Commercial and Corporations Law: Business Structures and Directors' Duties

This file discusses different business structures in Australia, including sole trader, trust, partnership, and company. It also explains the duties imposed on directors under the Corporations Act, including duty of care and diligence, duty to act in good faith, proper use of position and power, criminal liability, reliance on third-party advice, disclosure of material personal interest, financial reporting, and avoiding insolvent trading. The significance of these duties in the governance of a company is also discussed.

Commercial and
Corporations Law
2018

TABLE OF CONTENTS
Part A..........................................................................................................................................2
Legal Letter for Providing Information to John Smith............................................................2
Part B..........................................................................................................................................6
Duties Imposed by the Corporations Act on Directors..........................................................6
Significance of Directors’ Duties in Governance of the Company.........................................8
References................................................................................................................................10

PART A
LEGAL LETTER FOR PROVIDING INFORMATION TO JOHN SMITH
Walter Griffin
99, Camberwell Road, Melbourne
Australia
John Smith
18, Punch Lane, Melbourne
Australia
24th May 2018
Dear John Smith,
You have decided to establish your business in Australia in the fashion industry, and now
you have to choose the structure of the business. There are different business structures
form which you can choose based on their advantages and disadvantages which is most
appropriate for your business. In case you wanted to keep your business small, then you can
choose a sole trading structure. A sole trader is the sole owner of the business, and it is
handled and operated by him. The formation of this structure is far simpler than compared
to other structures because there are few legal requirements (Business, 2017). Furthermore,
a sole trader did not have to send an annual return or maintain as many books of accounts
as compared to others. The decisions of the business are taken by its owner which removes
complexity and increase the efficiency of the decision making. However, the business did

not have a separate legal personality from its owner. The revenue generated by the
business is considered as the income of its owner, and it is taxed under his/her income as
well (Small Business First, 2017).
Furthermore, the debts of the business are also considered as the debts of the owner. In
case the business becomes insolvent, then the court can issue an order to repay the number
of debts by selling the personal assets of the owner. Another form of a business structure is
trust in which property or land is held by a trustee for the benefit of a beneficiary (Business,
2017). As compared to a sole trader and other structures, the formation of trust is way more
complicated. A trust deed is a mandatory document in a trust which provides information
about the rights and liabilities of both trustee and beneficiary. In case of a trust, a trustee is
liable for the property which he/she holds, and the court can hold him liable for payment of
its debts. A partnership is another popular business structure in Australia. The Partnership
Act 1891 (SA) governs the operations and provides provisions regarding partnerships in
Australia. The definition of the partnership is given under section 1 of the Act. It is referred
to a business structure in which two or more parties joined together into a relationship in
order to operate a business in common and their main objective is to generate profit in the
business (Jade, 2018).
The definition provided four elements of a partnership which are necessary to understand in
order to form a partnership in Australia. Firstly, it provided that a partnership must have a
relationship between partners. In the case of Stekel v Ellice (1973) 1 WLR 191, the court held
that the element of relationship between partners is relatively strong based on which a
salaried employee whose name is not written in the partnership agreement can be
considered as a partner in the business (Morse, 2010). The partnership must carry out a
business in the partnership. In the case of Smith v Anderson (1880) 15 Ch D 247, the court
provided that carrying out a business does not mean doing an isolated act which will not be
repeated by the parties in the future. The partners must also carry out the business in
common. In the case of Keith Spicer Ltd v Mansell (1970) 1 All ER 462, the court held that as
long as partners did not start operating a business in common a partnership is not
constructed between them Chan, 2009).

Finally, the objective of the partnership must be to generate a profit in the business. In the
case of Britton v The Commissioners of Customs & Excise (1986) VATIR 204, the court held
that the partners must focus on generating a profit in the business however only sharing a
profit is not enough to construct a partnership (Morse, 2010). Generally, partners have
unlimited liability, and the court can use their personal property for paying a debt of the
business. However, partners can form a limited liability partnership under section 48 of the
Act based on which they cannot be held liable for personally liable for the debts of the firm.
Section 54 provides that registration of a limited liability partnership is mandatory.
In order to start a business in Australia, people can form a company as a business structure.
It is one of the most common business structures in Australia which is governed by the
Corporations Act 2001 (Cth). The members of a company are called shareholders, and they
hold shares of the company. The judgement was given in the case of Salomon v A Salomon
& Co Ltd (1897) AC 22 provided the principle limited liability of members and separate legal
personality (Petrin, 2013). Although shareholders are considered as the owners of a
company, however, they are not liable for its debts. They have limited liability in terms of
debts of the corporation. The company itself has a separate personality from its owners. It
has a common seal and rights similar to human beings. It can purchase or sell the property
under its name and hold it for benefits. It can sue or get sued by third parties for
infringement of duties. One of the biggest advantages of a company is that it is easier for its
members to raise capital for its operations.
They can issue its shares in the public or choose other methods such as debentures or loan.
The company is categorised into two parts: public and proprietary (section 112). There is no
limit on a maximum number of shareholders in a public company whereas there is a
maximum limit of fifty shareholders in a proprietary company (section 113) (Legislation,
2018). Perpetual succession is another advantage of a corporation based on which it cannot
be ended by the death of its members, unlike other structures. In the case of Re Noel
Tedman Holdings Pty Ltd (1967) QDR 561, the court held that the death of its members did
not have any impact on the legal status of a company (Pattnaik, 2016). A corporation can
only be terminated on its winding up (section 440A). The key disadvantage of a corporation
is that there are a lot of legal regulations which are necessary to be fulfilled by members

before and after the formation of a company. Furthermore, it is difficult to operate a
company efficiently because it incorporates interest from a number of parties.
In your case, Mr Smith, the establishment of a partnership is a more suitable option than
compared to others. You would be able to avoid the legal complications of a company and
trust while at the same time you will have more options for funding your business than
compared to a sole trader. You can enter into a partnership with local businesses especially
suppliers in the men fashion industry which would assist in reducing your operating costs
and create a positive relationship for the future. As your business is small, you would not
like to face legal complications of a company or trust. Also, you would not want to keep your
business small as a sole trader; therefore, a partnership is right between a sweet spot. There
are relatively lower legal complications and better investment opportunities. Additionally,
you can avoid unlimited liability by forming and registering a limited liability partnership.
Thus, a partnership is a more suitable business structure for you than compared to others.
Yours Faithfully
Walter Griffin

PART B
DUTIES IMPOSED BY THE CORPORATIONS ACT ON DIRECTORS
Directors have significant powers to take business decisions for the interest of the company.
They operate at the top managerial level of the corporation, and they are responsible for
showing the directing to a company by forming its future business strategies. In order to
develop these strategies and direct others in a company, directors have a number of powers
which they can use to make such decisions. Along with these powers, many responsibilities
are imposed on directors as well in the form of duties given under the Corporations Act
(Legislation, 2018). Although there are duties given under both common and statutory law,
however, in this file, statutory duties will be discussed. These duties play an important part
in controlling the actions of directors and ensuring that they did not misuse their powers.
Following are different statutory duties which are mandatory to comply by directors.
Duty of care and diligence (Section 180)
It is a duty of directors for maintaining a degree of care and diligence while performing their
business operations. They should maintain this case while exercising their powers and
performing their duties. In order to evaluate whether a director has maintained a level of
care and diligence, the court uses a subjective test in which it evaluates what a reasonable
person would do in such situation. As per subsection (2), this duty is imposed on directors
while they make a business judgement. They have to ensure that the decision is in good
faith of the company, and it did not have their personal interest (Legislation, 2018). They
should also inform themselves about the subject matter of the judgement, and they should
rationally believe that the decision is in the best interest of the company. In the case of AWA
Ltd v Daniels (1992) 13 ACLC 614, the court held that the director failed to act in good faith
of the company, and he prioritised his interest above the company’s benefits (Yeo, 2016).
Duty to act in Good Faith (Section 181)
While discharging their duties or developing future business strategies, the directors should
act in good faith by prioritising the interest of the corporation, and they should use their
powers for the proper purpose. The court evaluates acting in good faith by considering what

a reasonable person would do in such situation. One of the most popular cases of breach of
section 181 is ASIC v Rich (2009) 236 FLR 1. In this case, the court provided that the directors
should exercise their powers for proper purposes, and they should act honestly to prioritise
the interest of the company (Jacobson, 2009).
Proper Use of Position (Section 182)
The directors are at the top managerial position in a company, and they have many powers
to discharge their duties. However, it is their duty to ensure that they did not misuse their
position for acting in their personal interest rather than the interest of the company. They
should ensure that they did not misuse their position to cause harm to the company or
providing benefit to a third party rather than the stakeholders of the company. A good
example was given in ASIC v Adler (2002) NSWSC 171 case in which the director misused his
position to authorise a loan for the personal benefit even when he knew that it would be
detrimental for the company (Adams, 2011).
Proper Use of Power (Section 183)
In order to perform their duties, directors have immense powers based on which they take a
business decision in the company. However, it is their duty to avoid using such powers for
their personal benefits rather than focusing on the benefit of the company. They should use
their powers for the proper purpose and avoid using it for self-gain or benefit of others
rather than the company and its stakeholders. They should also avoid using their powers to
causing harm or negatively affect the interest of the company. The court provided in R v
Byrnes (1995) 183 CLR 501 case that the directors are liable under this section irrespective
of the fact whether such gain or harm has actually occurred or not (Star, 2018).
Criminal Liability of Directors (Section 184)
The court can charge directors for a criminal offence under the following breach of duties:
 Failure to act in good faith of the company
 Using the position is the wrong way for self-gain or causing harm to the company
 Using the powers for negatively affecting the corporation or for personal benefits
Reliance on Third-Party Advice (Section 189, 190 and 198D)

Directors can rely on the advice of third-party experts, and they can delegate their powers
after ensuring that they are for the benefit of the company (Legislation, 2018).
Disclosure of Material Personal Interest (Section 191-195)
Proper disclosures should be made by directors regarding material personal interest in the
transaction of a company as given under section 191 (1). They should make proper
disclosures and distance themselves from the transactions, after which they can retain any
profit, and the company did not have to cancel the transaction based on the fact that
directors have a material interest in the transaction (Legislation, 2018).
Financial Reporting (Section 285-318)
Directors have to prepare and issue directors’ report in the company, and they should
maintain a level of care and diligence while forming these reports. They should include their
honest opinion in these reports and maintain proper financial accounts which are
mandatory to be maintained by them.
Avoiding Insolvent Trading (Section 558G)
Directors should avoid trading or incur any debt in the company while it is insolvent or like
to be after such debt. The court could impose an appropriate penalty on directors if they
failed to prevent a company from incurring debts during insolvency or which is likely to
make a company insolvent (Legislation, 2018).
SIGNIFICANCE OF DIRECTORS’ DUTIES IN GOVERNANCE OF THE COMPANY
As discussed above, there are a number of duties which are imposed on directors of a
company. The purpose of these duties is to ensure that directors did not breach their duty
towards the company and its stakeholders. These duties ensure that the governance of the
company is focused towards the benefit of the company and its stakeholders. These duties
would impose both civil and criminal penalties on directors if they did not act in the interest
of the corporation. It ensures that they are taking business decisions for the benefit of the
corporation and its shareholders rather than gaining personal benefits. By compliance with
these policies, directors avoid causing harm to the company and implementing strategies for
its success. Thus, the directors’ duties play a significant role in the governance of the

corporation and effective compliance with these policies ensure the sustainable
development of the company.

REFERENCES
Adams, M. (2011) Latest developments in officers’ duties of SMEs. Journal of Business
Systems, Governance and Ethics, 6(3), p.31.
ASIC v Adler (2002) NSWSC 171
ASIC v Rich (2009) 236 FLR 1
AWA Ltd v Daniels (1992) 13 ACLC 614
Britton v The Commissioners of Customs & Excise (1986) VATIR 204
Business. (2017) Business structures and types.[Online] Business. Available at:
https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/
business-structures-and-types [Accessed on 25th May 2018]
Chan, G. Y. (2009) Company Promoters under the Chinese Company Law-A Comparative
Analysis. Hong Kong LJ, 39, p.223.
Corporations Act 2001 (Cth)
Jacobson, D. (2009) ASIC V Rich: ASIC One.Tel Case Against Rich and Silbermann Dismissed.
[Online] Bright Law. Available at: https://www.brightlaw.com.au/asic-v-rich-asic-onetel-
case-against-rich-and-silbermann-dismissed/ [Accessed on 25th May 2018]
Jade. (2018) Partnership Act 1891 (SA). [Online] Jade. Available at: https://jade.io/j/?
a=outline&id=511210 [Accessed on 25th May 2018]
Keith Spicer Ltd v Mansell (1970) 1 All ER 462
Legislation. (2018) Corporations Act 2001. [Online] Legislation. Available at:
https://www.legislation.gov.au/Details/C2018C00131 [Accessed on 25th May 2018]
Morse, G. (2010) Partnership law. Oxford: Oxford University Press.
Partnership Act 1891 (SA)

Pattnaik, S. (2016) Perpetual succession limits the scope of an individual. International
Journal of Law and Management, 58(3), pp. 281-298.
Petrin, M. (2013) Assumption of responsibility in corporate groups: Chandler v Cape plc. The
Modern Law Review, 76(3), pp. 603-619.
R v Byrnes (1995) 183 CLR 501
Re Noel Tedman Holdings Pty Ltd (1967) QDR 561
Salomon v A Salomon & Co Ltd (1897) AC 22
Small Business First. (2017) The most common types of business structures in Australia.
[Online] Small Business First. Available at: https://smallbusinessfirst.com.au/the-most-
common-types-of-business-structures-in-australia/ [Accessed on 25th May 2018]
Smith v Anderson (1880) 15 Ch D 247
Star, D. (2018) The latest from the federal court. LSJ: Law Society of NSW Journal, (43), p. 92.
Stekel v Ellice (1973) 1 WLR 191
Yeo, V. C. S. (2016) Directors' Duty of Care and Liability for Lapses in Corporate Disclosure
Obligations-Observations and Comments on Select Issues. SAcLJ, 28, p. 598.