Commercial and Corporation Law

This article discusses the laws governing partnerships in Australia and the directors' duties of due care and diligence and loyalty and good faith. It also provides relevant case laws and penalties for breaching these laws.

Running Head: COMMERCIAL AND CORPORATION LAW
COMMERCIAL AND CORPORATION LAW
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Question 1
Issue:
In the given scenario, the issue that has been identified is whether a partnership existed between
Samuel, Thomas and Peta
Rule:
The rules and regulations of governing partnerships in Australia have been provided in the
Partnership Act 1963 (Cth). Section 6 of the aforementioned act provides the meaning of
partnership. Section 7 of the aforementioned act lays down the provisions by which a business
structure is usually determined to be a partnership. In accordance with section 6 of the
Partnership Act, it can be stated that a partnership can be defined as a relationship between
people who carry out a business with a view of making profit.
In section 7(1) of the Partnership Act, it has been provided that the rules of determining whether
the business venture carried can be called a partnership are provided in subsection 7(2)-(4).
It can be stated in accordance with section 7(3) that sharing gross returns by the partners does not
create in itself a partnership irrespective of the fact whether such partners have common rights or
interests in the property or tenancy from which such gross returns are derived.
In accordance with section 7(2) of the Partnership Act, it can be stated that any tenancy, joint
tenancy, part ownership of a joint tenancy does not necessarily create a partnership, in itself with
respect to anything which is owned by the tenants or the owners irrespective of whether the
tenants or the owners share profits from the use of such tenancy.

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It has been provided in section 7(4) of the Partnership Act that when a person receives profit
from a business such person can be called the business’s partner. However there are certain
exceptions to the section in relation to the circumstances in which a person engaged in the
business cannot be called a partner. Such exceptions as provided in subsection 7(4) (a-e) are as
follows:
 Any person who gives a loan to the business by a written contract which is signed by all
the other partners of the partnership cannot be considered to be a partner if the
partnership. Such person however is entitled to receive profits.
 An agent or employee of the business who is employed for carrying on the operations of
a business cannot be called a partner of the business.
 A person does not become a partner if he receives any liquidated damages or debts from
the accurate profits of business.
 Any spouse or child of a deceased partner who receives profits of a business through
periodic payments or in installments cannot be called a partner only because the spouse
or the child of the partner receives a share of profit
In another notable case Smith v Anderson (1880) 15 Ch D 247, the court that in order to identify
a business as a partnership, such business must have the necessary elements of a partnership
which include:
 Carrying on the business together by the partners
 Carrying on the business for the purpose of making profit

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In the notable case of Wise v Perpetual Trustee Co Ltd [1903] AC 139, it had been held by the
court that the parties must intend to carry on the business together to make profit for the purpose
of
Application
By analyzing the facts of the case, it can be stated that Thomas, Peta and Samuels started a
business. The business involved selling assets of those businesses which were going into
liquidation on the internet. It can be stated by analyzing the facts of the case that Peta had
invested $100,000 into the business. Peta was provided with a monthly salary of 6000 dollars as
gratuity every month. However, she was not provided any amount in the first year of operations
of business. It has also been provided that Samuel and Thomas were not paid as employees but
through the consultancy agreements with the venture.
In accordance with section 7(4) of the Partnership Act 1963, it can be stated that any person who
shares the profits of the business, is to be regarded as a partner.
Further by the application of the judgment of the Smith v Anderson case, it can be stated that a
partnership existed between the parties as they intended to carry on the business jointly for the
purpose of obtaining profit. In this case, it is evident that they start they started the business to
share the profits jointly
Therefore, it can be inferred in this scenario that Samuel, Peta and Thomas acted as partners of
the business and the business started by them was a partnership. It can be further stated in
accordance with the exceptions as provided in section 7(4) that any person who provides a loan
by a written contract signed by all the members of the partnership cannot be regarded as a
partner. However, such person is entitled to get interest for the loan provided to the business.

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Therefore, in this case it is evident that the 100,000 dollars provided by Peta to the business was
not a loan as the 100,000 dollars was not provided by a written contract and neither did Peta
receive any interest for the loan.
Conclusion
Thus to conclude, it can be stated that the business started by Samuel, Pet and Thomas was a
partnership.
Question 2
Directors’ duties of due care and diligence
It can be mentioned that directors are required to discharge their duties with due care and
diligence. This duty has been imposed upon the directors by provisions of the Corporations Act
2001(Cth). Directors’ duties to act with due care and diligence have been specifically provided
in section 180(1) of the Corporations Act 2001(Cth). This section of the Corporations Act states
that directors must exercise their powers and discharge their duties in relation to the corporation
with due care and diligence. It is worth mentioning that this duty which requires directors to act
with due care and diligence is the most legislated duty of all the duties which have been provided
in the Corporations Act. There is a test to assess whether a director has acted with due care and
diligence while discharging his duties, Section 180(1) states that whether a director acted with
due care and diligence is to be assessed by the perspective of a reasonable director. If it is
established that any reasonable director acting in the same circumstances and the position as the
director in consideration, would have discharged his duties with additional care and diligence, it
would be held that the director in consideration contravened the provisions of this section. It can
be stated that due to the wide scope of this duty, directors often breach the provisions of the

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aforementioned section. Whether a director acted reasonably with due are and diligence is
assessed by the courts. When a director breaches the provisions of the section 180(1) of the CA,
he is held to have breached civil penalty provisions. It has been provided in section 1317E that
the court has the right to make a declaration of the civil penalty provision that has been breached.
It is to be mentioned that the declaration of contravention to be filed by the court must contain
the following information:
 The name of the court that made the declaration
 The civil penalty provision that had been breached by the director
 The person who contravened the penalty provision
 The conduct of the person which constituted the contravention
It can be stated that the Australian Securities and Investment Commission (ASIC) subsequent to
the declaration of the contravention may seek to impose penalties under 1317H, 1317S and
206C. It has been provided in section 1317H that directors who have breached a civil penalty
provision would be liable to pay a maximum fine of $200,000 to the commonwealth. In
accordance with section 1317S it can be stated that the courts can ask the directors to pay a
compensation to any of the parties who has suffered a detriment because of the conduct of the
director. Further, the ASIC can seek an order from the court banning the director to manage the
affairs of the company for a period of two years. It can be mentioned that there have been several
Australian Cases in which the breach of directors’ duties to act with due care and diligence have
been discussed. In the case ASIC v Cassimatis (No. 8) [2016] FCA 1023, it was held by the court
that directors’ duty to act with due care and diligence is owed to the company and not the
shareholders of the company. Thus it can be inferred that he directors who hold the total number
of shares in a company can be held to be liable for contravening this section. In the

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aforementioned case, it had been held that a company need not suffer a real loss to invoke this
section; a mere loss of reputation is enough to invoke this section.
In the case ASIC v Hellicar [2012] HCA 17, the court held that misstatements issued and
approved by the board of directors of a company, it would constitute a contravention of this
section. Further it can be stated that breach of disclosure obligations as provided in the sections
674, 728 and 1041H constitutes breach of section 180(1) of the Corporations Act. Penalties are
imposed upon directors for breaching the provisions of the aforementioned sections. In the case
ASIC v Lindberg, a fine of 100,000 dollars had been imposed and in the case of Australian
Securities and Investments Commission v Sino Australia Oil and Gas Limited (prov liq apptd) -
[2016] FCA 42 a ban of two years had been imposed on the directors.
Further in the case Australian Securities and Investments Commission v Healey - [2011] FCA
717 , it had been held by the court that if the directors fail to approve the financial statements in a
legal manner, it would be held that such director would be held to have contravened the
provisions of the aforementioned section.
Directors’ duties of loyalty and good faith
The Corporations Act and the provisions of common law state that the directors of companies
have the duty to act in good faith and loyalty in the same way as they have the duty to act with
due care and diligence while discharging their duties. Section 181 of the Corporations Act 2001
(Cth) provides that the directors of organizations must act in good faith and loyalty. Howver, it
can be stated that directors must discharge their duties for the achieving the proper purpose of the
organization. However, the aforementioned section which is very brief and contains very few
words can be interpreted by the courts in a flexible manner. In the case ASIC v Hellicar [2012]

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HCA 17 , it had been held by the court that it is the duty of the director to focus and act in the
best interest of the company. It has been interpreted by the courts that if a director emphasizes
on any other aspect apart from maximization of profit such directors would be held to breach
their duty. In another case Hutton v West Cork Railway Co (1883) 23 Ch D 654, the Court held
that directors must not allocate the funds of the company and spend that such funds on non share
holders of the company. However, directors have the right to spend the funds of the company if
it is believed by the director that it would be in the best interest of the company. It had been
opined by Lipton and Herzberg (2015) that section 181 of the Corporations Act 2001 (Cth), has
adopted a narrow view of Corporate Social Responsibility and should be replaced by the
provisions of section 172 of the Companies Act 2006 (UK).
It is worth mentioning that in case the directors breach their duty to act in good faith and with
loyalty as provided in section 181 of the Corporations Act; such directors would be treated to
have breached a provision of civil penalty. In case of breaching this section, pecuniary penalties
may be imposed on the directors and the directors may be banned from managing the affairs of
the company.

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Reference List:
Corporation Act 2001 (Cth)
The Partnership Act 1963 (Cth)
Australian Securities and Investments Commission v Healey - [2011] FCA 717
ASIC v Lindberg - [2012] VSC 332
ASIC v Hellicar [2012] HCA 17
Hutton v West Cork Railway Co (1883) 23 Ch D 654
Smith v Anderson (1880) 15 Ch D 247

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