Liability of Partnerships and Promoters under Australian Law

Business and Corporation Law

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Answer 1
I: Issue
The issue raised in this case is whether Steve would be held personally liable in case the
company became insolvent and failed to pay its debts?
L: Law
The companies operating in Australian have to comply with the guidelines which are issued
under the Corporations Act 2001 (Cth) in order to avoid legal penalties. However, the
companies also have to comply with the provisions given under the common law which
apply over its directors and members as well. The law provides that a company is a separate
legal entity which is different from its members, thus, it has the right to form a contractual
relationship with third parties under its own name. This provision was established in the
case of Salomon v Salomon & Co Ltd (1897) AC 22. The court held in this case that the
members of a company are separate from its legal entity, and they cannot be held
personally liable in case the company is unable to pay off its debts (Goulding, 2013). The
corporation gains its separate personality on the day it is registered as given under section
119. However, many times the promoters form contractual relationships with third parties
before filing the application for the registration of the company which is called pre-
registration contracts. These contracts are recognised in the common law as well as the
Corporations Act under section 131, 132, and 133. As per section 131, if a person signs a
contract on behalf of a corporation which is not yet registered, then such company is bound
by its terms, and it can also hold the right to receive the benefit of such contract in case the
contract is rectified by the organisation within a reasonable time.
However, the person who forms the contract can be held personally liable in case the
company failed to comply with the contractual terms. Clause 2 of section 131 provides that
liability of such person who has formed a contract on behalf of a company in case the
company failed to register or rectify the contract as per the time set by the parties while
forming the contract. Subsection 3 of this section provides that if the company retains a
benefit of the pre-incorporation contract, then some of the promoter’s liability can be
assumed in such case. In Kelner v Baxter (1866) LR 2 CP 174 case, a judgement based on the

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principle of pre-incorporation contract was given by the court. In this case, an advocate of
the company signed a contract on behalf of the corporation before its incorporation. When
the organisation failed to comply with the contractual obligations, then the third party held
the advocate personally liable since the contract was formed by him on behalf of the
company (Shepherd & Ridley, 2015). Furthermore, section 132 (1) provides that the
promoter will not be held personally liable towards the third party for payment of the debts
of the company if another party signed the discharged agreement. Thus, the promoters can
be held personally liable if the form any contract on behalf of the company before its
incorporation to a third party and the company failed to comply with such contractual
obligations.
A: Application
Steve was acting as the promoter of WA Gold Exploration Company while he formed a
contract on behalf of the company with Thor Mining Machinery Ltd regarding purchase of a
drill for the operations of the business. WA Gold Exploration was not registered at the time,
thus, the contract was governed by section 131 of the Corporations Act. It was a pre-
registration contract since it was formed before the enterprise was registered. Furthermore,
the board of directors of the company failed to rectify the contract which is formed by Steve
on behalf of the company with Thor. The company decided that it will not adopt the
contract and it rejected the benefits which are given in the contract that is receiving the
delivery of the drill. As discussed on Kelner v Baxter case, the advocate who entered into a
contractual relationship on behalf of the enterprise was held personally liable when the
company failed to comply with the contractual terms. Therefore, as per section 131 of the
act, Thor has the right to hold Steve liable under the contract formed by him.
On the other hand, the liability of Volvo Trucks (Australia) Ltd comes under the provisions of
the normal rules of corporate contractual liability. As discussed in Salomon v Salomon & Co
Ltd case, a company has a separate entity based on which it has its own liabilities in which
its members cannot be held personally liable. The contract formed between the company
and Volvo creates a contractual relationship between these two parties. The shareholders of
the company are not liable to satisfy the debts of the company towards its creditors. Steve
is a shareholder of the company, and he cannot be held personally liable for the company to