Liability of David towards Nu Shampoo Pty Ltd and Standard Bank

This article discusses the liability of David towards Nu Shampoo Pty Ltd regarding breach of the trade restraint clause and towards Standard Bank regarding failure to repay the loan. It also explores the laws and application of separate legal personality and limited liability in corporations.

Commercial and Corporations Law
Student Name
5/5/2019

Contents
Question 1..................................................................................................................................1
Issue........................................................................................................................................1
Laws.......................................................................................................................................1
Application.............................................................................................................................2
Conclusion..............................................................................................................................3
Question 2..................................................................................................................................3
Issue........................................................................................................................................3
Law.........................................................................................................................................3
Application.............................................................................................................................5
Conclusion..............................................................................................................................5
References..................................................................................................................................6

Question 1
Issue
 What is the liability of David towards Nu Shampoo Pty Ltd. regarding breach of the
trade restraint clause
 What is the liability of David towards standard bank regarding failure to repay the
loan?
Laws
The corporation is one of the types of business structure that are available to people. It
has many features. One of the important features of corporations is a separate legal
personality. Here separate legal personality refers to a different identity of the company from
its promoters, members, directors as well as from officers (Anderson, 2008). Because of this
feature, a company may carry its business activities similar to a natural person. Principle of
Separate legal personality has been provided in the case of Salomon v Salomon & Co Ltd
[1897] AC 22, which is one of the leading cases in the history of Corporations Act. In this
case, a person Salomon formed a company and transferred his shoe business assets to the
newly incorporated company by him. He received company’s shares and debentures in return.
Here Salomon was playing three roles namely, the seller of assets, a major shareholder of the
company and managing director of the company (Hannigan, 2012). As he was a secured
debenture holder, he asked his claim at the time of insolvency of the company and the court
held his claim valid. In the reasoning of the decision, the court held that no matter how many
roles Salomon was playing in the company and irrespective of his control on the affairs of the
company, this is to conclude that Salomon & Co, Ltd was a different legal entity.

This decision was further used as legal precedent in hearing and decision of
subsequent cases. Because of the separate legal personality of the company, another feature
also comes into the light, which is limited liability. Here this principle refers to a sense that
members and managers of the company have very limited responsibility in respect to debts
and liability of the company and they may not be held personally liable for such debts
(Business.gov.au, 2018). This is a general rule but the same has a certain exception.
As mentioned above company has different identity from its members and directors it
seems that there a virtual veil in between them. But in certain circumstances court lift this
veil and held the person liable who are liable to conduct the business because ultimately
directors/members/promoters are the people who act on behalf of the company. Lifting of
corporate veil principle provide safeguard to misuse of separate legal personality principle
(Legalvision.com.au, 2016). There are not a particular list of situations where court can lift
the veil but it depends on the discretion of the court. Gilford Motor Co Ltd v Horne [1933]
Ch 935 is also a case where court lifted corporate veil. The reason behind doing so was the
defaulted and fraudulent conduct of a person who incorporated a company breaching the
restraint of trade clause imposed by his previous employer (Lawcasesummaries.com, 2019).
In similar cases where people use separate legal personality for self-interest court held such
people liable.
Application
In the provided case, David incorporated a company named Hair Glo Pty Ltd, which
was engaged in the business of hair products. David could not start this business, as he was
restricted to do so as per the restraint of trade clause, mentioned in employment contract with
his previous employer. However, he did not held any position in company but acted as a
promoter. Applying the case of Gilford Motor Co Ltd v Horne, David seems to be held
personally liable for his conduct. He started the business in form of company, as he could not

do it in its individual capacity. As he was the promoter of the company, business belonged to
him and therefore he will be held personally liable towards his previous employer i.e. Nu
Shampoo Pty Ltd.
Another case is related to standard bank ltd where the company Hair Glo failed to
repay the loan taken from subjective bank. In this case, bank would have right against
company and not against David because he was the promoter of the company and taken loan
was in the name of Hair Glo. Further being the director of the company, Monica also does not
seem to be held liable as applying the provisions of Salomon V Salomon, company was a
separate legal entity. Nevertheless court may held David liable for this loan because he
formed this company to avoid his personal obligations but there are few chances of this
happening.
Conclusion
To conclude the asked issues this is to state that Nu shampoo Pty Ltd may held David
Liable but Standard Bank Ltd can sue the company Hair Glo. It will be on the discretion of
the court to decide whether or not to held David Liable towards Standard Bank Ltd.
Question 2
Issue
What are the legal obligations of Anne and Mary with respect to transactions made by
other partners?
Law
A partnership firm is a business structure where partners act on behalf of each other
and on behalf of their firm. In this manner, they are agents of the firm and other partners and

make them bind with their conducts. In Australia, different legislations are there on the
partnership, which are applicable to different states. For instance Partnership Act 1892
(NSW) (hereinafter referred to as an act) is applicable to New South Wales state of Australia.
This act defines the rules related to the partnership business. Section 24 (5) of the act says
that unless nothing is mentioned it is assumed that all partners are taking part in the affairs of
the firm. It means a third party assumes that partners have the right to act on behalf of the
firm. In addition to this legislation, another document is there which governs the terms of
mutual relationship of partners. This document is known as a partnership agreement. It is an
internal document of the firm and a third party cannot assume to have access to the same and
therefore a firm and other partner are always responsible to innocent third party for the
conduct of one or more partner of the firm. Section 24(2) of the act says that partners have
the right to ask for the reimbursement of expenses that they do on behalf of the firm. There
are some rules related to the obligations of partners towards third parties, which are contained
in the act. Firstly, section 5 of the act says that every partner acting on behalf of the firm bind
the firm and other partners from his/her conduct whereas he does such act in the regular
course of business and the third party has a usual assumption of authority. This provision has
one of the important effects that even in those cases where the partner act outside of
authority, the third party will have right against a firm and other partners where such party
had no knowledge of bad authority/ no authority of partner.
In addition to liability towards the third party, provisions are also there in the act
regarding the liability of partners towards other partners. As per the provisions of the act and
common law, partners have a fiduciary duty with each other. It means they should act in the
good faith of other partners as well as in firm. As per the provisions of section 29 of the act, it
is the duty of every partner to disclose the profits earned from business to other partners.
Further court is given in the case of Birtchnell v Equity Trustee, Executors & Agency Co Ltd

(1929) 42 CLR 384, that as partners have a fiduciary relationship with each other the same
must not make secret profits from the business of the firm.
Application
In the case provided hereby, four partners are there viz. Anne, Mary, Jane, and Sarah.
They have decided that all the partners can do the transaction up to $10000 in their individual
capacity while acting on behalf of the firm. Mary and Anne went oversee for one year and
remaining two partners Jane and Sarah conducted some transactions. First of all, Jane paid
$2000 for printer papers that she purchased from the shop of her boyfriend. The arm’s length
cost of these papers was only $1200. Here in this manner, Jane earned secret profits while
acting on behalf of the firm. Applying the provisions of Birtchnell v Equity Trustee,
Executors & Agency Co Ltd (1929) 42 CLR 384 she is responsible to return such secret profit
i.e. $800 to the firm. Another transaction that she did was the purchase of medical
instruments for that she paid $13000. Here she acted going outside of given authority. As
United Medical Suppliers Pty Ltd, being a third, the party could not have knowledge of such
authority, firm and other partners will held liable towards the same.
Sarah, another partner of the firm also made a transaction. She purchased a driver
training course from Uber Australia Ltd which was worth $2000. Here although the value of
the transaction was less than $10000. She acted outside of her authority, as the conduct was
not related to medical services. The third party cannot take the assumption of implied duty in
this case and therefore partners will not be liable to Uber Australia Ltd.
Conclusion
Jane is liable to return $8000 to the firm. Further, other partners will be held liable
towards third-party with respect to the medical instrument purchased by Jane. At last, the
third party will have no right against other partners in case of sale of a driver-training course.

References
Anderson. (2008). Directors' Personal Liability for Corporate Fault: A Comparative
Analysis.UK : Kluwer Law International B.V..
Birtchnell v Equity Trustee, Executors & Agency Co Ltd (1929) 42 CLR 384
Business.gov.au. (2018). Company. Retrieved From:
https://www.business.gov.au/planning/business-structures-and-types/business-
structures/company
Gilford Motor Co Ltd v Horne [1933] Ch 935
Hannigan, B. (2012). Company Law. UK: OUP Oxford.
Lawcasesummaries.com. (2019). Gilford Motor Co Ltd v Horne [1933] Ch 935. Retrieved
From: https://lawcasesummaries.com/knowledge-base/gilford-motor-co-ltd-v-horne-
1933-ch-935/
Legalvision.com.au, (2016). How Can a Court Pierce the Corporate Veil?. Retrieved From:
https://legalvision.com.au/how-can-a-court-pierce-the-corporate-veil/
Partnership Act 1892 (NSW)
Salomon v Salomon & Co Ltd [1897] AC 22