Duties of Directors in Company and Partnership Structures

Running head: CORPORATIONS LAW
CORPORATIONS LAW
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CORPORATIONS LAW1
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.

CORPORATIONS LAW2
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.