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ACCG2051 Business And Corporations Law

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ACCG2051 Business And Corporations Law

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Course Code: ACCG2051
University: Macquarie University

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Country: Australia

Questions:

1.Steve Jones is an entrepreneur with a variety of business interests. He learned of a gold deposit in Western Australia. Because he was anxious to exploit the opportunity, he flew to Perth and on 6 July and entered into a contract to buy a drilling machine from Thor Mining Machinery Ltd, to be used to drill a test shaft. The contract specified that the drill would be delivered, and payment of the $ 125 000 price would fall due, on 30 July. He signed the contract as follows:
Steve Jones, on behalf of WA Gold Exploration Ltd.
WA Gold Exploration Ltd was registered as a company by ASIC on 10 July, with Steve as 90% shareholder. He and the other shareholders met on 11 July, to elect a board of five directors. Steve himself was not elected to the board, because although he had originally discovered the opportunity, he had no experience in mining operations, and so did not want to be a director. On 14 July, the board signed a contract with for a fleet of five ore trucks from Volvo Trucks (Australia) Ltd, costing a total of $ 500 000, to be delivered on 30 September. The board also established a sub-committee to determine the company’s technical needs, and on 25 July the board accepted the committee’s recommendation that the company buy a drill from United Mining Machinery Ltd for $ 100 000. The board also contacted Thor Mining Machinery Ltd and told it that it would not be taking delivery of the drill. Unfortunately, in mid-September it became clear that the gold deposit was not as large as hoped, and the board ceased trading on the basis that the company had only $ 400 000 in assets and had accumulated $ 2 million in liabilities. The company is therefore unable to pay for the trucks.
Steve, who has personal assets of $ 1 million, has now been sued for breach of contract by both Thor Mining Machinery Ltd and Volvo Trucks (Australia) Ltd. Assume you are his legal advisor. Prepare advice for him citing full legal authority, as to what his legal position is.
2.Simon, George, Sara and Mary were all employed by different IT companies. However, they felt that they could do better if they went into business themselves. They pooled their available cash and drew up a partnership agreement, which stated that each partner had authority to enter into transactions on behalf of their firm, which they called Computer Solutions. The firm operates in Sydney and provides a service of storing data for customers. The agreement states that partners have authority to enter into contracts of up to $ 10 000, but that any contract for more than that must be approved unanimously by all partners.
George, Sara and Mary approach you for legal advice in relation to two transactions entered into by George, who had acted without referring back to the partners. One was for a 50TB hard-drive, bought by Simon on behalf of Computer Solutions, from Sunstar Computer Hardware Ltd, costing $ 15 000.
The other was for a second-hand ute, costing $ 9 000, which Simon ordered for the firm from You Beaut Ute Ltd, on the basis that the partnership should branch into the freight business – an idea that the other partners had previously rejected.

Answers:

1.Issue
Can Thor Mining Machinery Ltd and Volvo Trucks (Australia) Ltd sue Steve to breach the contract and whether Steve is liable for the same?
Law
It was held in the case of  Lee v Lee’s Air Farming Ltd (1961) AC 12 that a company is a separate legal entity from it is directors and employees. Directors are not liable for any act or deed of the company. Being a separate legal entity, a company do the business transaction in it is own name (cliffsnotes, 2018). A person who deals with the company has a belief that they are doing business with the company and not worth the officers or directors of the company. In addition to being a separate legal entity, a company is also an artificial person (Shepherd & Ridley, 2015).
People who put their efforts incorporation of a company and bring the same into existence are known as Promoter of the company. Before registration, a company does not get it is individual legal identity, and therefore cannot be held liable for anything. In order to make a company registered, promoters of the company enter into many contracts on behalf of the company. These contacts are termed as Pre-registration contracts (Latimer, 2011) Under Corporations Act 2001 (Cth) (hereinafter stated as an act), methods are mentioned in which company can deal with the pre-registration contracts. The same is mentioned hereunder
Pre-Registration Contracts:-
In general, promoters, directors, and officers of the company act on behalf of the company as an agent and company held liable for such actions. However, before the registration, a company cannot act as a principle and therefore the same cannot be held liable for the deeds or contracts of such people. Section 131 of the act is a section, which covers the provisions related to pre-registration contracts. Subsection 1 of this section states that a company can ratify the pre-registration contract, within the specified time mentioned in the contract or within a reasonable time (Australian Government, 2018). If the company does not ratify the contract within the specified or reasonable time then such contracts will not be bind on the company.
Section 131 (2) says that when a promoter enters into a pre-registration contract and company do not get registered or the same get registered but not ratified such contract, then the promoter will be held personally liable towards the third party in respect to the performance of the contract (Australian Contract Law, 2018). This can be stated that for a pre-registration contract, a company will be held liable only in those cases where the same ratified such contracts within the mentioned or reasonable time.
Post Registration Contract: –
 These are the contracts that a company enters into by it is own name. As mentioned earlier that after registration, the company gets a separate legal entity, therefore the same will be the only responsible person in respect to such post registration contracts (Knowles, 2012) Neither a promoter, director nor any of the officers of a company will be held liable for a pre-registration contract.
Application
In the provided case, two of the contracts are there. Both of these two contracts are defined as follows:-
Thor Mining Machinery Ltd
Steve Jones, one of the promoters of the company named WA Gold Exploration Ltd has made a contract with Thor Mining Machinery Ltd on behalf of his company. WA Gold Exploration Ltd (the company) has registered as on 10th July. Steve has entered into a contract with Thor Mining Machinery Ltd as on 06th July, therefore it was a pre-registration contract. The contract was related to purchasing a drill machine worth $ 125000, payment of which was going to be due as on 30th July. After incorporation of the company, the same has established an advisory committee.
This committee has recommended to the board that the company should buy a drill machine from another seller named United Mining Machinery Ltd which is selling the same for only $ 100 000 instead of Thor Mining Machinery Ltd. On 25 day of July, the board of directors of the company has accepted these recommendations of the committee. Applying the provisions of section 131 (1) of the act, the company could ratify this agreement before 30th July but the same has not made such ratification. As per the provisions of section 131 (2) of the act, Steve, being the promoter of the company would be personally liable for performance of the contract developed with Thor Mining Machinery Ltd.
Volvo Trucks (Australia) Ltd
This is another contract involved in the case. The company was registered as on 10th July. Afterward, on 14th July, the board of directors of the company has signed a contract with Volvo Trucks (Australia) Ltd to purchase 5 ore trucks. In consideration of these trucks, the company was required to pay $ 500000. This transaction was meant to be complete on 30th September. However, before the due date, an advisory committee of the company has reviewed the financial condition of the company and found that there are not enough assets in the account of the company. The company has not remained in the condition to make the payment to Volvo Trucks (Australia) Ltd, therefore contract of the company with Volvo Trucks (Australia) Ltd. this was purely a post-registration contract that the company has made with it is own name. Applying the provisions of Lee v Lee’s Air Farming Ltd, company is a separate legal entity here and therefore no one else can be held liable for it is conduct in an ordinary course.
Conclusion
Thor Mining Machinery Ltd
Steve will be held personally liable because the contract he has made was a pre-registration contract and the company has not ratified the same.
Volvo Trucks (Australia) Ltd
Steve will not be held liable because it was a post-registration contract and only the company is liable for the same.
2.Issue
To check the legality of two of the transaction that Simon, one of the partners of the firm has entered into with third parties on behalf of the firm. Whether other partners of the firm are bind with these contracts.
Law
The partnership is a business form where two or more people come together for making earring for them. The partnership agreement is a document that defines the authorities and responsibilities of partners. Two kinds of authorities are there that are available with partners of a partnership firm. One is express and another one is ostensible. Expressed authority can be written and can be oral too. Whereas on another side ostensible authority is the one which is not expressly granted to a partner but being the partners, it is assumed that such a person has this kind of authority. A partnership firm is not a separate legal entity similar to a company and therefore a firm and other partners are liable for the conduct of a partner. Section 5(1) of Partnership Act 1892 No 12 (the act) describes the relationship for a partner with a third party/outsider. Subsection 1 of this section says that a partners act as an agent of the firm and therefore firm, being the principal is liable for such deeds of a partner. However, this section further ads that the firm and another partner will be held liable only in those cases where the act of a partner is related to the purpose of a business (New South Wales Government, 2018).
This section further says that even when a partner act outside of the expressed authority but act in the ordinary course of business of partnership firm, the third party can held the firm and other partners liable for the same. The reason behind this section is to provide a safeguard to the innocent party (third party). A partnership is a closely held business and a third party cannot know about the internal settlement of partners in respect to authority distribution. Nevertheless, the section will not be applicable where a third party is or can be aware of such no authority of partners. In the case of Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103, a partner pursued an act which was under restriction category according to the partnership agreement, yet other partner and firm held responsible by the court because the act was related to the ordinary business of the firm.
Section 7 is also an important section, which says that if a partner does any act outside of the nature of the business, then other partners and firm will only become liable where special authority is given to the partner (Jade, 2018). According to the Section 24 (2) of the act, partners can get the reimbursement of the expenses that they do on behalf of the firm but such expenses must be related to the ordinary business of the firm (Austlii, 2018).
Application
In the given case, partners of the firm were involved in the business of providing data storage services to the customers. Being the partners of the firm named “computer solutions” they have made certain arrangements among them according to which none of the partners could make a contract worth more than $ 10000. In addition to this, they have decided that if a partner would enter into any transaction value of more than $ 10000 then the consent of all the partners would be required. Simon, one of the partners of the firm has entered into two transactions on behalf of the firm that is prescribed below-

Purchase of hard drive: – Simon has purchased hard drive for the firm that was of $ 15000 from Sunstar Computer Hardware Ltd.He did not take any approval from other partners. As all the partners have decided that they will not enter into any transaction of more than $ 10000, Simon should have taken approval of all other partners. Although purchasing of the hard drive is related to the business of the firm as the same is a necessity of data storage. Applying the provisions of a case of Mercantile Credit Ltd v Garrod and provisions of section 5(1) of the act, other partners and firm will be held responsible for the purchase transaction of the hard drive. In this case, the third party i.e. Sunstar Computer Hardware Ltd could not be aware of the limited authority of Simon.
Purchase of Ute:- The other transaction that Simon has done on behalf of the firm was a purchase of a ute from You Beaut Ute Ltd. This transaction is not related to the business of the firm. Although the value of ute was just $ 10000, yet in the absence of any specifically expressed authority, the firm and other partners cannot be held liable for the transaction. The seller of Ute had reason to believe that Simon is not acting according to the required authority.  

Conclusion
Liability in both the transaction is different and resulted as follow-

In the purchase transaction of the hard drive, firm and other partners will be held liable.
In the purchase transaction of Ute, Simon will be held personally liable and this transaction will not bind to the firm or other partners of the firm

References
Austlii. (2018). Partnership Act 1892 – SECT 24 Rules as to the interests and duty of partners other than partners in incorporated limited partnership subject to special agreement. Retrieved from: https://www6.austlii.edu.au/cgi-bin/viewdoc/au/legis/nsw/consol_act/pa1892154/s24.html
Australian Government, (2018). Corporations Act 2001.  Retrieved from:https://www.legislation.gov.au/Details/C2018C00275
Austrlian Contract Law. (2018). Corporations Act 2001 (Cth). Retrieved from: https://www.australiancontractlaw.com/legislation/cthcorporations.html
Cliffsnotes. (2018). Characteristics of a Corporation. Retrieved from: https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/corporations/characteristics-of-a-corporation
Corporations Act 2001 (Cth)
Jade. (2018). Partnership Act 1892 (NSW). Retrieved from: https://jade.io/article/276604
Knowles, J., R.  (2012). 200 Contractual Problems and their Solutions (3rd ed.) Somerset:John Wiley & Sons.
Latimer, P. (2011). Australian Business Law 2012. Australia: CCH Australia Limited.
Lee v Lee’s Air Farming Ltd (1961) AC 12
Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103
New South Wales Government. (2018). Partnership Act 1892 No 12.
 Retrieved from: https://www.legislation.nsw.gov.au/#/view/act/1892/12/historical2004-04-05/full
Partnership Act 1892 No 12
Shepherd, C., & Ridley, A. (2015). Company Law. Oxon: Routledge.

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