Company Structure and Liability

This assignment explores the differences between partnerships and companies, focusing on the benefits and drawbacks of each structure. It delves into the legal requirements for forming a company, including notification to ASIC, and examines the concept of vicarious liability in relation to company directors' actions. The scenario presented involves Mary leaving her partnership with Fred and Chris, and subsequently purchasing a car using company funds despite not being a director. The assignment requires students to analyze this situation and determine the legal ramifications for all parties involved.

Running head: COMPANY AND COMMERCIAL LAW 0
Company and Commercial Law

COMPANY AND COMMERCIAL LAW 1
Answer 1a
Mary, Fred, and Chris started a real estate business in Melbourne by writing an
agreement on a serviette. The term of the contract stated that equal amount is put by
each party and future profits will be divided equally between them. The business is
providing bespoke service to peoples entering in real estate market, and all three
partners were managing the operations.
Issue
The key issue is related to the type of business structure Mary, Fred and Chris
are in and understanding the legality of their contract since it is written on a serviette.
Rule
To establish a legally enforceable contract, few elements are required to be
fulfilled by the parties of such contract. A legal contract needs an offer, acceptance, and
consideration or a bargained for exchange. In other words, acceptance of agreement
terms by parties and having a consideration in the transaction validates a contract which
can be enforceable by law. There are four main types of business structures used by
businesses in Australia: Sole trader, company, partnership, and trust.
In Sole trader business structure, the processes of business are operated by an
individual who is responsible towards all aspects of the business. A company has a
separate legal entity from its owners, and it is more suitable when the operation is
expanding or growing. The Corporations Act provides regulations regarding the
establishment of a company. In Partnership business structure, a number of people
jointly decided to run a business together. The partnership is divided into two parts-
general and limited; the Partnership Act provides provision regarding partnership
structure. In Trust business structure an obligation is imposed on a party to hold an asset
for the benefit of another party.
Application
In case of Mary, Fred, and Chris, they have entered into a partnership business
structure. The agreement performed by them on a serviette is legally enforceable
because it comprises essential elements of a contract which are offer, acceptance, and

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consideration. The intention of parties is also similar, that is to start a business of
providing bespoke service for real estate.
The Lucy v Zehmer case is a good example; in this case, the court enforces a
contract which was written on the back of a receipt for selling of property to another
party. Zehmer provided that his intention was not available and the contract was written
in jest, but the court decided that the circumstance surrounding were justified the
seriousness of the contract hence it can be legally enforceable by law.
Conclusion
As per the provisions of Partnership Act, Mary, Fred, and Chris are in an
unlimited partnership business structure. The contract performed on serviette is legally
binding upon the partners because the fundamental principles of the contract are
available, such as offer, acceptance, consideration, and intention.
Answer 1b
Fred is a tax consultant who provides advice regarding tax implication in a
property. While giving information to ‘X’, Fred made an unintentional mistake which
causes ‘X’ monetary losses of $15,000 in tax. Without the advice of Fred, ‘X’ would
not have purchased the property.
Issue
The main issues are regarding the liability of Fred or other business partners
towards the loss suffered by customer X.
Rule
As per Tort Law in Australia, the negligence is a failure of maintaining proper
care when a person has a duty of care towards other peoples, which causes low to such
party. In case of misrepresentation, a party misrepresents particular facts to lure
someone into entering a legal contract, due to which they suffered monetary loss. A
negligent misrepresentation is an advice or fact which is given by a party honestly but is
misleading or false, due to which another party suffers financial injuries. In negligent
misrepresentation cases, the claimant has to prove three things, availability duty of care,
defendant’s liability of care and pecuniary loss.

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Application
Fred is operating a business of bespoke service which provides advice to peoples
regarding real estate market. Fred is a tax consultant which depicted him as a tax expert.
The information was given by Fred to X regarding the property, which causes damage
of $15,000 is constituted as negligent misrepresentation. Fred has a duty of care toward
his customers because he is considered as a tax expert; therefore, Fred has liability
towards X regarding the misleading advice given by him. Mary, Fred, and Chris are in a
partnership which makes other partners liable towards losses of X as well.
In Shaddock & Assocs. V Parranata City Council case, Shaddock asks PCC
regarding any road widening proposal for a land in the future. The PCC said no and
provided a written document for proof; Shaddock bought the property. Later PCC
compulsory acquire such a for a road widening project due to which Shaddock suffer
loss. He filed a suit against PCC and court decided that PCC has a duty of care which
they failed to fulfill; they have to pay for the damages of Shaddock. In Hedley Byrne &
Co Ltd v Heller & Partners Ltd case, the court establishes the provision of “reasonable
reliance” which provides that when a person is in a particular position that other could
reply over his/her advice, then such person must make an inquiry into the facts before
giving any advice. The court gave a similar judgement in Esso Petroleum Co Ltd v
Mardon case; the court provided that a person has a duty of care if he/she possesses or
is expert in the particular field and give advice to another party based on such
knowledge.
Conclusion
Fred is a tax consultant so it can be constituted that he is expert in tax laws, the
advice of Fred influences the customer's decision to invest in a property, and therefore,
he has a duty of care towards customers. Fred made a tort of negligent
misrepresentation by giving false information to X, which causes X financial loss. Fred
did not fulfill his duty of care which makes him liable towards X. other partners in the
firms will also be responsible towards X, as per the provision of Partnership Act.

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Answer 1c
Fred has given wrong advice to X which causes him a financial loss, it is
considered as negligent misrepresentation, and Fred is liable towards X. the advice
given by Fred was passed by X to his friend Y, due to which Y bought a property and
suffered a loss of $18,000.
Issue
The key issue is whether Fred and /or other partners of the firm can be held
liable for negligent misrepresentation towards Y’s loss.
Rule
The tort of negligent misrepresentation applies to the parties who are directly in
relation to the transaction. While giving advice, an individual has a duty of care towards
all such individuals who are relying upon his/her opinion on a specific matter. The
advisor is not liable towards third parties who are not directly relying upon the
information provided by him.
Application
The false advice given by Fred to X is considered as negligent misrepresentation
because Fred has a duty of care towards X. X is a client of Fred which proves that Fred
has a duty of care towards X. but, in case of Y, Fred did not have any direct connection
with him. Fred is not liable towards loss to suffer by Y because he did not have a duty
of care towards Y. The advice of Fred was given the position of a professional; such
opinion cannot be applied to other individuals.
In case of Ultramares Corp. v Touche, it was held that accountants could not be
held liable in case any third party suffered loss due to the negligent audit made by them.
In the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd, a bank (Heller and
Partners) give a report regarding the creditworthiness of their client (Easipower Ltd) to
another bank. Based upon such report, a third party company (Hedley Byrne & Co Ltd)
grant credit to such client. Easipower Ltd went into liquidation and Hedley Byrne file a
suit against Heller and Partners for negligent misrepresentation. The court provided that
a professional cannot be held liable for his/her advice which was shared with the third

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party, due to lack of duty of care. Therefore, Heller and Partners cannot be held
accountable for negligent misrepresentation because they did not have a duty of care.
In Esanda Finance Corporations v Peat Marwick Hungerfords case, Esanda
accepted a guarantee from Excel Company based upon their auditor’s report. Esanda
suffered loss, and they file a suit against the audit firm. The court provided that auditor
has no duty of care toward Esanda hence they cannot be held liable for negligent
misrepresentation. In this case, Fred and /or other partners of the firm cannot be held
accountable towards the losses of Y. to recover his damages; Y can file a suit of
negligent misrepresentation against X because he shared the wrongful advice with Y
without checking its validity.
Conclusion
Fred cannot be held liable towards the loss suffered by Y because Fred advise
his client X and his duty of care was limited to his client. Any professional advice share
by a person to the third party cannot make such professional liable towards such third
party because he/she did not have a duty of care. Y can file a suit of negligent
misrepresentation against X because he shares the advice of Fred with Y without
enquiring in the matter.
Answer 2a
The business of Mary, Fred, and Chris if proliferating, they prefer to expand it
further in the market. To develop their business, Mary, Fred, and Chris require raising
capital for its operations. They prefer to limit their liabilities in the business and also
prefer to limit the number of investors. They also prefer to choose the persons who can
or cannot invest in the business.
Issue
The main issue is regarding selection of a business structure which assists in the
expansion of Mary, Fred, and Chris business. They also prefer to limit the number of
investors who can invest in their business.

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Rule
As discussed above, a Company is more suitable for businesses which are
growing or expanding their operations because it allows them easily takes investment
for investors. The Corporations Act provides provisions regarding incorporation of a
company, an enterprise has separate legal entity from its owners, and they cannot be
held personally liable for the actions of such corporation, as provided in Salomon v A
Salomon & Co Ltd. An enterprise is considered as artificial person meaning it has
various rights such as it can sue or get sued, incurred debt and own a property in its
name. The company is more complicated to operate, and it requires a high level of
capital and expertise from the members.
The key aspects of a corporation include separate legal entity from the members,
limited liability of owners, complex procedures, mandatory to be registered, submission
of the annual return, and compliance with the provisions of Corporations Act. A
company has perpetual succession meaning the death of enterprise’s members did not
have any effect on the corporation’s entity, unlike partnerships, which dissolves as soon
as members died, unless provided otherwise. A company can raise a large number of
investment by issues its share in public, family, friends or relative. The structure of an
organization allows it to expand more swiftly and more efficiently which is beneficial
for its members.
A company is registered with Australian Securities and Investments Commission
(ASIC) and the directors are requiring complying with the regulation of Corporations
Act. A firm is divided into various parts according to their features and purposes, but
mainly they are two types: Public and Proprietary. The public company is more
prominent than compared with the proprietary company because proprietary
corporations can only have less than 50 members. A public organization can be listed on
the stock exchange, and they can raise capital from the public.
Application
Mary, Fred, and Chris can convert their partnership into a corporation to expand
their business; they prefer to raise capital and decrease their liability from the business.
They also want to limit the number of investors and select the individuals by themselves
who can invest in the business. By converting their partnership into a company, they can

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fulfill their requirements. The company will be able to raise funding from investors
other than Mary, Fred, and Chris, by issuing shares.
Mary, Fred, and Chris can decide whether to incorporate a public or proprietary
company. The benefits of a public company include a large number of investors, faster
expansion, more revenue, large size and limited liability. The stock market provides
better and easier option of rising funding then compared to the proprietary firm. But,
there are several issues in choosing a public company such as complicated regulations
to be fulfilled, more disclosures, ownership & controlling issues, vulnerable to
takeovers and initial financial commitment is higher. The process of managing a large
number of shareholders is significantly complicated in a company.
The proprietary company has various advantages such as a limited number of
investors, lower regulations, less risk of takeover, more control on operations and fewer
disclosures. The member of proprietary firm usually distributed share between their
family members and close relatives, it provides them better control over the process of
business since it is easier to conduct meetings and implement the decision. Along with
various benefits, there are several disadvantages of the proprietary company as well,
such as expensive procedure, legal obligations, and complex government regulations. A
proprietary firm is further divided into two parts: limited and unlimited.
In the case of Mary, Fred, and Chris, transforming their partnership into the
company is a better choice for them. They can analyse their requirement and select the
type of corporation which is more suitable for them. In case of public company, they
can expand their business significantly and collect a significant amount of invest from
the public. In case of a proprietary firm, they can select the investors and limit the
number of members. In a limited proprietary company, Mary, Fred, and Chris will be
able to limit their liabilities in the business.
Conclusion
For Mary, Fred, and Chris business, the registered company is a more suitable
option than compared to the partnership. A company structure will provide them various
benefits such as the expansion of operations, raising a large number of investments, and

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selection of investors. Mary, Fred, and Chris can evaluate their requirement to select the
most suitable type of company to fulfill their requirements.
Answer 2b
Mary decided to leave the company which she was operating with Fred and
Chris. The notification of Mary’s resignation was not sent to ASIC by Fred and Chris.
Mary decided to buy a new car and charge such amount on company’s accounts. After
checking the online database of ASIC, car dealer gives Mary her new car. The dealer is
now asking for money to the company.
Issue
The key issue is whether the company has to pay for the car of Mary, as per the
statutory provisions.
Rule
As per the Corporation Act, a registered company is required to notify the ASIC
regarding the resignation of a director within 28 days unless the director has already
given his resignation notices to ASIC. It is necessary that director has fulfilled the entire
essential requirement so his/her name can be removed from the records of a company as
a director. After receiving the notification, ASIC updates the director's list on their
website to avoid any confusion.
Application
Mary has resigned as a director of the company, but Fred and Chris failed to
notify ASIC regarding the same. A corporation must notify ASIC regarding the change
in corporate structure to avoid any confusion. In this case, Mary purchased a car by
showing the dealer that she is a director with Fred, and Chris on the portals of ASIC; the
dealer is demanding money from the company. The principle of vicarious liability is
applied in this case, in which employer held liable for the illegal actions of its
employees.
The judgement of Panorama Developments (Guildford) Limited v Fidelis
Furnishing Fabrics Limited case applies to this situation. In this case, company
secretary of the firm purchase a car and enter the bill in companies name; such company

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was held liable to pay the bill because they are accountable for the actions of their
employees. A similar judgement was given in Meridian Global Funds Management
Asia Limited v Securities Commission case, in which the court provided that if directors
use companies name to conduct any fraud to another party, then such corporations shall
be held personally liable towards such deception.
Conclusion
A company must notify ASIC regarding the resignation of its directors; a
corporation is also liable towards the fraudulent actions of its directors. In this case,
Fred and Chris are accountable towards the car dealer who sold his car to Mary due to
the principle of vicarious liability. They also failed to send the notification of Mary’s
resignation to ASIC due to which Mary was able to buy a car under the company name,
which also makes them liable towards the car dealer.