
judgement, the court applied the principle of the lifting of corporate veil
(Lee, 2015). It was established in this case that the plaintiff misused the
separate legal entity to violate the contractual term due to which he is
liable for violating the trade clause.
Application
In the given scenario, David needs advice on two letters which he
received. The corporation incorporated by David, Hair-Glo Pty Ltd, has a
separate entity from its owners as discussed in the case of
Salomon v
Salomon & Co Ltd. However, the purpose of this entity is to engage in
those business practices which are similar to the business practices of Nu
Shampoo Pty Ltd. David holds 99 per cent of the shareholding in the
company and the rest is owned by Monica. Although Monica is appointed
as the CEO and sole director of Hair-Glo Pty Ltd; however, she did not
engage in the daily operations of the company, and she has appointed
David as the Operations Manager to handle the operations of the
company. As discussed in the case of
Gilford Motor Co Ltd v Horne, the
legal entity of the company cannot be used by people to avoid their legal
obligations. David is avoiding compliance with his contractual obligation to
avoid engaging in similar trade practices as Nu Shampoo Pty Ltd by
incorporating this company which it operates.
In this scenario, the principle of the lifting of corporate veil can be
applied by the court to assess who are the parties that are running the
operations of the company. Since David is the key stakeholder and
Operations Manager of the company, he is violating his contractual
obligations with Nu Shampoo Pty Ltd by managing its operations in South
Australia. Based on these factors, David is likely to be held liable by the