Corporation Law: Liability of Agents and Lifting of Corporate Veil

This article discusses the liability of agents and lifting of corporate veil in Corporation Law. It explains the legal capacity and powers of a company as a separate legal entity. The article also refers to landmark cases such as Salomon v Salomon & Co Ltd and Lee v Lee’s Air Farming Ltd to support the arguments presented.

Running head: CORPORATION LAW
Corporation Law
Name of the Student
Name of the University
Author Note

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Answer 1:
Issue:
The issue is that whether there was a contract between Gabby and Terrance. The issue is
also regarding the fact that whether Mary and Peter had authority. Whether there is a liability on
the part of Peter to Gordon.
Law:
The law of agency states that an agreement is formed when an individual authorizes his
right to another person for the purpose of negotiating on his behalf with the third parties. The
individual authorizing the right can be termed as the principal and the right entrusted on another
person is his agent. In this regard, it is noteworthy to mention here that, under the law of agency
the agent acts according to the interest of the principal. The principal, in certain cases, is liable
for the actions of his agent. However, it is essential to have knowledge of the fact that whether
the agent has an authority to act. Therefore authority under law of agency can be categorized
into-
1) Actual authority.
2) Implied authority.
3) Ostensible authority.
Actual authority:
An authority is entrusted by the principal to his agent, however if the agent acts in excess
of his authority then the principle shall not be held accountable for the action of the agent. An
actual authority can be made orally and in writing. The agent in some cases shall be personally

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accountable to the third party for breach of warranty. It can be observed in Watteau v Fenwick
[1893] 1 QB 346, that the manager of the pub was directed by the owner not to buy cigarettes.
Such an authority was given by way of express or actual authority. However, it can be noted that
in this case was not held liable for the purchase of cigars because it formed an important part of
authority of the pub managers in England during that time.
Implied Authority:
An agency can arise as a result of implied authority. However, implied authority may not
be mentioned in the contract. Therefore, in some cases it may happen that the principal has
authorized the agent to work on his behalf for the purpose of ordering specific goods and
thereafter pays the agent for the same. In such cases an implied authority can be formed which
was noticed in the landmark case of Chan Yin Tee v William Jacks and Co. [1964] MLJ 290.
Ostensible Authority:
Apparent or ostensible authority can be formed in situations does not intend to give the
agent his authority and therefore authorizes the agent to believe that he has an authority to make
decisions in the absence of the plaintiff with the third parties. However, in most of the cases, an
authority lies upon the agents to act on behalf of the principal. In such cases, it can be observed
that when the prior authority was vested with the agent and such authority was terminated
without informing the agent then an ostensible authority is formed. In case of ostensible
authority, there is an intention on the part of the principal not to entrust an authority to the agent
however; he pretends to do so. Such representation on the part of the principal can be in the form
of inaction, as the principal was aware of the circumstances that how the agent would have acted
if was given the authority. It was observed in Freeman & Lockyer v Buckhurst Park Properties

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[1964] 1 All ER 630, that an authority was given to Kapoor, one of the directors of the company
to act as a managing director on various occasions. In this case, the third party had the
knowledge that Kapoor was authorized by the company to perform the role and therefore entered
into a contract with him accordingly.
Undisclosed Principle:
A contract exists between a third party and the principal even if it was not disclosed by
the agent that he was acting on the behalf of the principal. In case of undisclosed principle a
contract is formed between the principal and the third party because in such cases the agents do
not reveal that they are working under the authorization of their principle. It was found in Siu
Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199, that the agent has particular skill and
therefore the third party entered into a contract with him believing that he was acting on his own
behalf. In case of undisclosed principle, the third party demands performance from the agent or
from the person with whom he believes he has contract which is termed as the doctrine of
election.
Application:
In the present case study, it can be observed that Sara had a contract with Gabby without
informing him the fact that she was working as an agent under Terence. Therefore in this case
the doctrine of election can be applied. Gabby shall decide that whether he has a contract with
Terrance or Sara. In this regard, the case study of Siu Yin Kwan v Eastern Insurance Co Ltd
[1994] 2 AC 199 can be applied.

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In the present scenario, it can be stated that there is an actual authority to Mary while
Peter had implied authority. This is due to the reason that he was directed by Terrence not to buy
gold which he did. However, Terrence directed him to buy silver which he did not.
It can be observed that Terrence fired Peter on Monday i.e. after the termination of
agency. In this case Terrence shall be liable to Gordon as he was of the knowledge that Peter had
authority and that there were no termination. However, in this case Peter has used the business
email-id and therefore there is a breach on the part of Terrence in relation to ostensible authority.
Therefore, it is worthwhile to refer the case of Freeman & Lockyer v Buckhurst Park
Properties [1964] 1 All ER 630 as Gordon believed that Peter has authorized to act.
Conclusion:
It can be concluded that, there is a contract between Gabby and Terrence. There is an
actual authority to Marry while an implied authority lies with Peter. Therefore, Peter is not liable
to Gordon, Terrence is liable.
Answer 2:
Issue:
The issue is that whether Roger is personally liable to Industrial Machines Ltd. There is
an issue that whether Roger can challenge the decision of the Department of Industry regarding
rejection of application.
Law:
According to the provisions of Section 119 of the Corporation Act 2001 (Cth), a
company forms a corporate body upon being registered. Therefore, it is worth mentioning that a

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company has a legal existence which is separate from its members. Therefore, the shareholders
cannot be sued only the Company has the right to sue and be sued it is own which was held in
Macaura v Northern Assurance Co Ltd [1925] AC 619. In this regard, mention can be made of
Section 124(1) (a) of the Corporation Act 2001 (Cth), where it has been written that a company
possesses the legal capacity and powers same as that of an individual as well as the powers of a
corporate body. It is noteworthy to mention here that when a company is established as a
separate legal entity, it is separate from its members as a result of certain consequences which
can be summarized as-
1) It is evident the company is liable for the debts incurred by it. Therefore, the shareholders
of a limited liability company are not accountable to pay the debts incurred by such
company.
2) The company does not act as an agent to its shareholders.
It is worthwhile to refer here that the concept of separate legal entity and limited liability
was entrenched in the landmark case of Salomon v Salomon & Co Ltd [1897] AC 22. In this
case, it was observed that Salomon being the owner of the company transferred the assets to
another company which supplied him with shares and a debenture. As a result of it, Salomon’s
ownership transferred to that of a shareholder and to a creditor of the company. Therefore, the
creditors of the company who were supplying goods issued an application stating that debenture
was invalid. In this case, the court rejected the fact that Salomon was personally liable to the
creditors. The Court relied upon the following grounds while rejecting the arguments presented
by the creditors. These were:
 A company has a separate legal entity which is separate from the shareholders.

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 The company was not established with an intention to defraud the creditors.
Therefore, it is worth noting that the shareholders of a company cannot be sued
personally only the company can be held accountable because of its corporate liability.
Therefore, the company can be sued directly.
The doctrine of lifting of corporate veil was first established in the case of Lee v Lee’s
Air Farming Ltd (1961) AC 12. In this case, it was held by the Court that Lee being the
shareholder of the company cannot stay behind corporate veil as he was also the owner of the
company. This case also established the fact that the shareholder has the right to contract with
the company if he owns shares with the company. It is worth noting that when a company is
formed as a result of bypass the effect of law, then the corporate veil can be lifted. Similarly, it
was observed in Gilford Motor Co Ltd v Horne [1933] Ch 935 it was observed that in order to
avoid contractual obligations, a restraint of trade was agreed on the part of the employee of the
plaintiff. In such process he started same line of business with his wife and other employees as
shareholders. In this case, it was held by the court that the restraint has been broken. In Daimler
Co v Continental Tyre and Rubber Co [1916] 2 AC 307, it was observed that the courts are at
the authority to pierce the corporate veil in cases where the company tries to escape the effect of
law. In Daimler Co v Continental Tyre and Rubber Co, however, it was found that World War
1, the trading with companies of Germany was strictly prohibited. Therefore, it was decided by
the court that the trading of UK registered company with shareholders from Germany was like
trading with enemies. But still in case of loss incurred by the company, the shareholders shall not
be held liable.
Application:

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In the present scenario, it can be observed that the company was formed by Roger with
Mary and Timothy as the shareholders. Therefore the case of Salomon v Salomon & Co Ltd
[1897] AC 22 can be referred in this regard. The company formed by Roger had a separate legal
entity and therefore Roger is not personally liable to Industrial Machines Ltd however the
company is liable. Therefore, in this regard, it is worthwhile to mention here that the Industrial
Machines Ltd can directly sue the company but cannot personally sue Roger. In such cases, the
company is liable for non-payment and not the managing directors.
In the present scenario, it can be seen that the application for licence for explosives
manufacturing gets rejected. In this regard, the cases of Daimler Co v Continental Tyre and
Rubber Co [1916] 2 AC 307 and Gilford Motor Co Ltd v Horne [1933] Ch 935 can be applied.
It is noteworthy to mention here that, the courts shall not lift the corporate veil in cases if there is
an existence of deceit or wrongdoing that is common to all. In the present scenario, it has been
already mentioned that the Commonwealth legislation has prohibited licenses to individuals
having prior criminal convictions. Therefore, even if the courts lifted the corporate veil in favor
of Roger, his application would get rejected if he applied again for license.
Conclusion:
In the conclusion, it can be stated that Roger is not personally liable to Industrial
Machines Ltd. Roger cannot challenge the decision of the Department of Industry for declining
the application for license.

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References:
Cases:
Chan Yin Tee v William Jacks and Co. [1964] MLJ 290.
Daimler Co v Continental Tyre and Rubber Co [1916] 2 AC 307.
Freeman & Lockyer v Buckhurst Park Properties [1964] 1 All ER 630.
Gilford Motor Co Ltd v Horne [1933] Ch 935.
Lee v Lee’s Air Farming Ltd (1961) AC 12.
Macaura v Northern Assurance Co Ltd [1925] AC 619.
Salomon v Salomon & Co Ltd [1897] AC 22.
Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199.
Watteau v Fenwick [1893] 1 QB 346.
Acts:
The Corporation Act 2001 (Cth).