Liability of David for Trade Clause Violation and Failure to Pay Instalment

LAW

Issue
The issue in the given case study is to evaluate whether David can be sued in light of
breaching the trade clause or not? In addition, what is the liability of $ 100000 David of
towards the standard bank on lines of the failure to pay the instalment?
Rules
It is significant to note that when the companies are incorporated and set up, the
people who set up the company contribute capital and indulge into the preliminary work
incidental to the formation of a company that is the promotion, incorporation, and flotation;
and are referred to as the corporate promoters. The promoters can either be the shareholders
and the directors of the company, or choose to solicit people to invest money in the company
and appoint the board of directors for the management of the affairs of the company. It is
further significant to note that in the eyes of the law, the company has a separate identity and
is separate entity from all of the above mentioned groups and persons. By the virtue of the
separate entity principle, the corporations are conferred with the capability of entering into
contracts in own name, capacity to sue the third party for the enforcement of the contracts in
the own name and further, the third parties can also sue the company for the said contracts.
The principle of separate entity have been widely established in the eyes of the law and has
been pronounced in a number of case laws such as Salomon v Salomon & Co Ltd [1897] AC
2, Lee v Lee's Air Farming Ltd [1960] UKPC 33. Additionally in Macaura v. Northern
Assurance Co. Ltd. [1925] A.C. 619, Charterbridge Corporation Ltd v Lloyds Bank Ltd
[1970] Ch 62, 74, and others.
In the most popular case law of Salomon v Salomon, the proprietor had transferred
whole of the business to a company in exchange of consideration in the form of the shares
and debentures of the company. Further, it is vital to note that the shares of the said company
were bought by the family members of Salomon and thereby leading to full control of the
company in the hands of Salomon and his family. As the company went under liquidation,
the claim of the debenture holder that is Salomon were settled first, to which the creditors
opposed that being the sole controller of the company, Salomon should not be paid before the
settlement of the claims of the creditors. However, the courts of the law upheld the contrary
view and refuted the claims of the creditors citing that the company has an identity separate
from its shareholders. On the same lines, the court cited that the conduct of the corporation
cannot force the liability onto the shareholders behind the said investments. This further

implies that directors, promoters, or the shareholders will not be liable and responsible for the
acts of the company.
However, it is essential to note that the shareholders cannot always take the shelter of
the said principle and enrich themselves at the cost of deceiving other stakeholders in the
company (Anderson, 2009). The safeguard provided to the shareholders is denoted as the
principle of lifting of the corporate veil and has also been established in numerous case laws
such as Jones v. Lipman [1962] l WLR 832, Gilford Motor Co Ltd v Horne [1933] Ch. 935
(CA), and others. In the circumstances of the above cases, it was held by the courts of the law
that parties should beware from misusing the separate entity rule, owing to which the courts
can lift the artificial veil, and render the parties to be the personally liable for the detriments
caused.
Application
On the application of the above stated statutes, pronouncements on the given case
study, following points are noteworthy. In the first part of the case study, Nu Shampoo Pty
Ltd had placed a restriction on the employee David to not to carry similar business to that of
the company. In spite of this, David did not comply with the conditions of the subjective
trade clause and established the company Hair-Glo Pty Ltd having the same business as that
of the earlier mentioned company. The situation mentioned in the case study is similar to the
circumstances of the case Gilford Motor Co Ltd v Horne. In the said case the corporate veil
was pierced by the courts of the law, citing that there was a violation of the principle of the
restraint of the trade by the company and the corporate veil was lifted to hold the sole
controller of the company liable. As David violated the trade clause established by the
company Nu Shampoo Pty Ltd, he will be held personally liable for the said act of violation.
For the second part of the case study, it is imperative to note that Monica was the
director as well as the CEO of the company Hair-Glo Pty Ltd. In the said company, her
shareholding amounted to be 1 % and the shareholding of David amounted to be 99 %,
thereby making it quite evident that the sole control of the company Hair Glo was
concentrated in the hands of David. For the loans taken by the company, it is the prime
liability of the company to pay off the same and directors cannot be held personally liable.
This would be on the lines of separate identity of the company and the members, thus director
cannot be held personally liable for the loans taken in the given circumstances of benefitting
the company from the said loans.