LAW504 Case Study: Analyzing Company & Personal Liabilities

This case study delves into two complex scenarios concerning business and corporation law. The first scenario examines the potential liability of Steve Jones, the founder and major shareholder of WA Gold Exploration Ltd, for breaches of contract and company debts. It analyzes pre-incorporation contracts and shareholder liability, referencing key legal cases and sections of the Corporations Act 2001. The second scenario assesses the extent to which Simon, a partner in Computer Solutions, can bind the partnership to contracts with third parties, specifically Sunstar Computer Hardware Ltd and You Beaut Ute Ltd. It discusses agency law, apparent authority in partnerships, and the limitations of partner authority, citing relevant sections of the Partnership Act 1892 and case law. The analysis concludes that Steve is unlikely to be held liable in the first scenario, while Computer Solutions is likely bound by Simon's actions in the contract with Sunstar Computer Hardware Ltd but not for the purchase of the ute.

Running head: Business and Corporation Law
Business and Corporation Law
Author Name(s)
Institution
Author Note

Business and Corporation Law 1
Question 1: Steve Jones
Issue
Given that Steve is the Founder(promoter) of WA Gold Exploration Ltd, is he liable for
the breach of Thor Mining Machinery Ltd? Also, as a shareholder with 90%, is he liable for the
WA Gold Exploration Ltd debts with Volvo Trucks (Australia) Ltd?
Rule of Law
Company founders or promoters are the initial persons who exist before its incorporation,
and they are the one who takes the responsibilities of the incorporation work(Slorach et al, 2017
p.46). Unregistered companies have no legal personality, and one element of a contract requires
parties to have a contractual capacity which runs together with legal personality (Jones, 2015, p.
131). Therefore, no company can be either directly or indirectly become a party to contract prior
to its incorporation. When promoters enter into contracts in the name of the unregistered
company, they take the risk of becoming liable for those pre-registration contracts. Therefore, the
safest way is to wait for the registration or purchase an already existing company. In other words,
as getting into contract on behalf of a company creates an agency, common law did not allow an
agency to exist before its principal.
In English law, the landmark case that set these rules was (Kelner v Baxter (1866) LR 2
CP 174) which among the first cases that dealt with situations of pre-incorporation contracts. In
this case, the court ruled that when contracts are executed for a contemplated company,
individuals who had acted as the promoters of the unregistered entity would be the one legally
liable for those contracts. The case of (Kelner v Baxter (1866) LR 2) was ruled with the
application of common law. During those times, common law or the law in general did not have
any provision for ratification of contracts entered on behalf of a company that did not exist.

Business and Corporation Law 2
The rule that was highlighted by the case of (Kelner v Baxter (1866) LR 2) was that
promoters were the one who would be liable on any contract they form before incorporation.
However, this law did not set out whether the founders were to automatically become liable in
such circumstances.
The case of (Newborne v. Sensolid Co. Ltd (1954) 1 QB 45) is one of the cases that took
another twist that rejected the idea that promoters can become automatically liable. The case
involved a consignment that Newborne contracted to buy from Sensolid, signing the contract as
“Leopold Newborne (London) Ltd". He also ended it as “Yours faithfully, Leopold Newborne
(London) Ltd." When the defendant (Sensolid) refused to deliver the consignment, Mr.
Newborne sued for breach. The court held that both Leopold Newborne (London) Ltd and Mr.
Newborne himself could not sue. This court interpreted a contract as one that was entered by the
Leopold Newborne (London) Ltd but not Mr. Newborne. Therefore, as Leopold Newborne
(London) Ltd did not exist, same as the contract was with a non-existing party. The rationale held
here was mainly on the intent of the contracting parties. Did the parties intend to contract as
individuals or as companies? If the intention was to contract as a company, no one can later
assert that an individual would take the liability.
In Australia, the case of (Black v. Smallwood and Cooper(1964) N.S.W.R. 1121.)
followed the same construction set in (Kelner v Baxter (1866) LR 2) Smallwood and Cooper
entered into a contract on behalf of Western Suburbs Holdings Pty. Ltd before its incorporation.
When they breached the contract, the claimant sued them for breach. The majority court used the
law set in (Newborne v. Sensolid Co. Ltd (1954) 1 QB 45) and held that individuals could not be
liable when the first intention, which was contemplated at the time of creation the contract shows
that the parties wanted to transact as companies.

Business and Corporation Law 3
Since then, the law in Australia has undergone a transformation and section 131
(Corporations Act, 2001) deals with matters of agency in unregistered companies. The section
131(1) of this act has now allowed the agents of unregistered companies to ratify their pre-
incorporation contracts but this can only happen if the contemplated company is registered
before the lapse of the contract duration (Australia, 2011, p. 192). However, if the contemplated
company is not registered, the rule set in (Kelner v Baxter (1866) LR 2) would apply, and
promoters would be held liable where the interpretations seem to favor a contract made with
individuals. Also, if the registered company instead refuses to ratify the pre-registration contract,
again, the rules of (Kelner v Baxter (1866) LR 2) would apply and the persons who entered into
the contract may be personally liable.
Shareholders are members of a company and they are not legally liable for companies
debts just because they are shareholders (Kershaw, 2012, p. 20). However, there are only three
chances when they can be liable. For one, they are liable for executing their obligation which is
the payments of the money owed on unpaid shares. They may also be liable if agreed terms with
the company stipulated as such. Lastly, they can be liable if they were directors under the
circumstances in which directors become liable e.g. in misconduct. These provisions are
contained in Section 1.5.1 (1.2 Limited liability of shareholders) (Corporations Act, 2001).
Application
Applying (Kelner v Baxter (1866) LR 2) rules on Steve situation, the problem is not only
with the contract formed on behalf of a non-existing company, but also the pre-registration
contract was not ratified as per the provisions of the Corporations act section 131. Again, as seen
the facts of this case, Steve Jones, signed the contract stating that he had done so ‘on behalf of
WA Gold Exploration Ltd.’ What this implies is that both Steven and Thor Mining Machinery

Business and Corporation Law 4
Ltd intended to contract as companies. This situation matches the case mentioned above of Black
v. Smallwood and Cooper(1964) N.S.W.R. 1121 and Newborne v. Sensolid Co. Ltd (1954) 1 QB
45.
What amounts to ratification was explained in (Aztech Science v Atlanta Aerospace (Woy
Woy) (2005) NSWCA 319, 2005). A company can be said to have ratified a contract either
expressly or impliedly. The court explained that express (communication) ratification is only
necessary where there is a short timeframe. As can be seen in the case of Steve, there was no
express ratification and when the company contracted bought a drill from United Mining
Machinery Ltd instead of moving on with Thor Mining Machinery Ltd, the conducts here shows
that they never intended to ratify the contract. Again, the action by Volvo Trucks (Australia) Ltd
on Steve would likely to fail. The main reason is that Steve is only a shareholder, and SECT
1.5.1 provides that unless stipulated in the Shareholders and Company agreement, shareholders
cannot he held liable of the company’s failures just because they are members.
Conclusion
The action of Thor Mining Machinery Ltd on Steve would fail on the basis that the
contract was entered with a non-existing company. Similarly, the action by Volvo Trucks
(Australia) Ltd would fail because Steve is a shareholder and he is not liable for company debts.
Question 2: Simon, George, Sara, and Mary
Issue
Did Simon bind Computer Solutions with Sunstar Computer Hardware Ltd and You
Beaut Ute Ltd? Also, was Computer Solutions supposed to pay for the Second Hand Ute or that
should be held as Simon’s personal transaction?

Business and Corporation Law 5
Law
In agency law, an agent has the power to bind the principal with a third party as they are
deemed to act on the principal’s authority (Mann et al, 2012, p. 522). Unless stipulated in the
agreement, partnership business gives apparent authority to its partners and all of them have the
power to bind the entire partnership to a third party (Mann et al, 2012, p. 572). In partnership
business, apparent authority is generally broad and does not have the same limitation as that
found in an agency relationship. For instance, unlike in agency law where apparent requires a
manifestation by the principal that the agent is acting on his authority, in partnership, all that is
required is a proof to the third party that the person (agent) is a partner (Parisi, 2017, p. 414).
For instance, in (Mann v D’Arcy (1968) WRL 893) the court held even the innocent partners
liable for the damages. The court found that even though the contract was made with between
one partner and the Joint Ventures, that one partner had the authority to bind the others with the
Joint Ventures.
In (Partnership Act, 1892) section 5 (1), the law states that every partner in a partnership
other than in the cases of limited partnership or incorporated limited partnership is qualified to
act as an agent. The law extends to say that a partner’s action can bind the business as well as
other partners. The only chances when this rule may not apply is when the partner has no
authority in executing whatever act he purports to execute, and the third party is aware of the
limited authority (Emerson, 2009, p. 321). Also, section 8 restricts the application of this rule to
only contracts that partners make for the usual course of the business. A contract to purchase
personal item would not be binding to the firm. authority: The Court will prevent the partner
from asserting that he or she had implied authority on behalf of other partners to purchase those

Business and Corporation Law 6
items that are not related to the ordinary course their partnership business (Sze et al, 2011, p.
231). However, a proof of express authority can refute this exception.
For the protection of third parties from any misconduct of the partners, section 8 of
(Partnership Act, 1892) states that no internal agreement made between partners purporting to
limit their authority can prevent the third party’s action unless in situations where the third party
is aware of the limitation. In (Mercantile Credit Co Ltd v. Garrod (1962) 3 All ER 1103), one of
the partners sold the car from their garage yet they had agreed to not sell more cars. The 3rd
party returned the car, but he sued the garage for the breach. When the innocent partner tried to
avoid the liability, the court affirmed that both were liable since the third party did not know
about the limiting agreement.
Application
By applying the rules set in section the court will prevent the other partners from denying
the authority of Simon in binding the entire partnership with Sunstar Computer Hardware Ltd.
Like as ruled in the case of (Mercantile Credit Co Ltd v. Garrod (1962) 3 All ER 1103), the court
will assume that Simon had the authority of acting on behalf of the firm since he was a partner.
Even though other partners may state that Simon had not sought their approval, the court will
prevent them from walking away since Sunstar Computer Hardware Ltd and You Beaut Ute Ltd
had no information about their arrangements.
An illustration of when the court has previously made such comments was in the case of
(Singapore Branch v Asia Pacific Breweries (Singapore) Pte Ltd (2011) 3 SLR, 2011). The Judge
said at [38] that there is an “established principle” in law that the law never recognizes any idea
of ‘self-authorizing’ agents”. Applying the same statement, the law will never accept that Simon
was acting on his authority but that of the partnership.

Business and Corporation Law 7
On the part of the transaction with You Beaut Ute Ltd, the firm would not be liable for
this transaction since it is not part of their ordinary course their partnership business(Sze et al,
2011, p. 231). However, the partners would need to prove to the Court that the second-hand ute
was not something that the company deals with. In this case, Simon would be personally liable.
Conclusion
On analysis, even though Simon had no approval from other partners while entering into
a contract with Sunstar Computer Hardware Ltd, costing $ 15 000, all the partners will have to
accept the transaction. However, on the transaction with You Beaut Ute Ltd and the idea of
freight business, the court will hold Simon liable by himself. They would also need to prove to
the court that You Beaut Ute Ltd freight business was not part of their dealings. Another action
they could possibly take is to sue Simon for the violation of the partnership agreement. From
their case with Simon, they can they recover the damages that he had caused.

Business and Corporation Law 8
References
Australia. (2011). Australian Corporations & Securities Legislation 2011: Corporations Act
2001, ASIC Act 2001, related regulations. CCH Australia Limited.
Aztech Science v Atlanta Aerospace (Woy Woy) (2005) NSWCA 319, 2005.
Black v. Smallwood and Cooper (1964) N.S.W.R. 1121.
Corporations Act (2001).
Emerson, R, W (2009). Business Law. Barron’s Educational Series.
Jones, L (2015). Introduction to Business Law. Oxford University Press.
Kelner v Baxter (1866) LR 2 CP 174.
Kershaw, D (2012). Company Law in Context: Text and Materials. OUP Oxford.
Mann, R, A and Roberts, B, S (2012). Essentials of Business Law and the Legal Environment.
Cengage Learning.
Mann v D’Arcy (1968) WRL 893.
Mercantile Credit Co Ltd v. Garrod (1962) 3 All ER 1103.
Newborne v. Sensolid Co. Ltd (1954) 1 QB 45.
Parisi, F (2017). Law and Economics. Oxford University Press.
Partnership Act (1892).
Singapore Branch v Asia Pacific Breweries (Singapore) Pte Ltd, 3 SLR 540 (2011).
Slorach, J, S and Ellis, J (2017). Business Law 2017-2018. Oxford University Press.
Sze, P, and Choy, K (2011). Corporations and Partnerships in Tonga. Kluwer Law International.