Corporations and Business Structures: Rules, Duties, and Significance of ASIC v Vizard Case

This article discusses the rules regarding third party action in partnership firms and companies, fiduciary duties of partners and directors, and the significance of ASIC v Vizard case. It also emphasizes the importance of partnership agreement and its contents, including basic provisions, requirements of capital, administration and rights, and transfer of general provisions and interest.

Corporations and business structures

Part A: Rules regarding the third party action in case of the partnership firms and the
companies
The business environment is dynamic with a wide range of stakeholders. Different statutes
provide different rules to deal with the outside parties, as described in the following section.
Under the Australian law, a partnership denotes an association of persons for the common
purpose of carrying on the business that is the repetition of acts, resulting in the earning of profits.
The Partnership Acts of each State regulate the rights and obligations of partners. It is vital to
note in the case of the partnership firms that the partners do not have a separate legal identity
from that of the firm and all the partners are entitled to act on behalf of the partnership, unless
the contrary has been decided in the partnership agreement. Thus, there can arise a personal
liability of the partners as well in the event the firm is not able to settle the dues of the
creditors. Further, the partners have a several liability as well that is in context of the acts
done by the other partners in the course of employment in the partnership. This is known as
the joint as well as the several liability of the partners towards other partners as well as the
firm, as stated in the section 12 of the Partnership Act, 18911. The principle was accorded in
the renowned case of Mercantile Credit Ltd v Garrod as well2. It is to be noted when the
partners act as per the contract and during the course of the employment, different types of
liabilities can arise on account of the tort law as well. Thus, it would be right to state that
outsiders have been conferred upon the benefit of the presumption that all the partners will be
equally and totally liable while dealing with one partner of the firm. Thus, any of the partners
can be sued under the said business contracts.
In contrast to this, the liabilities, rights and other regulations concerning a company are
contained in the Corporations Act, 2001, as applicable on the companies3. The most distinct
feature of the corporates is the possession of the separate legal identity as stated in the
renowned case laws of Salomon v A Salomon & Co Ltd 4and Lee v Lee’s Air Farming Ltd5and
others. The said principle confers the benefit to the actual owners in the company of the
limited liability on the shares owned to the extent of the unpaid amount of the share capital,
as stated in the section 9 of the Corporations Act. Thus, the shareholders cannot be held liable
for the debts and negligence purported by the organisation towards the third parties. Hence,
1 Austlii, Partnership Act 1891 - Sect 12 (Web Page)
<http://classic.austlii.edu.au/au/legis/qld/consol_act/pa1891154/s12.html>
2 Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103
3 Pamela Hanrahan, Ian Ramsay & Geof Stapledon, Commercial Applications of Company Law (Oxford
University Press, 20th ed, 2019)
4 Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
5 Lee v Lee’s Air Farming Ltd [1960] UKPC 33

the personal assets of the shareholders cannot be seized for the settlement of the company
debts. However it would be wrong to state that the shareholders cannot be anytime sued and
can take the shelter of the limited at all times. Despite the rule of the separate personality, the
corporate shareholders may be held liable for certain kinds of contracts in the event of
fraudulent or illegal activities being carried with an aim to defraud the other stakeholders.
This principle is referred to as the lifting of the corporate veil. The courts are free to pierce
the corporate cloak when the objectives of the company have become fraudulent and when it
is apt to do so in the interest of public in large6. Further, if the directors of the company are
engaged in the evasion of the tax liability and undermining the interests of the other
stakeholders of the organisation, the said corporate veil can be lifted7.
Part B Fiduciary duties and participants in Company and Partnership business
structures
As stated in the previous section, in Australian context the state partnership acts regulate the
various matters on partnerships such as the rights and duties of the partners. As known, in the
partnership the identity of the firm is not considered separate from those of the partners in the
eyes of the law. In the partnership business structure partners must be able to trust and rely
upon the other partners of the firm for the management of the affairs of the firm. The
fiduciary duties of the partners have been stated in the various sections of the Partnership
Act, 1891, as listed following. The section 31 prescribes the duty of the partners to present a
truthful picture of the accounts of the firm8. This is in addition to the presentation of the
information with respect to all the material matters that affect the operations of the business
of the firm. Further duty is stated in the section 32 which mentions that the partners must
account for the benefit derived from any contract or transaction that has been carried on
without the knowledge of the other partners. The case law of Birtchnell v Equity Trustee,
Executors & Agency Co Ltd9 is essential to be noted here that states that each partner of the
firm is the agent of the firm as well as the other partners and thus owe a fiduciary duty. The
partnership business structure calls for the application of the duties of the partners even when
the business firm has entered into dissolution owing to the reasons of the death of a partner.
Thus, the duties of the partner shall prevail till the complete settlement of the accounts. The
6 Austlii, Piercing the veil on corporate groups in Australia: The case for reform (2009)
<http://www5.austlii.edu.au/au/journals/MelbULawRw/2009/13.html>
7 'How Can A Court Pierce The Corporate Veil? | Legalvision' (LegalVision, 2019)
<https://legalvision.com.au/how-can-a-court-pierce-the-corporate-veil/>
8 Partnership Act, 1891, sec 31
9 Birtchnell v Equity Trustee, Executors & Agency Co Ltd (1929) 42 CLR 384

section 33 of the act is further prescriptive of the duty that the partners must not carry similar
business to that of the firm unless the consent of the other partners has not been obtained. It is
further stated that the partners must mandatorily account and redeem the profits if such a
competitive business has been carried out by one or more of the partners of the firm10.
The duties of the directors of the corporates is governed by the various sections of the
Corporations Act as listed follows. The four fundamental duties of the directors are listed in
the section 181 to 183 of the act11. The aim of the fundamental duties is to ensure the
legitimate management of the company in the interests of the shareholders, other
stakeholders, as well as the beneficiaries of the company. It is further to be noted that the
directors must ensure not to engage in the conflict of interest and must at all times engage in
the exercise the professional conduct, due diligence and care in the managerial activities. This
is because if the directors indulge into such activities, they may be held personally liable as
pronounced in the renowned case of Gilford Motor Co Ltd v Horne12. Various other sections
of the act also prescribe certain other duties of the directors. For instance, the directors must
ensure the proper maintenance of the financial books and records in a fair, transparent
manner as required by the section 199. The yet another duty is the disclosure of personal
interests of directors to the market participant as required under the section 208 of the act.
The practice of the potential insolvent trading by the directors has been curbed as per the
requirement of the section 588G, which mandates the directors to make the disclosure of the
information that has the potential of affecting the share prices of the company. The directors
must ensure the fair conduct, or else the personal liability can be imposed as held in the
popular case of the ASIC v Sino Australia Oil and Gas Limited13.
Hence the discussions carried on in the previous parts, aid to establish the conclusion that the
various duties and responsibilities surround the partners and the directors of the company, as laid
down in the respective governing acts. These are comprehensive in nature and established to
ensure that the interests of the various connected stakeholders are safeguarded.
10 Partnership Act, 1891, sec 33
11 Australian Institute of Company Directors, General meetings of members (Web Page) <
https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-tools/pdf/05446-4-6-
director-tools-me-agms_a4_web.ashx>
12 Gilford Motor Co Ltd v Horne [1933] All ER 109
13 ASIC v Sino Australia Oil and Gas Limited [2016] FCA 42

Part C: Significance of the case, ASIC v Vizard (2005)
There have been occurred numerous cases where the directors have taken the shelter of the
separate identity of the company and entered into irregular contracts that involved conflicting
interests. However, the courts have executed the judgement stating that the directors would
be required to face punishments, severe penalties and litigation owing to the noncompliance
with the duties and regulations that are mandatorily prescribed in the act. The case of ASIC v
Vizard14 is quite popular in context of the upholding the duties of the directors and pursuance
of the interests of the various associated stakeholders. It is further significant to note that the
non-violent offences on the part of the directors affect a large number of stakeholders of a
corporation. Some of the popular cases apart from the one in discussion, where the courts
have upheld the responsibility of the directors are the Palmer v Australian Electoral
Commission15, ASIC v Healey16 and others.
The case is concerned with the company Telstra, and the non-executive director of the
company named Mr Vizard. The said company was about to engage in the acquisition of
some other firms. By the reason of the said execution, the share prices of the company would
rise in the favour of the investors and the fact was very well known the said director. In order
to make the best out of the said confidential nature of the information, the director engaged in
the creation of a trust of his family members and bought the stock of the target entities in the
acquisition. The regulator Australian Securities and Investments Commission took the action
against Mr Vizard for violating the duties under the section 183 of the Corporations Act as he
has utilised the business confidential information for the personal purposes. As per the
section 183 of the Corporations Act, it is the obligation of the directors to secure the
confidential information obtained by the virtue of the authoritative power that is associated
with the entity.
The vitality of the case lies in the fact that the courts had set an example in the corporate
community that the directors would be held liable for the irregular activities. It is essential to
note that when the directors of the corporations breach the section 183 of the Corporations
Act, the civil penalties are attracted. The civil debt is imposed on the directors which requires
the directors the payment of the damages by the directors. It was held in the case that the
interest of the directors undermined the interests of the company, members of the company,
ability of the corporation to pay the creditor dues and the breach of the director duties as well.
14 ASIC v Vizard (2005)145 FCR 57
15 Palmer v Australian Electoral Commission (2019) HCA 24
16 ASIC v Healey (2011) 278 ALR 618

The court had imposed on the director a civil liability of $ 400,000. In addition the director
had faced a 10 year disqualification from the position of director17. Thus, there is a clear
establishment of duties of directors and the intention of the courts that the directors must
maintain their responsibilities and ensure the fair conduct. The case served as one of the vital
turning points in the Australian corporate context in terms of the white collar crimes that are
purported by the directors in shelter of the authority and access to resources and information
of the entity.
17 Caron Beaton-Wells and Brent Fisse, Australian Cartel Regulation: Law, Policy and Practice in an
International Context (Cambridge University Press, 2011) 465.

Part D: Speaker Notes for the presentation
Introduction
The partnership takes place while two or more than two trading entities or people run the
business together. In general, the partnership may have up to 20 common partners, with
certain exceptions listed in the Corporations Regulations 2001. Because of the difficulties
included with having in excess of one person operate the business, this is greatly
recommended that the partnership agreement is performed at the time of creation of the
partnership. The partnership agreement is considered as very significant document that
describes the term as well as conditions of relationship amongst the partners. The
partnership agreement is not so necessary for the partnership to exist, however is useful in
describing that how loss or income would be allocated to the partner and how a business
would be regulated. In the following parts, the importance of partnership agreement is
discussed and critically examined. This part also discusses the possible contents in this
agreement to clients.
Importance of partnership agreement
The partnership agreement works properly such as the contract between the persons. The
rules dealing with what types of the partnership may be formed and how they are controlled
are confined in the Partnership Act 1891. The Partnership Agreement is very helpful for
avoiding the conflict, which may take place between the partners. Wherever the terms of the
partnership are not simply declare as well as noted, then dispute can arise over the
proprietorship division, the role along with responsibility of partners, and the division of asset
on the termination of partnership. Because of the importance of the partnership, it is highly
suggested that the partners should enter in the written partnership agreement. In addition, the
partnership agreement is the legally binding document as well as permits the partner to
construct the connection in the manner that is suitable for the specific business. This normally
develops the rights to sharing in the loss or profit for all the partners, the accountabilities of
all the partners, and proper processes for variations to and dissolution of partnership.
In addition, the partnership Agreement is very significant because it is helpful for spelling out
the role along with responsibility of all the partners. Further, the partnership agreement is also
useful in avoiding the issues related to tax by taking decision in relation to the tax structure of
partnership and most significantly, this is helpful for avoiding the legal problems by
determining the liabilities of the partners bringing in capital to create the partnership.

Contents of partnership agreement
Even though every partnership agreement is different on the basis of the objectives of
business, certain terms must be described in a document. There are certain common contents
of the partnership agreement. These contents should find the place in the partnership
agreement. These contents are discussed as below-
1. Basic Provisions- The primary section in partnership agreement cover fundamental
data like the partnership’s name, the name of all the initial partners, name of the
business, kind of partnership as well as pre-determined period of the partnership.
2. Requirements of capital- The lifeblood of the business is the capital of business. The
partners render the capital for the partnership either in property asset or in cash. The
partnership agreement must state the primary capital need of all the partners, and the
situations in which the additional capital can be called for. Additional financial data
may be addressed in this section, like the accounting needs, a fiscal year if not same
as from calendar year and the situations in which partners can ask for as well as get
the accounting.
3. Administration along with rights- running the partnership is collaborative by its
nature. Hitherto the partners can decide that administration as well as the rights to
profit must be depended on the certain other factors including the capital contribution.
In the common law, all the partners have the right for operating the partnership only
by virtue of being the members of partnership. In addition, the partnership agreement
can specify that the rights are described by the contribution’s percentage made by the
partner to a business.
4. Transfer of general Provisions as well as interest- The last sections of the partnership
agreement is required to state the ownership. This concluding section of the
partnership agreement should be devoted for stating the transfer of the ownership.
This section also contains the general provisions placed in the most of contacts that
are also considered as the boilerplate. The ownership transfer is very significant in a
case when the partners sell the interest to the person who is not business shrewdness,
the complete operations can suffer. The part of the agreement must state the situation
in which the partner can transfer the interest; often partnership agreement needs a

partner to first proposal sale of the interest to a partnership itself. In this way, for the
reason that the partnership agreement is contract amid partners, this must cover the
general provisions significant to different agreements, involving the notice provisions
as well as choice of law, meaning what the laws of jurisdiction would implement in
the matter related to the dispute.
Conclusion
As per the above discussion, it can be concluded that the partnership agreement states the
purpose for which the partnership is created. The partnership is the less-formal running
structure in comparison of the incorporation. The partnership agreement may secure the
owner in the incident of death of one partner, the disputes, selling to the new partner or end of
business, amongst other advantages.

Bibliography
Acts
Partnership Act, 1891
Corporations Act, 2001
Books/Journals
Caron Beaton-Wells and Brent Fisse, Australian Cartel Regulation: Law, Policy and
Practice in an International Context (Cambridge University Press, 2011) 465.
Pamela Hanrahan, Ian Ramsay & Geof Stapledon, Commercial Applications of Company
Law (Oxford University Press, 20th ed, 2019)
Case Laws
ASIC v Healey (2011) 278 ALR 618
ASIC v Sino Australia Oil and Gas Limited [2016] FCA 42
ASIC v Vizard (2005)145 FCR 57
Birtchnell v Equity Trustee, Executors & Agency Co Ltd (1929) 42 CLR 384
Gilford Motor Co Ltd v Horne [1933] All ER 109
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103
Palmer v Australian Electoral Commission (2019) HCA 24
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
Other Resources
Austlii, Partnership Act 1891 - Sect 12 (Web Page)
http://classic.austlii.edu.au/au/legis/qld/consol_act/pa1891154/s12.html
Austlii, Piercing the veil on corporate groups in Australia: The case for reform (2009)
http://www5.austlii.edu.au/au/journals/MelbULawRw/2009/13.html
Australian Institute of Company Directors, General meetings of members (Web Page) <
https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-
tools/pdf/05446-4-6-director-tools-me-agms_a4_web.ashx>
'How Can A Court Pierce The Corporate Veil? | Legalvision' (LegalVision, 2019)
<https://legalvision.com.au/how-can-a-court-pierce-the-corporate-veil/>