Duties of Directors in Company and Partnership Structures

This article discusses the duties of directors in company and partnership structures, including fiduciary duties and responsibilities towards the company and other partners.

Running head: CORPORATIONS LAW
CORPORATIONS LAW
Name of the Student:
Name of the University:
Author Note:

1CORPORATIONS LAW
Part A:
The issue that has to be analyzed in this part of the assignment is discussing the potential
third party actions that can be against a company and a partnership form of business structures.
The Corporations Act 2001 (Cth)1 governs the working and operations of a company. A
company is a business structure which has a separate legal entity which denotes that a company
has similar rights like a natural man, can incur debts and can even sue and be sued. It is provided
in sections 119, 124, 125, 601AA- 601AD2 of the Act. Further the limited liabilities of the
shareholders are given in section 5163 of CA. Its identity is distinct from its members such that it
is separate in the eye of law from the directors, shareholders and members. This concept of
separate identity was first held in the landmark case of Salomon v Salomon & Company Ltd4 by
the House of Lords. This limited liability concept safeguards the company owners where in
normal conditions they are not liable or answerable for the company’s obligations. As a result of
this, the members or the owners are only liable for the unpaid amount of shares and not for the
company’s obligations. This principle laid down in Salomon case is being followed later on in
various cases like Roundabout Ltd v. Byrne5, Battle v Irish Art Promotion Centre Limited6 and
others. This principle is called as the veil of incorporation or corporate veil7.
This veil protects the interest of the directors and thus they are protected from getting
liable for the liabilities of the company8. But this corporate veil can be pierced or lifted in case of
1 Corporations Act 2001 (Cth).
2 Ibid s 119, 124, 125, 601AA- 601AD.
3 Ibid s 516.
4 Salomon v Salomon & Company Ltd [1897] AC 2.
5Roundabout Ltd v. Byrne [1959] IR 423.
6Battle v Irish Art Promotion Centre Limited [1968] IR 252.
7 Macey, Joshua C. "What Corporate Veil." (2018) Mich. L. Rev. 117: 1195.
8 Jackson, Kody. "Behind the Corporate Veil." (2015) ReVista (Cambridge) 15.1: 50.

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insolvent trading by the directors. It is given in section 588G9 which states that the directors have
a duty to prohibit insolvent trading. Insolvent means that the company is unable to pay its
outstanding debts and insolvency is being defined under s 95 A (2)10 of CA. When a director
cannot prevent insolvent trading as a result of some dishonest reason, then the director is said to
commit an offence under section 588 G (3)11 of CA. But there lies some exception where the
director will not be held liable if section 588H12 is satisfied. Section 588 H provides conditions to
protect a director insolvent trading that the company has incurred some debts, there are ground to
believe that the company is solvent, that no active part is taken by the director in company
management and that he has taken steps to stop company from incurring debts. Thus it can be
said that the members of a company are generally protected if any third party institutes a suit
against the company due to the separate legal identity.
However, the case is completely different for a partnership business structure. The
Partnership Act13 hereinafter referred to as the PA controls and governs the partnership
businesses conducted in Australia. Section 914 of PA empowers the partners to bind the firm as
well as the partners for his action unless such act is done by a person without any authority or the
person with whom such dealing occurs has knowledge that the person is without any authority or
has no knowledge or believes him to be its partner. Even as per section 1015, the partners are
bound on behalf of the firm by its acts. Section 10 states that any act related to the firm’s
business binds the firm as well as the partners when such act is performed by a person authorized
to do it in the firm’s name with an intention to bind the firm. Section 1316 states the partner’s
9 Corporations Act 2001 (Cth) s 588G.
10 Ibid s 95 A(2).
11 Ibid s 588G(3).
12 Ibid s 588H.
13 Partnership Act 1963 (Cth).
14 Ibid s 9.
15 Ibid s 10.
16 Partnership Act 1963 (Cth) s 13.

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liability in a partnership business. It provides that the every partner is liable jointly for the debts
and liabilities of the partnership business as long such person remains the firm’s partner. Further,
a partner is also liable for the acts done by other partners as given in section 517. Further, when a
3rd party sues the firm for any damages, then the suit is instituted in the names of the partners.
This is because the partnership firm lacks legal identity. Due to which the partners are personally
liable for any liabilities or debts incurred by the firm during its operation. Moreover to pay off
debts incurred, the partners’ properties and assets can be encroached. This is not present in a
company where the company if sued it will be in the company’s name only and not in the name
of its members.
In the present case, it is seen that the interest of the members will be secured and
protected in case of a company form of business structure as compared to partnership form of
business. This is because the company has a separate legal identity.
Part B:
The issue to be discussed here is the application of the fiduciary duty in partnership and
company form of business structures.
Fiduciary duty can be regarded as the legal duty and obligation of the highest standard of
one party in order to act in the most desirable and best interest of other party. The person acting
in the fiduciary capacity must adhere to the high standard of honesty as well as full disclosure of
any relevant fact and shall not obtain any personal profit at the other party’s expense.
In the company form of business structure, the directors have fiduciary duties towards the
company. The basis of fiduciary duties lies on the mutual trust, repose, loyalty and confidence
17 Ibid s 5.

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with one another18. The fiduciary duties may be enforced by the derivative actions of the
members. These duties are given in both common law and statute. The statutory duties provide
that the directors must act in good faith for company’s interest for proper causes. It is also
provided in the statute that the directors will not be misusing their position or any information
received by them in order to gain any personal profit resulting into loss and detriment to the
company. In the common law, the directors are required to act with good faith for the company’s
benefit and further there must be no unauthorized gain or conflict of interest.
The duties of the directors are given in sections 180- 18319 of the CA. The director is
required to utilize their power and duties with proper care and diligence like any reasonable
person and this is given in section 18020. For this, the directors must use the best judgment rule
so that they can take the best decision for the company’s interest. In addition, the director must
not have any personal interest in the decision’s subject matter.
Section 18121 states that the officers as well as the directors must be using their powers in
good faith for a proper cause in order to perform the duties given to them to result into the best
interest of the company. Further section 18222 says that they shall not misuse their position for
gaining any personal profits and undue advantage which will result into loss or detriment to the
interest of the company. Again section 18323 states that when the officer or director has got some
information by virtue of his position in the company, he shall not use them for personal profit.
These are the duties which a director has towards the company. Section 19124 on the other hand
18 Manesh, Mohsen. "Fiduciary Principles in Unincorporated Entity Law." (2018).
19 Corporations Act 2001 (Cth) s180-183.
20 Ibid s 180.
21 Ibid s 181.
22 Ibid s 182.
23 Ibid s 183.
24 Corporations Act 2001 (Cth) s191.

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states that directors must have a duty to reveal any personal interest for which conflict can occur
to the other directors.
Like the company, the partners in a partnership firm have a fiduciary duty towards other
partners. This was decided by Justice Dixon while hearing Birtchnell v Equity Trustees,
Executors and Agency Co Ltd25. It is obvious that a partnership business will succeed in case
where the partners faith, trust and loyalty to each other. The case of Cameron v Murdoc26
provides that absolute good faith is the essential character to succeed in any partnership business.
Thus it can be said that fiduciary duties that also include the duty of care between the partners
have similar liabilities to the gain or losses. Beside these, the partners have the duty of
indemnifying to each other for their liabilities. However, the duties of the partners can be
modified and altered by an agreement and such alteration or modification must be known to all
the partners of the firm. This was construed in Noranda Australia Ltd v Lachlan Resources NL27.
In addition to these, the partners’ fiduciary duties are not only present during the life of
the partnership business but also present when such business is to be dissolved. The partners’
duties stop existing after the business is wound up and the accounts are settled. This is seen in
Everingham v Everingham case28.
The fiduciary duties of the partners are listed below;
 Duty of acting in good faith as in Cameron v Murdoch,
 Duty of accounting every information obtained and assets of the firm,
 Duty to exercise control on the business diligently as seen in Wilson v Carmichael,
25 Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 407-408.
26 Cameron v Murdoc (1986) 63 ALR 575 at 587.
27Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1.
28 Everingham v Everingham (1911) 12 SR (NSW) 5; 28 WN (NSW) 172.

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 Duty of avoiding conflict of interest,
 Duty not to earn any personal gain from the business,
 Duty to account every profit incurred from the business.
Thus from the discussion it is seen that fiduciary duty is needed in the smooth running of
business in both company and partnership firm.
Part C:
In part C of this assignment, the landmark case of ASIC v Vizard29 will be elaborated to
analyze the duties possessed by a director towards the company. The case involves insider
trading of a public prominent figure who in turn accepted civil penalty for breaching the duty of
a director enshrined in section 18330 of CA. The director of a company has a duty of not misusing
any information or matter that has come to his knowledge due to his position in the company as
the director for gaining any personal profit resulting into loss and detriment to the company’s
interest. This is provided under section 183 of CA. it not only forms a fiduciary duty but a
statutory one also.
In the case of ASIC v Vizard, Stephen Vizard was the nonexecutive director of Telstra
Company. As he was the director of the company, he had full freedom to access the board
meeting information and also internal business documents. Some of the internal business
documents provide an idea of the company’s acquisition strategy for acquiring few IT
companies. He further formed a family trust which was operated and controlled by his
accountant. Using internal information, he was able to purchase shares of 3 companies which
were also in the wish list of Telstra Company. ASIC initiated case against him alleging the
29 ASIC v Vizard (2005) FCA 1037.
30 Corporations Act 2001(Cth) s 183.

7CORPORATIONS LAW
breach of section 183. Section 183 provides civil liability of the directors such that they must be
using due care and diligence when exercising their duties and powers. The duty of not misusing
company’s information is also given in the general law besides section 183.
The issue which was to be decided by the court is whether he breached his duty given in
section 183. It was observed that he used the information which he gathered due to his position
in the company as the director. The motive behind it was gaining personal profit against the
interest of the company. Similar situation arose in the case of ASIC v Adler. In the present case,
Vizard admitted that he had violated the provisions enumerated in section 183. The Federal
Court in this case decided that he had violated section 183 and made him pay an amount of
390000 dollars as penalty fee. Further he was disqualified to act as a director for a period of 10
years. The decision was regarded as a landmark judgment in the field of breach of duties by a
director of a company. The court decided that the directors shall not mis- utilize the power vested
in a director by incurring any personal gain resulting loss or detriment to the company. While
discussing of the pecuniary penalties, Justice Finkelstein held that although the penalty awarded
was much less but if required it may be increased by the Parliament.

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Bibliography:
Books and Journals:
Jackson, Kody. "Behind the Corporate Veil." (2015) ReVista (Cambridge) 15.1: 50.
Macey, Joshua C. "What Corporate Veil." (2018) Mich. L. Rev. 117: 1195.
Cases:
ASIC v Vizard (2005) FCA 1037
Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 407-408
Cameron v Murdoc (1986) 63 ALR 575 at 587
Everingham v Everingham (1911) 12 SR (NSW) 5; 28 WN (NSW) 172
Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1
Salomon v Salomon & Co [1897] AC 2.
Wilson v Carmichael (1904) 2 CLR 190 at 195
Legislation:
Corporations Act 2001 (Cth).
Partnership Act 1963 (Cth).