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Issue

Describe about the Institutional Affiliation for Principles of Company Law.

The issue in this case is if Peter and Aidan can be held to be bound by the contract when Adrian entered into a contract for purchasing accounting standards worth $25,000. In this regard, it needs to be mentioned that according to the partnership agreement between Peter, Aidan and Adrian, each partner has the authority to enter into a contract up to the value of $10,000 and any contract more than this amount requires the sanction of the other partners.

Another issue in this question is if the contract created by Adrian for purchasing surveying equipment at a price of $8000 is binding against the firm. Adrian had entered into this contract as he believed that the partnership firm will be able to make a lot of profit if it diversified into surveying. Therefore, the issue is if contracts between Adrian and Tom and Edgar R. binding against the firm or not.

Law: The partnership law provides that authority of the partnered to create binding contracts should be considered in terms of the capacity of such apartment to bind the firm regarding the contracts it has created. In this regard, the law mentions that the contract will be binding for the firm if such a contract has been created by a partner and under these circumstances permit is considered that all the partners will be bound by the contract. At this point it should be mentioned that as against the company, a partnership does not enjoy a separate legal identity (Gillies, 2004). The result is that a partnership is not allowed by the law to enter into contracts in its own name. Consequently, when a partnership has to enter into contracts with third parties, it has to act the partners. Hence in such a case, an issue may arise if the partnership can be considered as being bound by the contract that has been entered into by a partner. Another issue that may arise in this context is if such a partner has acted beyond the authority that was provided to him or her and if the contract can be enforced against the partnership (Latimer, 2012).

Such an issue may arise in a number of different situations. Therefore, for instance, there can be a situation where an outsider may claim that all the partners should be considered as being bound by the contract when the contract was created by one partner but it is not able to perform (Freeman & locker v Buckhurst Park Property (Mangal) Ltd, 1964). In such a case, the law requires that the outsider should be able to establish that the partner who has created the contract, enjoyed the authority to create a binding contract on behalf of the partnership firm. In this way, in such a case, even if the partner acted outside the authority provided to it, the contract can be ratified by the other partners. Hence, the partnership can adopt such a contract (Kelner v Baxter, 1866).

Law

In order to deal with such a situation, section 5, Partnership Act provides that under the law, all the partners are treated as the agents of others and also of the partnership. Hence, the acts of the partners that were taken while furthering the business of the partnership, that is generally performed by the firm, is treated as being binding on the partnership firm unless the partner who has entered into the contract, does not have the required authority and moreover, the third party also knew regarding the lack of authority. A leading case in this regard is that of Re Agriculturist Cattle Insurance Co (1870).

Application: For this purpose, the partners may have actual authority or apparent authority. For example, in Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985), the court pointed out towards two parts of section 5. According to the first portion, it deals with the actual authority of the partners. On the other hand, the second one is concerned with the partners’ apparent authority. In this way, section 5 provides that an outsider has to establish that the contracting partner enjoyed actual or apparent authority in case the partner wants that the contract should be enforceable against the partnership.

On the basis of the facts that have been given in this question, it is clear that two contracts have been created by Adrian, one with Tom and the other with Edgar. However the question arises in these two contracts can be enforced against the partnership. For this purpose it needs to be seen regarding the contract with Tom, that although the transaction was beyond the scope of authority that was provided to the partners but it can be said that Adrian had apparent authority. The transaction was concluded by Tom while furthering the business of the firm that was usually carried on by it. Moreover, Tom did not know regarding the limit placed on the authority of the partners. The accounting journals that were purchased by Adrian were related with the nature of usual business of the firm. A transaction will be considered to be binding in such a case if the outsider was not aware regarding the lack of authority (Polkinghorne v Holland & Whitington, 1934). As mentioned above, Tom did not knew that Adrian cannot enter contracts worth more than $10,000 without getting an approval from other partners. In such cases, according to the partnership law, the limitation that has been placed on the authority of the partners do not effect the rights of the outsiders, when such an outsider is not aware of these limitations (Mercantile Credit Ltd v Garrod, 1962).

Application

However regarding the transition with Edgar, it was clear that surveying was not the business that was usually carried on by the firm. Therefore in this case the contract between Adrian and Edgar cannot be enforced against the partnership firm even if the value of the contract was $8000.

Conclusion: regarding the contract between Tom and Adrian, it can be said that the partnership firm is bound by this contract. On the other hand, the partnership firm and its partners are not bound by the contract created by Adrian with Edgar for purchasing surveying equipment.

Issue: in this question, the issue is if the corporate veil can be pierced by the court and it can be decided that Richard had formed Fat Away Pty Ltd only for the purpose of avoiding the clause that was present in his contract with Nu-Slim Pty Ltd. According to this contract, Richard had been prohibited from selling slimming products in competition with Nu Slim for a period of three years after he has left the company. Another issue that also needs to be decided is related with the personal liability of Richard for the loan of $40,000 that has been taken by the company.

Law: The doctrine of corporate veil provides that there is a difference present between the identity of a company and its members. This principle has been provided by the court in Salomon v Salomon & Co Ltd., 1897. Therefore, the purpose behind the introduction of the doctrine of corporate veil was to provide protection to the shareholders of the company against the risk of being held personally liable for its debts. But at the same time, it also needs to be mentioned that the protection that has been provided by the doctrine of corporate veil can be penetrated in some cases. Hence, when the court arrives at the conclusion that the main reason behind the formation of the company was to use it as a facade for illegal activities, it can be held that the members of the company will be personally liable (Nicholas, 1998). This objective is achieved by the courts by using the concept of piercing the corporate veil. In this way, when the corporate veil is lifted by the courts, the court decides that the obligations of the company can be enforced against its members. Generally it is provided by the law that a company has its own separate legal identity. The result is that the debts and obligations of the company can be enforced against the company only. In most of the cases, the separate identity of a company is recognized by the courts but under certain rare circumstances, the court may arrive at the conclusion that the corporate veil should be lifted (Sealy, 2001).

Conclusion


Therefore when a contract has been signed by a person which provides that the person will not be involved in a competing business with the company for the time mentioned in the contract, after the person leaves the company and such person forms a company which is involved in competing business with the former company, it can be held by the court that the purpose behind the formation of the new company was only to avoid the liability of such a person for the breach of contract with the former company. Therefore in such a case, the court may arrive at the conclusion that the new company is merely a facade or sham. Under such circumstances, the court may allow that the previous company can sue the person for this breach. Hence, in this case the court will not consider the separate identity of the corporation and look at the reality.

As mentioned above, one of the purposes behind the formation of a company is to provide protection to the personal assets of its shareholders if the company fails. As compared to the business structure of a sole trader or a partnership, where the owners are personally liable, the shareholders of the company are liable only to the extent of their investment. However, with the passage of time, the scope of protection that has been provided to the members of the company has been narrowed down by the courts. Therefore increasingly, the courts are holding that the members can be held personally liable in several situations. In order to achieve this objective, the courts left the corporate veil, particularly when small and privately held companies are involved or where the company has few shareholders and limited assets. The result is that if the company is considered as a separate entity, distinct from its members, in equitable results may be produced or such a situation may promote fraud.

An example regarding reading the corporate veil by the court can be given in the case of Lee v Lee Air Farming (1960). In this case, the court stated that an owner of the company can also be an employee of the company. The reason given in support of this decision was that the company is considered as a separate legal entity.

Regarding the issue of the liability of Richard for the breach of non-competing covenant that was present in his contract with Nu-Slim, the case of Gilford Motor Co Ltd v Horne (1933) needs to be applied. The brief facts of this case are that the court considered the company and its shareholders as a single entity. The court was of the opinion that Mr Horne was using the new company as an instrument of fraud.

In the present case also, the corporate way can be lifted by the court and Richard can be held liable for the breach of covenant. On the other hand, regarding the personal liability of Richard for the loan taken by the company, it can be said that the loan is not personally enforceable against Richard in view of the principle of separate legal identity of a company.

Conclusion:

In this case, the corporate veil can be lifted by the court and Richard can be held liable for the breach of contract with Nu Slim. However, United Bank cannot enforce the loan taken by Fat Away Pty Ltd against Richard personally.

References

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

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

Nicholas, B. (1998) Principles of Company Law, 3rd 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

Lee v Lee's Air Farming Ltd [1960] UKPC 33

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