Directors' Duties and Liabilities

This assignment delves into the responsibilities and potential consequences faced by company directors. It examines their duties to act in the best interests of the company, maintain accurate financial records, and avoid insolvent trading. The text highlights legal provisions that govern director conduct, including potential civil and criminal liabilities for breaches of duty.

Running head: BUSINESS LAWS
Business Laws
Name of the student
Name of the university
Author note

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................6
Answer 3........................................................................................................................................10
Bibliography..................................................................................................................................14

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Answer 1
This section of the paper provided advice to Harry, Meghan, William, and Kate in relation to the
types of business structures and their advantages and disadvantages. There are three primary
types of business structures which can be selected for the purpose of indulging into business
operations. These are as follows
1. A sole proprietorship
2. A partnership
3. A company
 Public Company
 Private company
This section of the paper provides a discussion in relation to all three types of business structures
and discusses their advantages and disadvantage
Sole Trader
This is a form of business activity which is carried out by a single person. No other person has
any control or obligation in relation to a proprietorship business. The business and the person
who is in control are one and the same before the law. Thus the rights and duties of the person
are the same as the rights and duties of the business. The business is carried out by the proprietor
in its own name. The advantages and disadvantages of a sole trader are as follows.
Advantages-

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1. The business of proprietorship is the simplest form of business to be set up. The form of
business structure needs the lowest cost as compared to the other business structures in
relation to set up as well as administrative requirements.
2. The sole responsibility of the business is on the sole owner. This means that the person
has supreme Control over the operations of the business. He has the right to take all
decisions in relation to the business and is under no obligations in relations to the
decisions taken by him as compared to that in other forms of business structures1.
Disadvantages
1. The advantage of limited liability is not provided to the sole trader from a commercial
perspective which is otherwise available in a company form of business structure. In case
there is a failure in relation to the business then the proprietor will have to take sole
responsibility in relation to the failure and the liability may extend towards attachment of
personal assets of the person.
2. The form of business structure has scope of raising capital from the public and thus if the
proprietor wishes to expand the business the structure is not reliable.
Partnership
A partnership is a form of business structure in which two or more people indulge in carrying out
a commercial activity or a business having a mutual purpose of gaining profit. The business is
governed by the terms set out in the partnership agreement or deed. However there is no feature
of a separate legal entity in a partnership. Any loss or profit which is made by the business is
1 Hannigan, Brenda. Company law. (Oxford University Press, USA, 2015.)

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shared by the partners based on the terms of the partnership agreement. The tax obligation of the
partnership is also solely on the partners2.
Advantages
1. The process of setting up a partnership is comparatively simple and cheap to that of a
company.
2. Partners are able to get additional funding in relation to the business from each other
which is not possible in a sole proprietorship
3. In a partnership the partners are able to share their responsibility which may lead to
effective management
4. Partners have a relatively high level off control as compared to that of a company
Disadvantages-
1. The nature of liabilities of a partner is that they are severally and jointly liable in relation
to all liabilities which arise out of the partnership. This signifies that the debts of a
partner in relation to the business are binding on all partners in the partnership.
2. Protection through the concept of limited liability is not available in a partnership and the
partners are liable personally for the debts incurred by the business. This means that the
personal assets of the partner may be attached to the liabilities of the business.
3. The business is dissolved when a new partner is admitted or an existing partner leaves the
firm. A new partnership agreement has to be created in the situation.
Company
2 KOH, Pearlie, Pey Woan LEE, and Hans TJIO. "Form, substance and context in company law." (2017).

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A company at law is a separate legal person and in its own a legal entity. A company can be
further divided into a public and a private company. The advantages and disadvantages along
with differences are as follows:
Advantages:
1. The primary advantage which a person has wile choosing to operate a business with a
company structure is that of limited liability. This means that members cannot be
personally liable in case debts are incurred by the company. They only can be made liable
in relation to the amount of inspection which has been made by them to the shares3.
2. A well recognized and commercially accepted structure is provided through the use of a
company structure.
3. Multiple owners can be accommodated into a company more easily as compared to that
of partnership and these owners may have different motives.
4. A company operates as a distinct entity and can get into contract and be a party to a legal
proceedings in its own name it can also own property in its own name and therefore
prevents misuse of power.
Disadvantages
1. The administrative requirements in relation to the company are quite onerous such as
maintaining share registers and directors’ certificates. The control of the company is in
the hands of the directors and not the owners.
2. Strict duties are imposed on the directors of a company by law and they may be subjected
to criminal and civil proceedings on personally for the breach of such duties.
3 Mann, Richard A., and Barry S. Roberts. Business law and the regulation of business. (Nelson Education, 2015.)

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3. The cost of compliance with all regulatory requirements is very high in company as
compared to the other business structures.
Public and private company
A private company in Australia is only allowed to have 50 members and in a public company
there may be unlimited members. The burden of compliance is much more on a public company
as compared to a private company. A public company is allowed to issue shares and raise funds
from the public; however these features are not available to a private company. The cost of
compliance with all regulatory requirements is higher in a public company as compared to a
private company. On the other hand directors of a private company have more control over its
affairs as compared to a public company4.
Answer 2
This section of the paper discusses the law applicable on the above discussed business
structures and further provides an advice to Harry, Meghan, William, and Kate in relation to the
best suited business structure for their proposed business activity and their requirements.
Sole trader
There are no specific regulations which have been enacted in relation to governing the
business activities of sole traders. General business law is applicable on the way in which a
business activity is carried out by a sole proprietor. A sole proprietor needs to obtain an
Australian Business Number in order to carry out business activities in Australia. The sole trader
has to register for Goods and Services Tax if the yearly income is $75,000 or more. Where a sole
4 Beatty, Jeffrey F., Susan S. Samuelson, and Patricia Sanchez Abril. Essentials of Business Law. (Cengage
Learning, 2018).

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trader employs other persons in the business they have to comply with employment regulations
such as the Fair Work Act 20095. There are no separate duties which are imposed on a sole trader
in relation to the way in which it carries on its business. Sole proprietorship is subjected to law
has any other natural person would be subjected6.
Partnership
Law in relation to partnership is governed by specific legislations in Australia along with
the provisions of common law. The legislation which governs Partnership at the Federal level is
the Partnership Act 1963. Each state has its own Partnership Act which has comparatively
similar rules in relation to partnership as compared to the federal legislation. Across all
jurisdictions in Australia partnership is established when there is a valid agreement between two
or more parties for the purpose of carrying out a business activity and having common intention
of making profit7.
Whether a person is a partner or not is analyzed by the application of section 6 of the
PA8. For a person to be a partner there must be a participation in the gross returns of the business
along with sharing of profit and losses and being able to exercise rights of a partner in the light
of joint ownership.
The most significant part of law relating to partnership is that of the liabilities of a partner
in a partnership business. The liability of a partner in a partnership is of a significantly large
nature. Any person who is determined to be a partner in the business is deemed to be both the
principal and agent of the business. Therefore each partner has the right to bind other partners,
5 Fair Work Act 2009 (Cth)
6 Clarkson, Kenneth, Roger Miller, and Frank Cross. Business Law: Texts and Cases. (Nelson Education, 2014).
7 Davidson, Daniel V., Lynn M. Forsythe, and Brenda E. Knowles. Business law: Principles and cases in the legal
environment. (Wolters Kluwer Law & Business, 2015).
8 Partnership Act 1963 (Cth) s. 6

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which means the business as a whole to any act done by him. According to the case of John
Grimes Partnership Ltd v Gubbins9 all partners in a partnership business are both financially and
legally responsible for the other partners action conducted in the general course of business.
Therefore when it has been determine that a partner has acted in and negligent manner all other
partners of the business would be liable to the negligent act. Even if the partner holds only 10%
of the shares in the business any liability incurred by him in the course of business would be
binding on the business in full. Even in situation where the partner has acted beyond the
authority provided to him by the partnership agreement and the third party did not have an idea
that the authority has been exceeded the partner would bind the business to his actions.
Company
The law in relation to companies is governed by the Corporation Act 2001 in Australia10.
The legislation primarily deals with business entities at both inter-state and Federal level.
According to the legislation a company has an identity which is different from its owners and is
created legally by the legislation. A company comes into existence when it has been registered
with the Australian security and Investment Commission. The most common types of companies
are those which have share capital. This means that the company is limited by shares. It is the
duty of the company to incorporate the corporate governance principles provided by the
Australian Securities Exchange and if it is not done so by the company they must notify the ASX
as to why the principles are not being followed. A company has to have a constitution which sets
out the powers of the company. The office holder or the director of a company has to be a natural
person of an age of 18 years. These persons have been provided with several legal duties by the
legislation as well as common law which they must comply with while discharging the power.
9 John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37
10 Corporation Act 2001 (Cth)

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This is to ensure that the shareholders of the company are not exploited by the directors. There
are various other regulations imposed on a company such as disclosure obligations and auditing
requirements. The burden of compliance is much more on a public company as compared to that
of a private company.
It has been provided in the scenario that William and Kate do not want to be active
members in the management of the business and want to Limit their liability. In the given
situation the best possible structure which would suit their requirement based on the above
discussed law would be that of private company. In addition it has been provided by the case
study that Harry and Meghan wants to direct 50% of the profits of the company for homeless
Australians. However it is to be noted that an organization can only be registered as a non-profit
organization if it does not have any intention of making profit. In addition where 50% of the
profits are to be directed towards charity it is very likely that public funding would not be
provided to the company. Therefore in the given situation according to the requirements of Harry
and Meghan the best suitable structure through which they can carry out their business activity
would be that of a private limited company by shares. Through this form of company William
and Kate would not have to participate in the management as they can only act as shareholders or
non executive directors of the company and can also limit their liabilities to the amount of
investment which has been made by them towards the share of the company. In addition Harry
and Meghan would have the required control through which they can direct 50% of the profits of
the company towards charity without much intervention through a private company.

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Answer 3
This section of the paper specifically sets out the obligation, rights and liabilities which
Harry, Meghan, William, and Kate have in relation to a private company. The Corporation Act
specifically obligation, rights and liabilities of directors of a company. These rights and liabilities
are also based on the provisions of common law. In Australia directors have both statutory and
equitable duties in relation to the company. The statutory duties of directors are stated in section
180 to 184 of the Act. These duties are consistent to those which are set out by common law and
principles of equity. The first and foremost duty of a director is to ensure that they are working in
“good faith” and “proper purpose” towards ensuring the best interest of the company. This duty
is imposed on the directors by Section 181 of the Act as well as common law. This duty signifies
that while discharging their functions in relation to the organization the directors must Act in
good faith and ensure that their Act is for a proper purpose and would result in the best interest
of the company11.
The next duty which would be imposed on Harry, Meghan, William, and Kate is the duty
of care and diligence. This duty is specifically set out through the provisions of s.180 of the Act.
A specific test is provided under the section which is applied by the judges to analyze
compliance of the directors with this specific duty. The test applies the principles of the objective
test at common law. Therefore where in an objective test breach of Duty is identified by
comparing of actions to a reasonable person, in this situation breach of duty is identified by
comparing of actions to a reasonable director in the same position12.
Section 182, 183 and equitable duties impose particular duties on directors of a company
which are not to misuse the position they hold in the company for any information which have
11 Corporation Act 2001 (Cth) s. 181
12 Corporation Act 2001 (Cth) s. 180(1)

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been achieved by them through their powers in the company for personal interest at the cost of
the company13. At common law it is the duty of a director in case of a situation of conflict of
interest to ensure that priority is given at all times to the interest of the company over personal
interest as they are in a fiduciary relationship with the company. Therefore Harry, Meghan,
William, and Kate would have to ensure that they have to give priority to the company as a
separate legal person and not their personal interest at any time while discharging the duties.
These duties are not only applicable on executive directors but also to non executive directors as
provided through the case of ASIC v Healey14. Therefore, if William and Kate do not want to
participate in the management of the business as non executive directors, the duties would still be
binding on them. In case the directors inevitably fall into a situation which creates a conflict of
interest between personal and company interest they have a duty under section 191 to disclose
any interest in relation to the particular transaction to the board of directors of the company15.
The directors of the company have a right to receive appropriate remuneration for the
efforts provided by them in relation to managing the affairs of the company. They have the right
to take any decision which is in the best interest of the company. The right of making decision is
subjected to the business judgment rule as incorporated through section 180 (2) in the
Corporation Act. This means that only when no reasonable director would have taken a similar
decision can the directors be held liable for the breach of the duty16.
It is also the obligation of the board of directors to conduct an Annual General Meeting in
relation to the company the directors also have a duty of ensuring that all financial records in
relation to the company and kept up to date. The records must be accurately documented so that
13 Corporation Act 2001 (Cth) s. 182 & 183
14ASIC v Healey (2011) FCA 717 at [166]
15 Corporation Act 2001 (Cth) s. 191
16 Corporation Act 2001 (Cth) s. 180(2)

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they can provide a correct explanation in relation to the transactions of the company and
appropriately outline its financial position.
In addition to these duties s. 588G of the Act prohibits the directors from carrying out
business activities when the company has become insolvent or it is reasonably believed by the
directors that the company may become insolvent if they indulge into the proposed transaction17.
Insolvency is the situation where the company is not able to pay its debts and the liabilities of the
company has become more than its assets. This duty is imposed on the directors so that a
company is not able to defraud any investor or creditors. In relation to this duty specific defenses
are provided under s. 588H of the Act. According to the section if the director had a genuine
belief that the company would not become insolvent due to getting into a transaction they cannot
be held liable for the breach of the duty. The directors can be made personally liable for any loss
incurred by the company during the time of insolvent trading where it is found that the duty has
been violated18.
In situation where it is identified that the directors of the company have been involved in
violation of duties owed by them to the company they may be made personally liable. It has been
provided through s.184 of the act that where the directors are involved in a reckless and
deliberate breach of duties they are subjected to criminal liabilities under the provisions of s. 6.1
of the criminal code. In addition to the criminal liabilities the directors are also subjected to civil
liabilities which are provided in section 1317E of the Act19. Under the provisions of civil liability
the court may impose a financial penalty on the directors for not complying with their duties if
the breach made by them is of a serious nature. In addition the court also has the right to suspend
17 Corporation Act 2001 (Cth) s. 588G
18 Corporation Act 2001 (Cth) s. 588H
19 Corporation Act 2001 (Cth) s. 1317E

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a director from managing a corporation for a period at the discretion of the court where breaches
of directors’ duties have been identified20.
Therefore Harry, Meghan, William, and Kate have to take into consideration these obligation
rights and duties while managing the affairs of the company.
20 Corporation Act 2001 (Cth) s. 206C

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Bibliography
ASIC v Healey (2011) FCA 717 at [166]
Beatty, Jeffrey F., Susan S. Samuelson, and Patricia Sanchez Abril. Essentials of Business Law.
(Cengage Learning, 2018).
Clarkson, Kenneth, Roger Miller, and Frank Cross. Business Law: Texts and Cases. (Nelson
Education, 2014).
Corporation Act 2001 (Cth)
Davidson, Daniel V., Lynn M. Forsythe, and Brenda E. Knowles. Business law: Principles and
cases in the legal environment. (Wolters Kluwer Law & Business, 2015).
Fair Work Act 2009 (Cth)
Hannigan, Brenda. Company law. (Oxford University Press, USA, 2015.)
John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37
KOH, Pearlie, Pey Woan LEE, and Hans TJIO. "Form, substance and context in company law."
(2017).
Mann, Richard A., and Barry S. Roberts. Business law and the regulation of business. (Nelson
Education, 2015.)
Partnership Act 1963 (Cth)

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