Whether Smith can execute transactions outside the agreement formed by the partners of the firm under the Partnership Act.
Partnership Act 1892 (NSW)
Section 5(1), 6 and 8 of the Partnership Act, 1982
Under the present facts and circumstance of the case, section 5 will be applicable which talks about how the partner can bind the firm that has a limited partnership and the partner is also an agent of the firm and as well as for other partners. The provision says that if the partner does any act that is in the usual course of the business, binds the firm as well as other partners also unless the partner does not have any authority to do so. In the present situation, there is an expressed contract stating that Smith, Peter, and Jones were partners of the firm, which Smith expressed authority to act on the behalf of the firm. Both the transaction done by Smith acted for the business and section 6 of the Act bound other partners under this situation.
In the present facts and circumstance of the case, section 5(1) plays an important role as according to this provision, if any partner contracts beyond the authority provided to him under the agreement, a third party can still uphold all the partners liable. In the present case thus, Mary and used Truck Ltd. can hold all the partners liable to pay the amount because Smith has the authority to perform a transaction even though his transaction exceeding the expressed authority. This Act aims to protect the rights of the third party. As per section 8 of the Act, any internal agreement between the parties will affect the rights of the third party.
In the case of Mercantile Credit Ltd v Garrod, there was an agreement between the partners of the firm that they will buy or sell cars for their garage business but still, one partner had sold the car. The third-party did not know about this agreement and had sued both the partners for the same. However, in the case of Abbott v Abbott, the partner took a plea that they were under the contract but the court opined in order to protect the rights of the third party, both the partners will be liable under the doctrine of an undisclosed principal. So far as the transaction of Smith for $8,500 is concerned, the third party can hold all the partners in the firm liable as the Act was within the usual course of business. All the above provisions and case laws can be applied in the present facts and circumstances of the case.
Road Measuring Professionals is a surveying firm in NSW, which used to do perform a survey of the roads that were under construction. And during the business, the partners of the firm, Smith, Peter and Jones entered into an agreement which had limited the authority of the partners up to $10,000. Smith, however, had bought a survey instrument worth $11,000 and along with this in good faith and to increase the profit of the firm had purchased an old truck for the business worth $8,500 which is less than the authority provided in the agreement. The precedents of the cases and various provisions state that both Mary and the Used Tricks Ltd. can sue all the partners to recover the money. The facts clearly state that the transaction executed by Smith was within the usual course of business and as he was the agent of the firm, his act will bind all the other members to pay the amount.
As per Antermony Coal Company v Wingate, the Partnership Act provides various provisions that are there to safeguard the interest of the third parties. As in the present facts and circumstance of the case, the third parties were not aware of the agreement between the partners, but still, as per the Partnership Act, they can all the three partners to give their money. The authority provided under the agreement was $10,000 and when Smith purchased the survey instrument from Mary for worth $11,000. It must be noted that as per section 5 of the Partnership Act, Smith acted outside the authority provided to him under the agreement. There is a clear ostensible authority to the Smith to conduct any activity on behalf of the firm as well as for the other partners. According to Commissioners of Sewers v Gellatly, the ostensible authority suggests that the third party has all the reason to believe that the partner is an agent of the firm and for the partners to execute any transaction. The facts of the case state that Smith often used to purchase things associated with the business on behalf of other partners.
Both the transactions executed by Smith were in good faith and for the usual course of the business. The firm deals with surveying the roads that were under construction so buying a survey instrument of $1000 above will not hold Smith responsible and liable alone. As Smith is an agent of the firm, he has the authority to conduct such a transaction. Also when Smith purchased an old truck, that was less than $10,000 and the truck was purchased for the profit of the firm and this transaction is also related to the business of the firm related to the survey of the roads. Buying a truck would not help Smith to have profits in any way but the entire firm can be profited with that. Thus Mary and Used Trucks Ltd. have the legal position as per Partnership Act 1892 to sue all the other partners for the recovery of money.
Section 6 of Partnership Act 1982
Section 8 of Partnership Act, 1982
Mercantile Credit Ltd v Garrod (1962) 3 ALL ER 1103
Abbott v Abbott  3 All E R 823
Commissioners of Sewers v Gellatly  3 Ch D 610
Antermony Coal Company v Wingate (1866) 4 M 1017
Whether David has breached the order of the court and is prosecutable under the contempt?
Whether David has liability towards Cenvest Real Estate Ltd.?
Corporations Act 2001 (Cth).
Section 119 of CA
Section 124(1) (a) of CA
The concept of incorporation will be applicable to the present facts and circumstance. As per section 119 of the Act, once the company is registered, it comes into existence and becomes a legal entity. In other words, the entity of the company is separate from its members until the company is again de-registered. It must be noted that it is only the company which has a legal interest in the property and not the members of the company. As per Macaura v Northern Assurance Co. Ltd, the company has the ability to be sued and to sue other members of any company on behalf of the members of the company.
Also, according to section 124(1) (a), the registered company has the power of the natural person and a body corporate. The company has the same powers that of a natural person, it has the same prohibitions that can be put on an individual. In case of a limited liability company, the shareholders, directors or the managing directors do not have any liability towards the debt of the company; they only need to be liable for paying their own shares. The meaning of Limited Liability Company is that the capital is fixed in which the company has to perform their business and no shareholders will be liable in case the company comes under debt or execute transactions.
The landmark case for the present facts and circumstance is the case of Salomon v Salomon, where the Salomon transferred the assets to the company that he had formed and had transferred his role from being an owner of the company to its shareholder. The court, in this case, held that the company has the separate legal entity and there was no identification of fraud or whatever form. Another important principle in the case of David is the doctrine of lifting up of corporate veil, under which the court has the power to take cognizance over the members of the company despite the fact, that the company and members have a separate legal entity (Max, 1932). However, the corporate veil is lifted only in certain situations.
There has to be proof of fraud conducted by the members of the company, this doctrine was established to control the misuse of the provision of the separate legal entity of the company. In the case of Gilford Motor Company Ltd v Horne, the court held that the corporate veil of the company has to be lifted because it is evident from the facts and circumstance of the case, that the members of the company were trying to avoid the contractual obligations there were held upon them as they were trying to restrain the trade of the company. Also in the case of Daimler Co v Continental Tyre and Rubber Co, the court decided to lift the corporate veil as it was established that the members of the company were trying to escape the effect of law as there was a severe fraud that had occurred in the company.
Now all these principles of law can be well applied to the present facts and circumstance of the case, David was the sole trader and was prohibited by the court to sell or buy vehicles. However, from the Cenvest Real Estate Co., David signed a contract for lease for $50,000. David established a company named Sydney Auto Group Pty Ltd., where David was the managing director of the company. It must be noted that the company formed by David is the company limited by shares and in this case, the company and David are different legal entities. Thus the transaction between the Cenvest Real Estate Co. was made by Sydney Auto Group Pty Ltd. and not David as the company has the power of a natural person. Also when David was in need of extra capital, his brothers joined his business and became shareholders.
Earlier, the amount decided for the leas was of $50,000 but was later revised to $30,000, for which Cenvest Real Estate Co. wanted to sue David for the breach of contract. It must be noted that there is, whatsoever, no fraud committed on the part of David towards Cenvest as the lease was revised because the other shareholders felt that the lease was very expensive. Also, it must be noticed if the Cenvest wanted to sue the company of David in the court of law, the court will not lift the corporate veil of the company as there is no incidence of fraud and no members were trying to escape from the liability or the effect of law. Also, the establishment of intention is also very important to uplift the corporate veil, which is missing in the present facts and circumstance.
It can be concluded that David cannot be prosecuted for the contempt of court and nor can be sued for the breach of the contract performed with the Cenvest Real Estate Co. It must be noted that it is the Sydney Auto Group Pty Ltd. which had executed the business and performed transaction and not David. As per law, the members and the company has a separate legal entity. Therefore, for the first issue, neither David can be sued not Sydney Auto Group Pty Ltd. as David did not perform or execute business not the court had imposed restrictions of trade on Sydney Auto Group Pty Ltd. For the second issue, Cenvest Real Estate Co. cannot sue David for the breach of contract but can sue the company to recover the rest amount. As the company formed by David is a limited liability company and the members cannot be held liable for the recovery of the money. Also, it cannot be proved that there was fraud in the company as intention plays an important role to decide whether the court will lift the veil of the company or not. But Sydney Auto Group Pty Ltd. can be held liable to recover the amount in this case.
Macaura v Northern Assurance Co. Ltd.  AC 619
Salomon v Salomon,  AC 22
Gilford Motor Company Ltd v Horn,  Ch 935
Daimler Co v Continental Tyre and Rubber Co.  2 AC 307
Max, R (1932). The Endless Problem of Corporate Personality, 32nd ed, North Ryde: CCH.
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