Duties of Partners and Directors in Partnership and Companies

This article provides an overview of the duties of partners and directors in partnerships and companies. It discusses fiduciary duties, disclosure obligations, and conflict of interest. It also explores the liability of partners and individuals involved in proprietary companies under contracts with outside parties.

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Title page
Name of the student
Student ID

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Contents
Part A...............................................................................................................................................3
Sole Trader.......................................................................................................................................3
Set up............................................................................................................................................3
Administrative cost......................................................................................................................3
Administrative burden..................................................................................................................3
Partnership.......................................................................................................................................3
Set up............................................................................................................................................3
Administrative cost......................................................................................................................4
Administrative burden..................................................................................................................4
Proprietary companies.....................................................................................................................4
Set up............................................................................................................................................4
Administrative cost......................................................................................................................4
Administrative burden..................................................................................................................5
Part B...............................................................................................................................................5
Liability of Partners under contracts entered into with outside parties........................................5
Liability of individuals involved in a proprietary company under contracts entered into with
outside parties..............................................................................................................................6
Part C...............................................................................................................................................7
The duties owed by partners to each other...................................................................................7
The duties owed by directors in companies.................................................................................8
Reference List................................................................................................................................10

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Part A
Sole Trader
In sole trader, an individual carries on the trading and is legally liable for all the profits and
debts1.
Set up
A business name is to be selected and business is initiated. It does not require a separate bank
account.
Administrative cost
The trader liability is unlimited. He pays himself as an employee along with workers'
compensation insurance and superannuation contributions.
Administrative burden
The trader liable for all the profits and debts. The burden includes reporting requirements,
financial records of at least past 5 years.
Partnership
Two or more persons (up to 20 people) when join together to carry on business of continuous
nature with the aim to share losses and profits2.
Set up
A name and state must be selected for registration. An agreement must be drafted and employer
identification number must be sought. A business account to be opened3.
Administrative cost
The partners are held personally liable for the losses..
Administrative burden
The liability of the partners is unlimited.
Proprietary companies
1 Business. 2018. Sole trader. Retrieved on < https://www.business.gov.au/planning/business-structures-and-types/business-
structures/sole-trader>. Accessed on 14th April 2019.
2 Business. 2018. Partnership. Retrieved on <https://www.business.gov.au/planning/business-structures-and-types/business-
structures/partnership>. Accessed on 14th April 2019.
3 Legal. 2018. Steps Involved in Setting Up a Partnership. Retrieved on
<https://business-law.freeadvice.com/business-law/partnerships/setup-partnership.htm>. Accessed on 14th April 2019.

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When any business is registered as per the guidelines of Corporation Act 2001 and ASIC and
attains the status of a separate legal entity, then, the business is considered as a proprietary
company.4
Set up
The name must be selected and then decide as how to operate, that is, by replaceable rules,
constitution or by both. The share structure and obligation of officeholders must be decided. A
registered office must be maintained.
Administrative cost
It is necessary to have a separate bank account. Bank fees must be paid depending upon the kind
of bank operated. It is necessary to register the name of the company. If a constitution is
formulated then it requires paper work. The company must pay its officers and employees. The
officeholders must maintain the company details, records, pay lodgment and annual review fees..
Administrative burden
The administrative cost is high in comparison with sole trader and partnership and requires $488
for the registration. The liability of the shareholders is limited.
Part B
Liability of Partners under contracts entered into with outside parties.
In partnership, two or more than two (up to 20 people) people join together to carry on the
business of continuous nature with the aim to earn and share losses and profits, then, it is a
partnership5.
A partnership is a branch of agency law wherein the people are the partner and agents of each
other and of the partnership firm. The partners are in fiduciary relationship with each other and
with the firm6.
In partnership, every partner of the firm is its agent and the agent of other partners and any act or
omission which is undertaken by a partner while carrying on the business of the partners will
4 ASIC. 2018. Steps to register a company. Retrieved on < https://asic.gov.au/for-business/registering-a-company/steps-to-
register-a-company/>. Accessed on 14th April 2019.
5Business. 2018. Partnership. Retrieved on https://www.business.gov.au/planning/business-structures-and-types/business-
structures/partnership. Accessed on 14th April 2019.
6 Re Agriculturist Insurance Co (Baird’s case) (1870).

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bind the other partners and the firm provided that the partner is acting within his authority. If the
partner is exceeding or violating his authority but is still carrying on the usual business of the
firm ill only bind the firm provided that the outsider is acting in good faith and in the belief that
the partners in fact possess the authority. So, the main elements include:7
i. That contract with the outsider is carried on by the partner of the firm.
ii. The contract so entered must be within the scope of the business of the partnership8
iii. The contract so entered must be comply with in the usual manner9;
iv. The outsider must be acting in good faith10.
Thus, all the partners are held to be liable for the contracts that are undertaken by a partner with
an outsider provided the partner is acting within the usual course of business and the outsider is
dealing in good faith.
Liability of individuals involved in a proprietary company under contracts entered into
with outside parties.
Any contracts by an individual will bound the proprietary company provided the contract that are
entered by him with the outsider is within his authority. A company is a separate legal entity in
the eyes of law and thus the contract that are undertaken by any individual or officer of the
company will bound the company only and no liability can be imposed upon the company. In
Salomon v A Salomon & Co Ltd11 it was held that the liability that is generated with an outsider
under contract will only be imposed upon the company and not to the individual because the
company has a separate legal personality, which implies that the company and its officers are
two distinct persons and are considered as separate in law. However, this separate legal
personality at times is disregarded by the courts in certain situations and is rule is called the
piercing the corporate veil of the company. In such situations, the individual are held personally
liable for the acts that are undertaken by them under contract with the outsiders. The situation
includes12:
7 Nickolas James. 2011. Business Law. Wiley
8 Polkinghorne v Holland (1934);
9 Mercantile Credit Co Ltd v Garrod [1962] and Goldberg v Jenkins (1889);
10 Construction Engineering (AUST) Pty Limited v. Hexyl Pty Limited & Ors. (1985) 155 CLR 541
11 Salomon v A Salomon & Co Ltd [1896] UKHL 1
12 Ian M Ramsay and David B Noakes. 2001. Piercing the Corporate Veil in Australia. 19 Company and Securities Law Journal
250-271. Retrieved on <https://law.unimelb.edu.au/__data/assets/pdf_file/0008/1710089/122-

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i. Agency – When the control of an individual is such that it has control over the
company, then, the individual is held to be an agent of the company and any liability
arising there from will make an individual liable13;
ii. Fraud – When the individual in order to avoid any legal obligation uses the company
structure to enter into contract with outsiders, then, the individual is held to be
liable14;
iii. Sham or façade – When the individual in order to hide the real purpose establish a
company, then, any contract entered with the outsider is disregarded and the
individual is held to be liable15.
iv. Unfairness/justice – An individual can be held personally liable to bring justice16.
Part C
A comparison is drawn amid the duties owed by partners to each other and the duties owed by
directors in companies.
The duties owed by partners to each other
In partnership, two or more persons (up to 20 people) join together to carry on business of
continuous nature with the aim to share losses and profits17. The persons who carry on the
business of partnership are called partners.
The partners of a partnership firm are the agents of the firm and of each other. There are several
duties that must be complying with the partners of the firm to each other and which include:
i. Every partner in the partnership firm has a fiduciary duty towards each other. The
fiduciary duties comply that each partner must act with honesty and in good faith
towards each other. The acts of the partners must be such so that they attribute the
concept of good faith and diligence towards the fellow partners and the partnership
firm.
Piercing_the_Corporate_Veil1.pdf> Accessed on 14th April 2019.
13 Balmedie Pty Ltd v Nicola Russo (1997).
14 Re Edelsten; Ex parte Donnelly (1988) 80 ALR 704
15 Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.
16 RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442
17 Business. 2018. Partnership. Retrieved on <https://www.business.gov.au/planning/business-structures-and-types/business-
structures/partnership>. Accessed on 14th April 2019.

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ii. The partners have a duty that they must make full disclosures to each other which is
relevant to the partnership. If any information is not told by the partners to each other
then it is considered to be violation of their duties towards each other. No partner is
permitted to keep any secret which might affect the partnership firm and the fellow
partners.
iii. All the partners have a duty towards each other that they must not indulge in any kind
of activity which is of a nature that it results in competing with the partnership itself.
Attempt should be made to make sure that there should be no conflict of interest
situations and the if the conflict still prevails then it is the interest of the partnership
that must be taken into account.
iv. It is the duty of the partners that they should not make any kind of secret profits. It is
great violation towards fellow partners and is a violation of the duties towards each
other.
v. It is the duty of the partners that they must not in any manner should use the property
of the partnership for their own personal purpose. The property must be strictly use
for the compliance of the purpose of the partnership.
vi. Every partner has a duty towards each other to be careful and must make full
disclosures of any contracts, obligations, finances etc that are taken by any individual
partner on behalf of the company, this is necessary as the act of one partner will bind
the others as they are considered to be the agents of each other.
The duties owed by directors in companies
The Corporation Act 2001 and the common law both has enshrined duties that must be followed
and comply with the directors of the company. Any non-compliance will result in the violation
and results in consequences. The duties include:
i. As per section 180 of the Act, every company officer and director must act with all
due care and diligence and in all good faith and must not have any material personal
interest in any transaction that is entered by them on behalf of the company18. The
director can only protect himself from the breach of section 180 provided that the acts
18 ASIC v Rich & Ors (2003).

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that are carried on by the director of the company are undertaken by him with expert
opinion, sound judgment, etc.
ii. As per Section 181, every director must act in good faith and in such a manner so
that it is in the best interest of the company19. This duty inscribes the duty of honesty
and trustworthiness in the minds of the people.
iii. As per section 182 and section 183, every director of the company has an obligation
that he must use his position and the company information that is attained by him in
such a manner so that it is not in detriment to the interest of the company and for his
own benefit20.
iv. As per section 588G of the Act, every company director must make sure that he must
not raise any kind of debts which results in bringing financial constraints upon a
company resulting in making it insolvent or the director must not raise any debt when
the company is already insolvent. If the director indulges in any kind of such act then
the director is indulged in the act of insolvent trading and thus is considered to be in
violation of section 588G of the Act21.
v. As per section 191-195 of the Act, every director must make sure that there should
not be conflict of interest and if the interest of the director is in conflict with the
interest of the company, then, it is the interest of the company which must supersede.
19 Talbot v NRMA Ltd (2001).
20 Sitmar Transit Mixes Pty Ltd v Baryczka (1998).
21 Woodgate v Davis (2002).

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Reference List
Books/Articles/Journal
James, Nickolas. 2011. Business Law. Wiley.
Ramsay, I and Noakes, D. 2001. Piercing the Corporate Veil in Australia. Company and
Securities Law Journal 250-271.
Case laws
ASIC v Rich & Ors (2003).
Balmedie Pty Ltd v Nicola Russo (1997).
Construction Engineering (AUST) Pty Limited v. Hexyl Pty Limited & Ors. (1985) 155 CLR 541.
Mercantile Credit Co Ltd v Garrod [1962] and Goldberg v Jenkins (1889);
Polkinghorne v Holland (1934).
Re Agriculturist Insurance Co (Baird’s case) (1870).
RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442
Re Edelsten; Ex parte Donnelly (1988) 80 ALR 704
Salomon v A Salomon & Co Ltd [1896] UKHL 1
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.
Sitmar Transit Mixes Pty Ltd v Baryczka (1998).
Talbot v NRMA Ltd (2001).
Woodgate v Davis (2002).
Online Material
ASIC. 2018. Steps to register a company. Retrieved on <
https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/>. Accessed
on 14th April 2019.
Business. 2018. Partnership. Retrieved on https://www.business.gov.au/planning/business-
structures-and-types/business-structures/partnership>. Accessed on 14th April 2019.
Business. 2018. Sole trader. Retrieved on < https://www.business.gov.au/planning/business-
structures-and-types/business-structures/sole-trader>. Accessed on 14th April 2019.

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Business. 2018. Partnership. Retrieved on <https://www.business.gov.au/planning/business-
structures-and-types/business-structures/partnership>. Accessed on 14th April 2019.
Legal. 2018. Steps Involved in Setting Up a Partnership. Retrieved on <https://business-
law.freeadvice.com/business-law/partnerships/setup-partnership.htm>. Accessed on 14th April
2019.