Liability of Partners and Corporations in Business Law

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Business and Corporations Law

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Answer 1
Issue
The key issue, in this case, is whether Steve can be held personally liable for the contract
formed by him on behalf of the company?
Law
While managing their operations in Australia, companies are subject to a wide range of legal
regulations which they have to comply with in order to avoid penalties. The Corporations
Act 2001 (Cth) applies throughout Australia, and it provides provisions which organisations
have to comply with while operating in Australia. Moreover, provisions are given under the
common law which also applies to corporations operating in Australia and the company can
be held liable for breaching the provisions given under the common law. Salomon v Salomon
& Co Ltd (1897) AC 22 is a significant case in which the key characteristics of a company
were established by the court (CSU LAW504 Modules, 2018, Topic 14). The court provided in
this case that a corporation has a separate legal entity which differentiates it from its
members or shareholders. Due to this separate entity, the liabilities of a company are its
own, and its shareholders cannot be held personally liable by the court to pay back the
debts of the company in case it becomes insolvent. The corporation has the right to enter
into a legal contract with third parties such as customers, suppliers, creditors, investors or
others under its own name.
It means that the liability raised under these contracts is limited to the company and its
shareholders can only be held liable up to the amount they invested in the enterprise. Since
a company is an artificial persona, it operations are managed by directors who are
responsible for entering the company into a legal relationship. However, before the
incorporation of the company, its promoters have the right to sign contracts under the
name of the company to create contractual relationships. Section 119 provides that a
company get its separate legal entity when it is registered, thus, the contracts formed on
behalf of the enterprise before its registration are called pre-incorporation contracts. The
provisions regarding pre-incorporation contracts are included in both common law and the
Corporations Act. The guidelines regarding liability raise under a pre-incorporation contract

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are given under section 131 (CSU LAW504 Modules, 2018, Topic 14). The law provides that
the contract which is formed before the incorporation of a company can bind the
corporation under its terms after its incorporation. Furthermore, the company also has the
right to rectify the contract within appropriate time as given under the terms of the
contract.
The corporation has the right to enjoy the benefit raised from the contract which is formed
on its behalf before its incorporation. However, the person forming the contract can be held
personally liable in case the corporation failed to comply with the contract or its terms.
Section 131 (2) provides that the person who entered into a contract on behalf of an
enterprise which is not yet registered can be held personally liable by the third party in case
the company failed to register. Furthermore, if the company failed to rectify the terms of
the contract within an appropriate time, then the person who initiated the contractual
relationship can be bound by the third party. Section 131 (3) provides that in case a
proceeding is brought before the court for recovery of the damages under subsection 2,
then the court can evaluate the circumstances of the case to (a) ordered the company to
partly or fully pay the damages to the person who was held personally liable (b) transfer the
property which the enterprise received due to the contract (c) pay the amount to the party
with whom the contract is formed (CSU LAW504 Modules, 2018, Topic 14).
Application
A pre-incorporation contract is formed by Steve on behalf of WA Gold Exploration Company
regarding the purchase of a drill for business purposes. The contract is formed with Thor
Mining Machinery Ltd while Steve was acting as the promoter of the enterprise. This
contract comes under the regulations given under section 131. The board of WA Gold
Exploration Company failed to rectify the contractual terms which are formed between the
company and Thor Mining Machinery Ltd. The benefit which is raised under the contract is
rejected by WA Gold Exploration Company since it rejected the delivery of the drill. As per
the provisions of section 131 (2), Steve signed the contract on behalf of WA Gold
Exploration Company, thus, Thor Mining Machinery Ltd has the right to hold him personally
liable under the terms of the contract since the contractual obligations are not discharged
by WA Gold Exploration Company. The contract formed with Volvo Trucks (Australia) Ltd
was formed after the registration of WA Gold Exploration Company was completed. The