Corporate and Partnership Law: Analysis of Legal Issues in Assignment

This law assignment addresses two key legal issues: the liability of an individual for breaching a trade clause and the liability of partners in a business. The first question examines whether David can be sued for violating a non-compete clause and his liability regarding a loan default. The analysis covers the principle of separate entity, lifting of the corporate veil, and relevant case laws such as Gilford Motor Co Ltd v Horne. The second question focuses on the rights and liabilities of partners in various contractual situations. It covers the agency relationship, fiduciary duty, and the application of the Partnership Act 1892 (NSW), including cases like Birtchnell v Equity Trustee and Mercantile Credit Ltd v Garrod. The assignment applies these legal principles to the facts provided, offering conclusions on each scenario based on the ILAC method.

LAW

Issue
The issue in the given case study is to evaluate whether David can be sued in light of
breaching the trade clause or not? In addition, what is the liability of $ 100000 David of
towards the standard bank on lines of the failure to pay the instalment?
Rules
It is significant to note that when the companies are incorporated and set up, the
people who set up the company contribute capital and indulge into the preliminary work
incidental to the formation of a company that is the promotion, incorporation, and flotation;
and are referred to as the corporate promoters. The promoters can either be the shareholders
and the directors of the company, or choose to solicit people to invest money in the company
and appoint the board of directors for the management of the affairs of the company. It is
further significant to note that in the eyes of the law, the company has a separate identity and
is separate entity from all of the above mentioned groups and persons. By the virtue of the
separate entity principle, the corporations are conferred with the capability of entering into
contracts in own name, capacity to sue the third party for the enforcement of the contracts in
the own name and further, the third parties can also sue the company for the said contracts.
The principle of separate entity have been widely established in the eyes of the law and has
been pronounced in a number of case laws such as Salomon v Salomon & Co Ltd [1897] AC
2, Lee v Lee's Air Farming Ltd [1960] UKPC 33. Additionally in Macaura v. Northern
Assurance Co. Ltd. [1925] A.C. 619, Charterbridge Corporation Ltd v Lloyds Bank Ltd
[1970] Ch 62, 74, and others.
In the most popular case law of Salomon v Salomon, the proprietor had transferred
whole of the business to a company in exchange of consideration in the form of the shares
and debentures of the company. Further, it is vital to note that the shares of the said company
were bought by the family members of Salomon and thereby leading to full control of the
company in the hands of Salomon and his family. As the company went under liquidation,
the claim of the debenture holder that is Salomon were settled first, to which the creditors
opposed that being the sole controller of the company, Salomon should not be paid before the
settlement of the claims of the creditors. However, the courts of the law upheld the contrary
view and refuted the claims of the creditors citing that the company has an identity separate
from its shareholders. On the same lines, the court cited that the conduct of the corporation
cannot force the liability onto the shareholders behind the said investments. This further

implies that directors, promoters, or the shareholders will not be liable and responsible for the
acts of the company.
However, it is essential to note that the shareholders cannot always take the shelter of
the said principle and enrich themselves at the cost of deceiving other stakeholders in the
company (Anderson, 2009). The safeguard provided to the shareholders is denoted as the
principle of lifting of the corporate veil and has also been established in numerous case laws
such as Jones v. Lipman [1962] l WLR 832, Gilford Motor Co Ltd v Horne [1933] Ch. 935
(CA), and others. In the circumstances of the above cases, it was held by the courts of the law
that parties should beware from misusing the separate entity rule, owing to which the courts
can lift the artificial veil, and render the parties to be the personally liable for the detriments
caused.
Application
On the application of the above stated statutes, pronouncements on the given case
study, following points are noteworthy. In the first part of the case study, Nu Shampoo Pty
Ltd had placed a restriction on the employee David to not to carry similar business to that of
the company. In spite of this, David did not comply with the conditions of the subjective
trade clause and established the company Hair-Glo Pty Ltd having the same business as that
of the earlier mentioned company. The situation mentioned in the case study is similar to the
circumstances of the case Gilford Motor Co Ltd v Horne. In the said case the corporate veil
was pierced by the courts of the law, citing that there was a violation of the principle of the
restraint of the trade by the company and the corporate veil was lifted to hold the sole
controller of the company liable. As David violated the trade clause established by the
company Nu Shampoo Pty Ltd, he will be held personally liable for the said act of violation.
For the second part of the case study, it is imperative to note that Monica was the
director as well as the CEO of the company Hair-Glo Pty Ltd. In the said company, her
shareholding amounted to be 1 % and the shareholding of David amounted to be 99 %,
thereby making it quite evident that the sole control of the company Hair Glo was
concentrated in the hands of David. For the loans taken by the company, it is the prime
liability of the company to pay off the same and directors cannot be held personally liable.
This would be on the lines of separate identity of the company and the members, thus director
cannot be held personally liable for the loans taken in the given circumstances of benefitting
the company from the said loans.

Conclusion
The discussions conducted in the previous parts enable to conclude that while David
would be liable for the violation of the competing trade principle, he will not be liable for the
failure of the company towards the payment of the instalments.
Question 2
Issue
What are the rights and liability of partners for the concerned various contracts
entered into by the firm?
Rules
The Australian law recognises a partnership as an association of persons with a mutual
view to earn profits. The Partnership Acts in each State are separate for the regulation of the
certain obligations and the rights of partners. The business structure of partnership involves
people called the partners, contributing the capital and assets for the operations as well
managing the affairs of the firm simultaneously on behalf of the firm and each other. The
case law of Birtchnell v Equity Trustee, Executors & Agency Co Ltd (1929) 42 CLR 38 is
vital to be noted in this regard, which states that each partner has a fiduciary duty towards the
other partners. Thus, it can be stated that the partners are the agents of the partnership firm as
well as the other partners of thee firm, commonly referred to as the agency relationship.
The Partnership Act 1892 No 12 (NSW) is applicable on the partnership firms
registered in the New Sydney. Accordingly, it is significant to note that the courts of law does
not consider the identity of the firm separate from the partners, leading to the partner’s
personal liability for the acts of the firm. In addition, it is vital to note that partners are not
only personally liable for the acts of the firm, but are also severally liable towards the acts of
the other partners that are done on behalf of the partnership firm, during the employment as
the partners. Further, the additionally duties and responsibilities are mentioned in the
partnership agreement as decided by the partners of the firm. As stated in the section 24(5),
there is an underlying assumption that the firm is managed by all the partners, unless the
contrary is proved or stated specifically. The principle is stated to safeguard the rights of the
outside partied dealing with the form and who cannot have the knowledge of the internal
matters of the firm. In this regard it is imperative to note that when the partners violate their
agreements and authorities and do such acts that are out of the purview of the authorities, the

rights of the third parties are secured and the contracts remain intact in this scenario. In
addition, it is important to note that section 5(1) makes a complementary statement that the
third parties are entitled to enforce their claims for the transactions entered into by the
partners on behalf of the firm even when they did not had any express or implied authority to
do so. Further, the section 24(2) states that the partners are entitled to be reimbursed for the
expenditures done on behalf of the firms. The case of Mercantile Credit Ltd v Garrod [1962]
3 All ER 1103 is significant in this regard, in which the partners had violated the authority of
the acts and entered contracts outside the purview of the ordinary course of business, yet the
firm was bound by the said contract. Thus the concluding principle of the case is that when
the contracts are not in line with the ordinary business activities, the firm will be still bound
by such contracts and third parties cannot assume of the exisytence of the implied authorities
in this regard.
Application
On application of the principles of law and the stated case laws on the give case study,
following points are noteworthy. As Jane and Sarah are solely managing the affairs of the
partnership firm in absence of Anny and Mary, Jane has entered into the contract of
purchasing the printer papers worth $ 2000, while its normal price amounts to $ 1200. The
contract is thus evident of the existence of personal interest of the partner Jane. On
application of the rules of the partnership, it can be stated that Jane owed a fiduciary duty
towards the firm and other partners and should not have led to the conflict of the interest. As
a result, Jane will be required to pay back the secret profits earned amounting to $ 800. In
another instance, the contract has been entered into by Jane for the purchase of medical
instruments worth $13000, which were outside the express authority of the partners. This was
because the partners were allowed to enter into contracts up to $ 10000. The firm will be
liable for this transaction as the action was though outside the express authority, yet in the
ordinary course of business of the firm. Further, in another instance, Sarah ordered a driver
training course which was outside the ordinary course of business of the firm. In this case, as
the concerned act was not in the ordinary course of the business, the third party cannot take
the safeguard of assuming the implied authority in this regard, as a result the firm will not be
liable under these circumstances.
Conclusion
As per the discussions conducted in the previous parts, following conclusions are
reached. Firstly, the firm will be liable for the first transaction; nevertheless Jane would be

required to pay the firm, the secrets profits earned. Similar is the liability of the firm in the
second transaction, because the acts were related to the ordinary course of business, though
outside the authority of the partner Jane. In the last transaction, third party cannot sue the firm
on the grounds of assumption of implied authority because the said act was outside the
normal business activities.

References
Anderson, H. (2009). Piercing the veil on corporate groups in Australia: the case for reform.
Retrieved from: http://www5.austlii.edu.au/au/journals/MelbULawRw/2009/13.html
Birtchnell v Equity Trustee, Executors & Agency Co Ltd (1929) 42 CLR 38
Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62, 74
Gilford Motor Co Ltd v Horne [1933] Ch. 935 (CA)
Jones v. Lipman [1962] l WLR 832
Lee v Lee's Air Farming Ltd [1960] UKPC 33
Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103
Partnership Act 1892 No 12 (NSW)
Salomon v Salomon & Co Ltd [1897] AC 2