Liability of Companies and Partnerships in Business Law

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Business Law Assignment

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Question 1
Issue
The issue is whether Thor Mining Machinery Ltd and Volvo Trucks (Australia) Ltd can
personally hold Simon liable for the contractual terms?
Law
The Corporations Act 2001 (Cth) provides key regulations which companies have to comply
with while managing their operations in Australia. The law provides that after its
registration, the company becomes a separate entity. Section 119 provides that this entity
becomes the separate entity on the day when it is registered. Based on such entity, the
enterprise is able to create contractual relationships with third parties under its own name.
As given in Salomon v Salomon & Co Ltd (1897) AC 22 case, the concept of the limited
liability of members and the separate personality of members was established by the court
(CSU LAW504 Modules, 2018, Topic 14). The liability raised in such contracts cannot bind
the shareholders of the company personally liable. Similar views were given by the court in
the case of Lee v Lee’s Air Farming Ltd (1961) AC 12. Since the organisation is a separate
legal entity, the debt owed by it to its creditors cannot bind its members liable to its terms
(CSU LAW504 Modules, 2018, Topic 14). However, the promoters of a company can enter
into a contract on behalf of the enterprise, and these terms are binding on the parties to the
contract. These contracts are formed before the company is registered, thus, they are called
pre-incorporation contracts. These contracts are governed by both common law and the
Corporations Act. The common law provides that these contracts bind the company into its
terms. However, if the enterprise is not registered, then the person who formed the
contract on behalf of the company can be held liable for such contractual liabilities.
Section 131 of the Corporations Act provides provisions regarding the liability of pre-
incorporation contracts. The section provides that the contract which is formed by a party
on behalf of a company which is not yet registered, then such company is bound but the
terms of such contract. The company also has the right to receive the benefits of the
contract which is formed with a third party. Furthermore, the corporation also has the right
to rectify the contractual terms as per the time which is decided by the parties while

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forming the contract. However, subsection 2 of this act provides the liability of the person
who forms the contract on behalf of the enterprise (CSU LAW504 Modules, 2018, Topic 14).
The law provides that an individual who forms a contract on behalf of the company which is
not yet registered can be held personally liable by the third party if the contract did not get
registered. The person would also be held liable in case the company is registered but
decided not to rectify the contractual terms within the specified time limit set by the
parties. Furthermore, section 3 of the act provides that a company which receives certain
benefit from the contract can also hold the party liable who formed the per incorporation
contract on behalf of the enterprise. Section 132 (1) of the act provides that the promoters
of a company can be held liable for the third party regarding the payments of the debts if
another party signed the discharge agreement (CSU LAW504 Modules, 2018, Topic 14).
Application
In this case, Steve created a contract on behalf of WA Gold Exploration Company while
acting as the promoter of the company. The contract was formed with Thor Mining
Machinery Ltd regarding the purchase of a drill. The contract was a pre-incorporation
contract since WA Gold Exploration Company did not register yet based on which the
provisions given under section 131 applies to this case. After incorporation of the company,
the board members of WA Gold Exploration Company filed to rectify the contractual terms
to rescind the contract. The benefit of the contract was rejected by WA Gold Exploration
Company based on which Thor Mining Machinery Ltd can hold Steve liable for payment of
the debt. Therefore, section 131 applies in which case based on which Thor Mining
Machinery Ltd can held Steve personally liable for breaching the contractual terms of the
contract. In the case of Volvo Trucks (Australia) Ltd, the contract was formed after the
registration of WA Gold Exploration Company. As per the provisions given in the case of
Salomon v Salomon & Co Ltd, the company is liable for its own debts, and the shareholders
cannot be held liable for such debt personally. Thus, WA Gold Exploration Company is liable
for its own liabilities, and Volvo Trucks (Australia) Ltd cannot hold Steve liable for the
contract.
Conclusion
To conclude, Thor Mining Machinery Ltd can held Steve liable for breach of the pre-
incorporation contract since WA Gold Exploration Company failed to comply with its terms.