Companies and compliance with guidelines
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?
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 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.
Separate legal entity and contractual relationship with third parties
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 pay back the debts of the corporation owed to Volvo. Thus, Volvo can recover its debts in the liquidation of the company by selling its assets.
Conclusion
In conclusion, the liability of Steve is present in case of Thor because the company failed to comply with the terms of the contract; however, Volvo cannot hold him personally liable.
Whether the partnership and partners are liable towards You Beaut Ute Ltd and Sunstar Computer Hardware Ltd and whether other parties can take action against Simon?
The Partnership Act 1892 (NSW) governs the partnerships and the relationship between the firm and its partners. Section 1 (1) of the act provides that a partnership is referred to a relationship between two or more parties which entered into an agreement in order to carry out business in common to generate profits for themselves. The partners of a company operate as agents for other partners based on which they are bound by the actions of other partners. Section 5 (1) of the act provides that partners act as an agent of a firm while they are operating in the ordinary course of business (Austlii, 2018). They act as every partner who acted in carrying out the usual activities of the business, the other partners are also bound by such terms. Thus, they can be held personally liable for the actions of a partner which are carried out while performing the activities of the business as usual. This provision did not apply when the partners acted outside the scope of the business or without any authority. The other partners are also liable by the act of a single partner when a third party did not know or believe in the fact that the partner is acted on behalf of the partnership as a whole. Thus, the provision given under section 5 (1) of the act is restricted to the nature of the business.
Pre-registration contracts and legal implications
Moreover, section 7 of the act provides that other partners of a partnership firm are binding on the actions taken by a single partner if such actions are taken by on an express authority which has taken by the expressed partner. For example, if a dental chair is purchased by the partner of a law firm, then other partners will not be held liable based on such agreement. Section 5 (2) of the act provides that the action of a partner must be acted in the “usual way” of business. While carrying out the business in a usual way, the act provides that the single partner acted as the agent for the entire partnership based on which other partners are bound by the terms as well. Thus, the law provides that the partner of a business which has acted within the proper authority and taken a business decision while acting in the usual way of business, then other partners will be held liable by the act of such partner as well. In Goldberg v Jenkins & Law (1889) 15 VLR 36 case, the court provided that the unusualness is a demonstration based on which the genuineness of the action of a partner is determined in which other partners can be held liable by the business of the partnership (Ellinger, Lomnicka & Hare, 2011). Section 8 of the act provides that an internal agreement which is formed between the partners is only effective when the third party is aware regarding such an agreement as well.
Mercantile Credit Ltd v Garrod (1962) 3 All ER 1103 case is relevant in this matter since the court provided it judgement based on this principle. In this case, two parties entered into a partnership to operate a garbage business in which they decided that they will not buy or sell cars (Slorach & Ellis, 2012). One of the partners breached this term based on which other partners were held liable by the court as well. In this case, the doctrine of undisclosed principal applied by the court since the partner did not disclose the fact that the purchase is made for the partnership business. However, it was held that the partnership is liable by the action of such partners. Section 9 (1) of the act provides that the joint liability of each partner apply when a formal discharge of one partner is occurred based on which other partners are discharged by the liability of the contract as well. Furthermore, in Polkinghorne v Holland (1934) HCA 28 case, the partnership invested the client’s money in setting up of a sham company. All the partner were held liable for the fraud that the actions come under the scope of the partnership business, thus, all the partners were held liable by the actions of the one partner.
In the present case, a partnership firm is created in which Simon, George, Sara, and Mary are partners. Based on an internal agreement formed between the partnerships, a restriction is imposed on the partners based on which they cannot enter into a contract up to $10,000 in value. A contract was formed with Sunstar Computer Hardware which was initiated by Simon regarding the purchase of a 50TB hard drive, and the value of such hard drive was $15,000. Another contract is formed by Simon as well in which he purchased a second hand Ute for the business from You Beaut Ute Ltd for $9,000. While entering into the second contract, Simon acted outside his authority. The actions taken by Simon were outside the ordinary course of business, thus, other partners are not liable towards the third party based on the contract formed by Simon. The third party that entered into a contract was not aware of the limitation of the authority which is imposed on the partner in the first contract, thus, the third party can hold other partners liable for the contract formed by Simon. However, since an internal contract has formed between the partners, they can hold Simon liable for his actions.
Conclusion
In conclusion, all partners are liable towards Sunstar Computer Hardware based on the contract formed by Simon, however, You Beaut Ute Ltd can only held Simon liable since he acted outside the scope of the business. Other partners can hold Simon liable for breaching the internal contract of the partnership.
References
Austlii. (2018). Partnership Act 1892 – Sect 5. Retrieved from https://classic.austlii.edu.au/au/legis/nsw/consol_act/pa1892154/s5.html
Corporations Act 2001 (Cth)
Ellinger, E.P., Lomnicka, E. & Hare, C. (2011). Ellinger’s Modern Banking Law. Oxford: Oxford University Press.
Golderg v Jenskin & Law (1889) 15 VLR 36
Goulding, S. (2013). Principles of company law. Abingdon: Routledge.
Kelner v Baxter (1866) LR 2 CP 174
Legislation. (2018). Partnership Act 1892 No 12. Retrieved from https://www.legislation.nsw.gov.au/#/view/act/1892/12/historical2004-04-05/full
Mercantile Credit Ltd v Garrod (1962) 3 All ER 1103
Partnership Act 1892 (NSW)
Polkinghorne v Holland (1934) HCA 28
Salomon v Salomon & Co Ltd (1897) AC 22
Shepherd, C. and Ridley, A. (2015). Company Law. Abingdon: Routledge.
Slorach, J. S., & Ellis, J. G. (2012). Business Law 2012-2013. Oxford: Oxford University Press.
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