Liability of David and Partners in Commercial and Corporation Law

Running Head: LAW504 0
Commercial and Corporation Law
Student’s Name
5/6/2019

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Question 1
Issue
What is the liability of David regarding two letters out of that, one he received
from his earlier employer Nu Shampoo Pty. Ltd. and another from Standard Bank Ltd.?
Laws
The corporation is one of the important business structures that consist of many
features. One of the important features of the company is its separate legal identity. As
mentioned above a company has separate legal status hence the company can do all
the acts similar to a natural person. For instance, the same can enter into a contract and
can carry business activities. A company also has capacity to own property as decided
under the case of Macaura v Northern Assurance Co Ltd [1925] AC 619. In addition to
this, a company can also process legal proceedings against a third party similar to a
natural person and third parties will have all the rights against a company.
Here this is also necessary to state that in addition to being a separate legal
entity a corporation is also an artificial entity and therefore some natural persons are
associated with the dealing of the company such as promoters and directors/officers.
Due to separate legal status of the corporation, these people cannot be considered as a
company even they have full control of the business. As stated under section 119 of the
Corporations Act 2001 (Cth), a company come into existence when the same is
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registered (Austlii.edu.au, 2019). It means if a person holds 100% shares of the
company then also he/she will be counted as a distinct one from the company. The
principle of separate legal entity was determined in the case of Salomon v Salomon &
Co Ltd [1897] AC 22. In the subjective case, Salomon (an individual) formed a company
named A. Salomon and Company, Ltd transferring his business assets of an existing
business. In consideration of assets transfer, he took debentures of the company.
Further, he was the only owner of A. Salomon and Company as the whole shareholding
was with his and his family member. Later on company faced liquidation and at this
incident, Salomon claimed his debt as debenture holders due to that claim of other
creditor fallen into risk (Gibson & Fraser, 2013). They initiated action against Salomon
and stated that Salomon and his company had no different identity from each other. In
the judgment of the case, justice was granted in favor of Salomon considering different
legal personality of the corporation. Principle of Separate legal entity is also known as
the principle of the corporate veil. Because it is considered that, an artificial veil makes a
company separate from its members, promoters, and directors.
This principle gives rise to another principle namely principles of limited liability. It
means in general promoters and directors/officers of the company are not responsible
for the act/conduct of company. The only the corporation itself will be responsible for the
conduct of directors and officers, which they do in the name of the company and on
behalf of the company. However, in exceptional cases, Judges can pierce the corporate
veil and in that situation, members and directors of the company became personally
liable for their acts conducted on behalf of the company. This can happen in those
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cases where they think that doing so is necessary for the protection of the law. In the
case of Daimler Co v Continental Tyre and Rubber Co [1916] 2 AC 307 court lifted the
corporate veil because the company was formed to escape the effect of law. Similarly,
in the case of Gilford Motor Co Ltd v Horne [1933] Ch 93, court pierced the corporate
veil as the person incorporated a company to avoid his contractual obligation. In this
case, plaintiff restricted former employees from conducting similar kind of business
activities but one of the employees formed a company can start the same business. The
court considered an employee and his company as the same person and held him
personally liable (Harris, 2013).
Application
David worked as an employee of Nu Shampoo Pty Ltd and developed an
employment agreement with the same. As per one of the terms of this contract, David
could not start a business of hair products. This was a restraint of trade term of the
contract. David left Nu Shampoo in 2017 and formed his own company. He took 99%
shares in the same but the sole director of the company was his sister Monica. The
company he formed is named as Hair Glo Pty Ltd. which conduct same business as Nu
Shampoo Pty Ltd. Applying the provisions of Corporation’s Law, David has separate
status from the company yet he seems to be held liable. As per the facts and decision of
the case of Gilford Motor Co Ltd v Horne, judges will pierce the corporate veil and will
held David liable because he formed the company to avoid his contractual obligation.
David received one more letter, which was from Standard Bank Ltd. Bank sent
this letter as the company formed by David Hair Glo Failed to repay the loan taken from
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