Steve Jones is an entrepreneur with a variety of business interests. He learned

Question

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 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 60% 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 involved in day to day running of the company.

On 14 July, the board signed a contract to purchase 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 or paying for it.

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.

Explanation / Answer

Given that the company WA Gold Exploration Limited is a limited liability company, the corporate veil cannot be pierced to reach Steve and he cannot be compelled to honour the company's liabilities to Volvo trucks more so since he was not even part of the board or executive team. Hence Volvo trucks will have to pursue its course of action only against the company however, Thor Mining can sue Steve (and have recourse) since their contract was executed prior to the formation of the company also and was signed and executed by Steve himself.

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