Business and Corporation Law Assignment - Agency and Corporate Veil

This assignment delves into key concepts of business and corporation law, focusing on agency law and the principle of corporate veil. The first part analyzes three scenarios involving agency relationships, examining the rights and obligations of principals, agents, and third parties in contract formation. It explores express and implied authority, the indoor management rule, and the consequences of an agent's actions, including breaches of fiduciary duties. The second part examines the corporate veil, discussing the separate legal identity of a company and its implications for shareholder liability. It analyzes a scenario involving a company's debt and the potential liability of a majority shareholder, referencing the Salomon v Salomon & Co Ltd case. Additionally, it explores circumstances where the corporate veil can be lifted, using the Gilford Motor Company v Horne case as an example. The assignment concludes by providing legal arguments for each scenario.

Business and Corporation Law
Assignment
Date
Student id

Question 1
Issue
The aim of the case is to determine whether there is any contract between principal (Terence)
and third party (Gabby, Mary, Gordon) on the account of the contract enacted by agent (Sara,
Peter).
Law
Agency law would be taken into consideration when the objective is to determine the
relationship among agent, principal and third party. As per agency law, the agent is supposed
to work on behalf of the principal based on the authority delegated by principal. This agency
relationship provides the rights to the agent to enact contract for the concerned principal. In
this regards, it is essential that agent must possess the necessary authority to enact contracts.
This authority can be implied or express. When the principal has explicitly granted the rights
to work on behalf of the principal, then it would be categorised as express authority.
However, in case of implied authority the sphere of the authority would be presumed on
behalf of the third party after taking the note of the conduct of the principal towards his/her
agent (Pentony, et.al., 2013).
Also, the case when the agent does not have any of the authority (implied or express) and still
has represented the principal, then based on the indoor management rule, the rights of the
third party will remain safeguarded and hence, the principal has to complete the contractual
obligations. However, the critical part is that the third party must not have any clue regarding
the lack or absence of authority of agent and in good faith, the third party should have created
legal relation with agent. The decision announced in Royal British Bank v Turquand (1856) 6
E&B 327 case is the witnesses of this fact (Latimer, 2016).
However, it is pivotal that the above immunity would not be extended when the third party
was well aware regarding the absence of agent’s authority and still enacted the contract with
agent. In such cases, the indoor management rule would not provide any rights to third party
to sue principal for not completing the contractual liability. This is because the contract made
by agent with the third party become void and hence, would not be enforceable on the
principal (Vermeesch & Lindgren, 2011).

According to the general rule, it is essential that when the principal has revoked authority of
the agent, then the principal must inform the external parties regarding the withdrawal. This
is because there is significant possibility that agent would contact the external party and enact
contracts and work fraudulent on behalf of the principal. Further, if the external party does
not get any clue from outside and make legal relations with agent based on the belief that
agent is representing the principal, then the contractual liability would arise on principal. The
verdict cited by honourable court in Freeman& Lockyer v Buckhurst Park Properties [1964]
2 QB 480 case is the relevant evidence in this regards (Taylor & Tayor, 2015).
According to agency law, when the respective agent has not obeyed the instructions offered
by the principal or makes any secret gains by acting for self-interest, then the principal has all
the legal rights to sue the agent for violating the fiduciary duties and also the principal can
recover all damages suffered.
Application
1. Terrence (Principal), Sara (Agent), Gabby (External party)
Terence is the principal who has asked Sara to make designs for his Jewellery business and
also to make contracts with external parties. Sara has visited a customer Gabby and has
displayed several designs of brooch. Finally, Gabby has selected a particular design of brooch
with cost of $1000 and has enacted a contract with Sara. It is essential to note that Gabby
does not have any clue that Sara has working for Terence and hence, in good faith has entered
into legal relations. It is apparent that Sara was working as agent on Terence behalf and thus,
the contractual liability to design a brooch of worth $1000 of the selected design would be a
liability for Terence. An enforceable contract present between Terence and Gabby.
2. Terrence (Principal), Peter (Agent), Mary (External party)
Terence has granted the authority to Peter for enacting contract with external parties.
However, Terence has specifically asked not to order gold for the company because they
already have excess amount of gold. Irrespective of this instruction, Peter has agreed to
purchase gold worth $1500 from Mary. Also, Mary was unaware of the aspect that Terence
has strictly said no to purchase gold and therefore, under the relevance of indoor management
doctrine, the parties Mary and Terence are bound in an enforceable contract. If Terence

rejects the contractual obligations, then Mary can sue Terence and recover the amount of
$1500. Further, Terence is having valid rights to sue Peter for violating the fiduciary duties.
3. Terrence (Principal), Peter (Agent), Gordon (External party)
It can be seen from the case that Peter was fired by Terence because he has violated the
fiduciary duties. However, Gordon the diamond merchant who supplies diamond to Terence
was unaware of the fact that Terence has fired agent Peter. Also, Terence does not bring the
notice of Gordon about this authority withdrawal from Peter. Hence, the contract enacted on
the part of Peter with Gordon would extend the enforceability on Terence and thus, he has to
make the payment of $5000 to Gordon. Further, Peter has taken the diamond from Gordon
and has left the place and thus, Terence is in the position to sue Peter and recover the amount
of diamond.
Conclusion
Based on the above discussion, it can be concluded that in all the above cases, Terence and
external party have enacted enforceable contract. Also, due to the breach of the fiduciary
duties, Terence can sue Peter and demand compensation for the damages suffered.
Question 2
Issue
Considering the relevant facts of the situation presented, the key issue is to opine Roger on
the validity of the payment claim made by Industrial machines Ltd in relation to outstanding
payment due from the company in which Roger is a majority shareholder. Further, in wake of
the relevant legal principles related to principle of corporate veil, the decision made by
Department of Industry needs analysis.
Law
A unique feature about the company is that it has a legal status. This legal status is not
dependent on the owners which tend to have a separate legal identity of their own. Since the
company has a legal identity, hence it is capable to enter into contractual relationships with
different parties. The management tends to act as agent to execute these agreements on behalf
of the company since the company is unable to do so (Andrews, 2011). Further, it is amply

clear that since the contracts are entered into on behalf of the company, hence the underlying
rights and liabilities would also be borne by the company. As a result, it is possible for the
unpaid creditors to sue the company for any defaults on payments or delay in discharging of
contractual obligation (Davenport & Parker, 2014).
A key in such cases is the irrespective of whether the company eventually settles these claims
or not, the unpaid creditors cannot make a legal claim against the shareholders irrespective of
their ownership and ability to pay. This is because the outside creditors or other parties have
entered into a contract with the company and not the shareholder. As a result no obligation
arises for the shareholder to entertaining outstanding liabilities on the company provided, no
personal guarantee has been extended (Richard, 2003).
The above concept is known as “principle of corporate veil” and was first highlighted more
than a century ago in the Salomon v Salomon & Co Ltd [1897] AC 22 case. An individual
named Salomon had a shoe business which was transferred later to a new company formed.
By virtue of this transfer, Salomon was issued both stock and debenture by the company.
Later, before the company went into liquidation, Salomon had sold the debentures to a third
party. The business had creditors who had outstanding claims along with unpaid debenture
holders (Lindgren, 2011). Claims were made that Salomon should discharge these debt as the
company was not different from Salomon considering the majority ownership held by him.
However, the court decided in favour of Salomon and cited that company has a legal entity
which is clearly distinguished from Salomon. Hence, the undischarged parties can claim
money from the company with whom they have contractual relationship. However, no legal
claims can be made against Salomon (Carter, 2012).
This protection that the shareholders get on account of a separate legal identify can be
misused and hence in certain circumstances, it is permissible to lift the corporate veil
(Andrews, 2011). One of such instances is when the court tends to have reasonable doubt
based on the underlying circumstances that the company and the shareholder have an implied
agency relationship and hence canot be distinguished (Davenport & Parker, 2014). A worthy
case foe discussion in this context is the Gilford Motor Company v Horne [1933] Ch 935
case. The defendant was a former employee of Gilford Motor Company and had signed a
non-compete agreement with the motor company. The defendant however was keen to start
the same business as the motor company while avoiding legal liability for breach of non-
compete contract. Thus, he started a new company in which his family members had

significant shareholding. When the matter was reported to court, it was highlighted that the
defendant would be liable for the losses owing to company just being an instrument to ensure
that defendant cannot be accused (Carter, 2012).
Application
Roger owns a significant share of United Chemicals Pty which has bought phosphate
processing machine from another company Industrial Machines Ltd as a specific price which
needs to be paid in three equal annual instalments. Roger’s brother Timothy is the MD of
United Chemicals Pty and has enacted the contract for the purchase of the machine on behalf
of the company. The company is able to make the two payments but defaults on the third one
owing to business slowdown. To recover the pending amount, the board of the outstanding
creditor (i.e. Industrial Machines Ltd) decides to claim money from Roger considering his
immense wealth. This decision of Industrial Machines Ltd is clearly not consistent with the
prevailing law as the United Chemicals Pty is separate from Roger who is the owner. The
contract for processing machine has been enacted with the company and not Roger and
therefore the liability to pay also is on the company. Hence, to recover the pending dues,
United Chemicals Pty should be sued by Industrial Machines Ltd rather than demanding the
money from Roger.
Besides, Roger also has intention to have footprints in explosive manufacturing business but
for commencement of the same, a licence is required. Roger applies for the same but is turned
down owing to criminal offence in the past which according to the legislation is the correct
course of action on the part of the department. However, then an application is made on
behalf of a new company specifically formed for this purpose and in line with decision made
in Gilford Motor Company v Horne case, it makes sense for the department to reject the
application.
Conclusion
The above discussion implies that Roger does not have the liability to pay the outstanding
debts of the company owing to the “principle of corporate veil” Also, by lifting the corporate
veil for the new company formed, it can be argued that the department is correct in rejecting
the application of licence the second time.

References
Andrews, Neil, (2011). Contract Law (3rd ed.). Cambridge: Cambridge University Press.
Carter, J. (2012). Contract Act in Australia (3rd ed.). Sydney: LexisNexis Publications.
Davenport, S. & Parker, D. (2014). Business and Law in Australia (2nd ed.). Sydney:
LexisNexis Publications.
Latimer, P. (2016). Australian Business Law CC (1st ed.). Sydney: LexisNexis Study Guide.
Lindgren, KE. (2011). Vermeesch and Lindgren's Business Law of Australia (12th ed.).
Sydney: LexisNexis Publications.
McKendrick, E. (2003). Contract Law (5th ed.). Basingstoke: Palgrave.
Pendleton, W. & Vickery, N. (2005). Australian business law: principles and applications
(5th ed.). Sydney: Pearson Publications.
Pentony, Graw, Lennard & Parker, (2013). Understanding Business Law (5th ed.). Sydney:
Butterworths.
Richard, S. (2003). The Modern Law of Contract (5th ed.). London: Cavendish.
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