Mr. Samyak was appointed as an employee of Moonlight Timber Private Limited on the condition that if he was to leave his employment, he will not…
CA Foundation · Business Laws · MTP · June 2024
Mr. Samyak was appointed as an employee of Moonlight Timber Private Limited on the condition that if he was to leave his employment, he will not solicit customers of the company. After some time, he was fired from the company . He set up his own business under proprietorship and undercut Moonlight Timber Private Limited’s prices. On the legal advice from his legal consultant and to refrain from the provisions of breach of contract, he formed a new company under the name Nine Stars Timbers Private Limited. In this company, his wife and a friend of Mr. Samyak were the sole shareholders and directors. They took over Samyak’s business and continued it. Moonlight Timber Private Limited files a suit against Nine Stars Timbers Private Limited for violation of contract. Nine Stars Timbers Private Limited argued that the contract was entered into between Mr. Samyak and Moonlight Timber Private Limited and as the company has separate legal entity, Nine Stars Timbers Private Limited has not violated the terms of agreement. Explain with reasons, whether separate legal entity between Mr. Samyak and Nine Stars Timbers Private Limited will be disregarded?
Suggested Answer and Working Notes:
(i) Revocation of continuing guarantee (Section 38 of the Indian Partnership Act, 1932) According to section 38, a continuing guarantee given to a firm or to third party in respect of the transaction of a firm is, in the absence of an agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm. Such change may occur by the death, or retirement of a partner, or by introduction of a new partner. (ii) Effects of insolvency of a partner (Section 34 of the Indian Partnership Act, 1932): (i) The insolvent partner cannot be continued as a partner. (ii) He will be ceased to be a partner from the very date on which the order of adjudication is made. (iii) The estate of the insolvent partner is not liable for the acts of the firm done after the date of order of adjudication. (iv) The firm is also not liable for any act of the insolvent partner after the date of the order of adjudication, (v) Ordinarily, the insolvency of a partner results in dissolution of a firm; but the partners are competent to agree among themselves that the adjudication of a partner as an insolvent will not give rise to dissolution of the firm.
Topics: The Companies Act, 2013
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