Institutional Affiliation For Partnership Agreement And Lifting The Corporate Veil

Describe about the Institutional Affiliation for Partnership Agreement.

The issue that has to be decided in this case is if Peter and Aidan are bound by the contract created by Adrian for the purchase of accounting standards worth $25,000 even when it has been mentioned in the partnership agreement that each partner has the authority to bind the partnership for contracts up to $10,000 and any contracts in excess of this amount need the prior approval of all the partners. At the same time, another issue is related with the purchase of surveying equipment by Adrian for a price of $8000 as Adrian believes that the firm will make a lot of money if it diversifies into surveying. Under these circumstances, it has to be seen if the contracts created with Tom and Edgar R. binding against the partnership.

Rule: The partnership law provides that the authority of a partner has to be considered in terms of the capacity of such a partner to bind the firm in case of a contract created by the partner. If the partnership firm is bound by the contract created by one partner, all the partners will be liable under the contract. It is worth mentioning that a partnership is not a legal entity and therefore it cannot enter into contracts with third parties on its own. As a result, a partnership will enter into a contract with outsiders through the partners. In such a situation, two questions may arise. The first issue is if the partnership will be bound by the contract or if the contract can be enforced only is the partner that has created the contract. Similarly the second issue is if the partnership is held to be bound by the contract, if the partnership agreement was breached when the contracting partner has acted beyond the scope of authority provided to the partners (Gillies, 2004).

Such an issue may arise in a number of different situations. For instance, an outsider may claim that all the partners are bound by the contract when the contracting party cannot perform the contract (Freeman & locker v Buckhurst Park Property (Mangal) Ltd, 1964). In such a situation, it is required that the outsider should establish that the contracting partner has the authority to bind the firm by the contract created by such a partner. Therefore even if such a partner as acted beyond authority, the other partners can ratify the contract and therefore, the partnership can adopt the contract (Kelner v Baxter, 1866). The Partnership Act provides in section 5 (1) that all the partners are treated as we agents of the firm as well as the agents of the other partners. The acts of all the partners that take place while doing the business that is usually carried on by the firm, are binding for all the other partners unless it can be said that the partner has acted without the authority and at the same time, the third party knew regarding the lack of authority or if it did not know or believe that such a person was a partner. The origin of this rule can be traced back to Re Agriculturist Cattle Insurance Co (1870).

Rule for partnership agreements

The authority that has been conferred on the partner can be actual or apparent authority. Therefore in Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985), it was mentioned by the High Court that there are two parts of section 5, Partnership Act. The first part of this section is related with the actual authority of the partners and the second part of this provision is related with the apparent authority enjoyed by the partners (Latimer, 2012). Consequently, section 5 provides in this regard that the outsider has to establish the actual or the apparent authority of a partner for the purpose of claiming that the partnership firm is bound by the contract that has been created by the partner.

Application: In the present case, two transactions have been made by Adrian with Tom and Edgar. In the first translation, although Adrian had exceeded the scope of authority conferred on him but it can be considered that Adrian had the apparent authority. At the same time, Tom was not aware that a limit has been imposed on the partners of the accounting firm regarding the value of contracts that can be created by each partner without the approval of other partners. At the same time, the accounting generals were related with the nature of business in which the accounting firm was engaged. In this regard him, it has been mentioned by the law that the apparent authority of a contracting partner can be used to bind the partnership only if the partner was performing the usual business of the firm, which is of the nature in which the firm is generally involved (Polkinghorne v Holland & Whitington, 1934). In such cases it is necessary that the partnership be aware of the fact that the person is a partner of the firm but the third-party should not know regarding the fact that certain limits have been placed on the authority of the partners (Mercantile Credit Ltd v Garrod, 1962). The reason that can be given in support of this answer is that Tom Was aware of the fact that Adrian is a partner of the accounting firm but he was not aware of the presence of any restrictions that have been placed on the authority of the partners to bind the firm regarding the contracts created by them. Under the law of partnership, the restrictions that have been based on the authority of the partners does not have any impact on the rights of the outsiders in the outsiders are not aware of these restrictions when they enter into connections with the firm.

Application of partnership agreement rule

On the other hand, it can be presumed that Edgar was aware of the fact that surveying is not the usual business of the accounting firm. Under these circumstances, it can be said that the contract between Adrian and Edgar is not binding against the accounting firm. Surveying was not the usual business of the firm and therefore, Edgar cannot enforce this contract against the partnership even if it falls within the scope of authority of Adrian.  

Conclusion: Therefore in conclusion, it can be said that Tom can enforce the contract created by Adrian against the partnership firm but Edgar cannot enforce the contract related with the sale of surveying equipment, against the partnership.

The issues that have to be decided in this case is if the court can pierce the corporate veil and hold that Fat Away Pty Ltd had been formed by Richard only with a view to avoid the clause present in his contract with Nu-Slim Pty Ltd according to which he cannot sell slimming products in Victoria 3 years after leaving the company. Similarly it also needs to be seen if Richard can be held personally liable for the loan $40,000 taken by Frances.

Rule: According to the doctrine of corporate veil, the legal identity of a corporation is differentiated from the identity of its shareholders (Salomon v Salomon & Co Ltd., 1897). In this way, the notion of corporate veil has been introduced with a view to protect the shareholders from the risk that they may be held personally accountable for the debts of the company. But it is worth mentioning at this point that section provided by the corporate veil is not impenetrable. When the court has arrived at the decision that the company's business is not conducted in accordance with the corporate law if the company has been formed as a facade for illegal activities, the law may hold the members of the company personally liable for the obligations of the company. For this purpose, generally the courts use the concept of lifting the corporate veil.

Hence, the notion of piercing the corporate veil can be described as the decision of the court to consider the obligations of the company as the obligations of its members. In this context, the law provides that generally company has to be treated as a separate legal entity. Therefore, a company is liable for its own debts and obligations. Therefore, generally the courts have recognized the separate legal identity of the company but there can be certain rare circumstances where the court may decide that the corporate veil needs to be lifted (Nicholas, 1998).

Conclusion for partnership agreement

In this regard, if a person has signed a contract with the company according to which, such a person will not compete with the business of the company for a particular period after the person has left the company and such person establishes a company for doing a business that is in competition with his former company, the court may decide that the new company has been formed by such a person only with a view to avoid the breach of the obligation present in his contract with the former company according to which, such person could not compete with the company after he has left the company (Sealy, 2001). In such cases, it may be the decision of the court that the new company is a sham or a facade and therefore, the court may allow the previous company to sue the person for breach of contract. Therefore in such cases, it is available to the court to look beyond the legal fiction of separate identity of the company and consider the reality.

The companies are created with a view to protect the personal assets of the shareholders in case the business fails. Therefore as compared to a sole trader or a general partnership, where the owners are considered as being personally liable for the debts of the business, the liability of the shareholders in case of a company is restricted. But during the recent years, the courts have narrowed down the limits of protection that are available to the members of the company and increasingly, the members are being held personally liable for the obligations of the company in a number of situations. For this purpose, the most effective way is to pierce the corporate veil, especially in cases where small privately held business entities are involved or in case of close corporations were only a few shareholders are present and the company has limited assets. Consequently, by treating such a company as a separate entity, that is separate from its members, may provide inequitable results or it may promote fraud.

Application: The facts of Gilford Motor Co Ltd v Horne (1933) can be applied to the facts of this case. In this case, the court treated the company and its shareholders as a single entity as the court believed that the company was being used as an instrument of fraud. In this case, Horne was the MD of the company and it has been mentioned in his employment contract that they will not solicit the customers of the company in case he has left the company. Therefore when the companies sacked Horne, he decided to start his personal business. For this purpose, he created a company and the only shareholders and directors of this company were his wife and a friend. But the court decided that there has been a breach of the covenant according to which they cannot solace in the customers of the company. The court also pointed out that the new company has been created by Horne only with a view to prevent being accused of the breach of covenant.

On the other hand, United Bank Ltd. cannot claim that the corporate veil should be pierced in its case and hold Richard personally liable for the debt taken by the company. The reason is that in this case there is no fraud.

Conclusion:

Therefore in this case, it can be said that Richard can be held liable for the breach of the covenant present in his contract with Nu Slim, according to which they should not establish any business that competes with the business of Nu Slim. On the other hand, Richard cannot be held personally liable for the debt taken by Fat Away Ltd.

References

Gillies, P. (2004) Business Law, 12^th ed, Sydney: The Federation Press.

Latimer, P. (2012) Australian Business Law, 31st ed, North Ryde: CCH.

Nicholas, B. (1998) Principles of Company Law, 3^rd ed. Cavendish Publishing Ltd

Sealy, L. (2001) Cases and Materials in Company Law, 7th ed. Butterwoths

Case law

Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541

Freeman & locker v Buckhurst Park Property (Mangal) Ltd (1964)2 QB 480

Gilford Motor Co Ltd v Horne [1933] Ch 935

Jones v Lipman [1962] 1 WLR 832

Kelner v Baxter (1866) LR 2 CP 174

Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103

Polkinghorne v Holland & Whitington (1934) 51 CLR 143

Re Agriculturist Cattle Insurance Co (1870) LR 5 Ch App 725 at 733

Salomon v Salomon & Co Ltd [1897] AC 22