LAW504 Commercial and Corporation Law Assignment Solution Analysis

This document provides a comprehensive solution to a commercial and corporation law assignment, addressing two problem questions using the ILAC (Issue, Law, Application, Conclusion) format. The first question examines the liability of an individual, David, in relation to two letters, one from a former employer regarding a restraint of trade clause and the other from a bank concerning a company loan. The analysis delves into the principles of separate legal entity and corporate veil, referencing relevant case law like Salomon v Salomon & Co Ltd and Gilford Motor Co Ltd v Horne. The second question focuses on the liabilities of partners in a firm concerning transactions conducted by two partners, Jane and Sarah. This section analyzes the application of the Partnership Act 1892 (NSW) and the implied authority of partners, referencing cases such as Mercantile Credit Ltd v Garrod, and Bentley v Craven to determine the partners' responsibilities and financial obligations. The assignment assesses the legal implications of each scenario, providing a detailed application of the relevant laws and a final conclusion for each issue.

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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this bank. As David’s sister Monica is the Sole director of Hair Glo, she took the loan for
the startup capital of the company. In this case, the loan was taken on behalf of Hair Glo
and therefore the same was liable to pay the loan. Applying the principles of Salomon v
Salomon & Co Ltd, company and its promoters/directors (i.e. David and Monica) will be
considered as a different person and will not be held liable for the debts of the company.
It means the standard bank is entitled to sue Hair Glo but not David. However, the court
may held David liable if it thinks that lifting of corporate veil is necessary in this case too.
Conclusion
David is personally liable to Nu Shampoo Pty Ltd but Standard bank can no sue him
directly. Standard bank has the right to sue to Hair Glo.
Question 2
Issue
What liabilities arise to partners of the firm in relation to various transactions
conducted by Jane and Sarah?
Laws
The partnership is also one of the types of business structures. Similar to
corporations, this structure also has certain characteristics. One of the features of the
partnership structure is that the same do not possess a distinct legal identity from its
partners. This is the reason that partners of the firm remain personally responsible
towards the third party with respect to debts and other liabilities of the firm. Partners
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decide their mutual rights and liabilities via partnership agreement, which is an internal
and mutual agreement. Only partners of the firm have access to the partnership
agreement and therefore the third party cannot be aware of the authority of partners.
Here to say partners act as an agent of other partners and therefore other partners are
responsible for the act of one partner in the capacity of principle. Partnership Act 1892
(NSW) is the partnership legislation in New South Wales that provide provisions related
to the partnership business. This act provides the relationship of a partner with other
partners and that with the third parties. Firstly, in order to discuss the relationship of
partners with third parties, this is to state that the partners have liability towards third
parties in respect of an act conducted by other parties. Section 5 of the act is a
significant section. As per the provisions contained in this section, every partner
possess is entitled to bind the firm to the third party with his/her conduct. Partners act in
the capacity of the agency relationship with the firm and other partners and these
parties are liable to an outsider where partner act in the usual way for partnership
business (Legislation.nsw.gov.au, 2019). This section has two important effects. Firstly,
in case of the absence of express authority, partners are rendered an implied authority
to act on behalf of the firm. It means in order to bind the firm and other partners; a
partner does not require having express authority. However, an outsider can rely on the
existence of implied authority only in those situations where the transaction done by a
partner in ordinary course of business.
Second aspect is that the third party can sue other partners and the firm, even in
those cases where partner act beyond their express authority but the same could take
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the supposition of implied authority. The fact and the decision of Mercantile Credit Ltd v
Garrod [1962] 3 All ER 1103 is necessary to have a look upon. In this case, two
partners of the firm established the decision that they would not sell and purchase a car.
The principal business of the firm was of a car garage. One partners of the firm sold a
car, which was not a property of their firm. The third party initiated a case against the
firm for the bad title of the car. Court held the third party had the right to do so as he
assumed that the partner had authority to sell the car as it was in the ordinary course of
business of firm (Jones, 2013).
Other sections of the act outlined the relationship of partner with other partners. As per
section 24(2) of legislation, partners can take the refund of amount that is expended by
the partners on the behalf of the firm. As per the provisions of common law, partners
owe greatest faith to each other as they have a fiduciary relationship. As per the
provisions of agency law, partners are required to work in the best interest of the
partnership firm and other partners. It was decided in the case of Bentley v Craven
(1853) 52 ER 29 that a partner must not generate undisclosed profit using information of
partnership firm (Roach, 2014).
Application
All the partners of the firm reached the decision that they will have authority to
enter into a transaction of up to $10000 for the business of the firm. When Anne and
Mary left for abroad, the rest of the partners entered into some transactions. As
partnership firm is established in Sydney hence Partnership Act 1892 (NSW) will be
applicable to the same. One of the partners of the firm Jane paid $2000 for printing
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papers. She made this purchase from the shop of her boyfriend whereas the actual
market price of papers was $1200. Jane in this case, made a profit of $800 at the
expense of the firm. In this way, she breached the duty of care and is responsible to
payback $800 to the firm. The second transaction done by Jane was the purchase of a
medical instrument that she purchased from United Medical Suppliers Pty Ltd (UMS)
for $13000. Jane in this transaction acted outside the purview of express authority
provided to her. Here applying Mercantile Credit Ltd v Garrod, firm and other partners
have liability to the third party. UMS could rely on implied authority as the deal was in
line with the objectives and activities of the partnership business. At last, another
partner of the firm Sarah also entered into a transaction. She entered into a transaction
to purchase a driver training course in consideration of $2000. Here this transaction was
outside of the boundary of her express authority. Although the value was less than
$10000 the transaction was not related to the partnership business. Uber Australia
being an outsider was not able to check the express authority of Sarah but the same
also could not rely on implied authority as the transaction was not related to medical
practice.
Conclusion
Jane has liability to return $800 to a firm that she earned as secret profit. In the
second case, firm and every partners of the same is liable to UMS Pty Ltd as the
transaction is related to partnership business and third-party developed the contract
relying on the implied authority of Jane. In the last case, neither firm nor other partners
are liable to a third party i.e. Uber Australia Ltd as the same could check that Sarah had
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no express or implied authority to purchase the driving course on behalf of her medical
practice firm.
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References
Austlii.edu.au. (2019) Corporations Act 2001 - Sect 119. Retrieved From:
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s119.html
Bentley v Craven (1853) 52 ER 29
Corporations Act 2001 (Cth)
Daimler Co v Continental Tyre and Rubber Co [1916] 2 AC 307
Gibson, A. & Fraser, D. (2013) Business Law 2014. Austrlia: Pearson Higher Education
AU.
Gilford Motor Co Ltd v Horne [1933] Ch 93
Harris, B. (2013). Business and Corporations Law. New South Wales.
Jones, L. (2013) Introduction to Business Law. UK: OUP Oxford.
Legislation.nsw.gov.au. (2019) Partnership Act 1892 No 12. Retrieved From
:https://legislation.nsw.gov.au/inforce/f9dfc85e-8f91-e79f-99e5-
8042677519f3/1892-12.pdf
Macaura v Northern Assurance Co Ltd [1925] AC 619
Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103
Partnership Act 1892 (NSW)
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Roach, L. (2014) Card and James' Business Law.UK: Oxford University Press
Salomon v Salomon & Co Ltd [1897] AC 22
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