Liabilities and Fiduciary Duties of Partners and Directors in Corporations and Business Structures

This report discusses the liabilities and fiduciary duties of partners and directors in corporations and business structures. It covers the liability of participants and executives of the company and partnership firm towards the third party, fiduciary duties of partners and directors, and the significance of regulations mentioned under CA 2001.

Running Head: TERM 2, 2019 0
Corporations and Business Structures
Student’s Name
8/22/2019

Partnership and Business Structures 1
Contents
Part A...............................................................................................................................................2
Part B...............................................................................................................................................4
Part C...............................................................................................................................................6
Bibliography....................................................................................................................................9
Books/Journals 9
Case Laws 9
Other Resources 9
Legislation 10

Partnership and Business Structures 2
Part A
No business acts in isolation and therefore the same has to deal with the outsiders. Under
different business structures, different level of liability arises while dealing with such parties. In
this section, the liability of participants and executives of the company and partnership firm
towards the third party would be discussed. Firstly to discuss the scenario under the partnership
firm, this is to mention that partners of the same are liable to act on behalf of the firm' business.
They do not have a separate identity from their firm and this is the reason that in the eyes of the
third party, partners are equivalent to the firm and vice versa. Partners of the firm may hold
liable for the debts as well as for other liability of the firm in a personal manner. In other words,
this is to state that the personal assets of partners may be sold in order to fulfill the liability of the
firm. In such a manner this is not wrong to state that partners have unlimited accountability in the
scenario of the partnership firm.
In conjunction to the liability of acts of firm, partners are also liable for the actions and dealing
conducted and entered into by another partner. The reasoning behind the same is that each
partner work as an agent for the firm and also for other partners. A partner may have various
kinds of authority under his/her agency relationship namely express authority, implied authority
and ostensible authority. In case of presence of any of such authority, partners have the capacity
to bind the firm and co-partners. When a partner does any act related to the regular business of
the firm and within the given authority, he/she makes other partners bound by such conduct.
Partnership Act1 (PA 1891) and common law provide the liability of partners with respect to the
conducts of the firm as well of other partners. Different types of liabilities arise in such a
situation, for instance, joint liability, contractual liability, liability under tort and so on. While
1 Partnership Act 1891 (Qld.)

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discussing the contractual liability of partners, the decision of the case of Mercantile Credit Co
Ltd v Garrod2 is required to be discussed. In such a situation, the court held firm and other
partners liable for the execution of a contract made by other partners because he did so under the
regular course of business or firm and the third party had no idea about the limited authority of
partner. It means firms and partner are liable for the contract made by one partner when the third
party has reason to believe that the partner is acting with authority.
Section 13 of the PA 1891 defines tort liability of partners and states that a partner is responsible
for the wrongs done by another partner where such wrongs/tort comes is related to a firm's
business3. Section 12 outlines that partners are liable severally and jointly to outsiders in respect
of debts of the firm.
Now, moving the discussion towards liabilities of executives and managers of business under a
company structure, this is to state that directors and officers are there to manage the affairs of
business under this structure. Not similar to partnership firm a company has a different legal
personality and therefore only a company may be held liable for its conducts. A company has all
the contractual capability to do business as a natural person and therefore may build the contracts
in its name. Corporations Act 20014 (CA 2001) is the act which contains corporate law of
Australia. In such a manner, a third party who enters into a contract with the company knows
that they are dealing with the company and not with the directors in their personal capacity. They
are not liable for any act that the company does and their personal assets remain secure in such a
way5. Nevertheless, this is to state that in addition to being a legal personality, a company is also
2 Mercantile Credit Co Ltd v Garrod (1962) 3 ALL ER 1103
3 Classic.austlii.edu.au, Partnership Act 1891 - Sect 13, <
http://classic.austlii.edu.au/au/legis/qld/consol_act/pa1891154/s13.html>
4 Corporations Act 2001 (Cth)
5 Pamela Hanrahan, Ian Ramsay and Geof Stapledon, Commercial Applications of Company Law 20th (Oxford
University Press, 20th ed, 2019).

Partnership and Business Structures 4
an artificial being. The same has the capability to enter into a contract or to do other conducts in
its name but the same cannot sign the contract or decide the business matter as similar to a
natural person. To regulate the behaviour of directors, CA 2001 prescribes some duties of
directors. Directors can be held liable personally to the third party only in those situations where
they do an act breaching their duties6. Similarly, directors of the company are not responsible for
the contracts made by other directors nor do they have any responsibility in conjunction with
torts committed by the company or any other officers in their personal capacity.
Part B
In the above-mentioned section i.e. Part A, liabilities of directors of the company and partners of
the firm have been discussed. Now, another client of the concern i.e. fiduciary duties of such
people is going to be addressed in this part of the report. Starting the discussion on such duties
first meaning of the same is required to know. The fiduciary duty obligates one person, who owe
it to act in the best interest of others. If to discuss the fiduciary duties of partners, this is to state
that the same is mentioned under PA 1891 and common law. A partner owes such duty to the
firm as well as to other partners. Such duties exist because of agency and trustworthy
relationship that a partner owes to firm and other partners.
Firstly, section 23 of PA 1891 outlines one of such duty where the section demands partners to
use the assets and property of the firm for a business of the same. The partners owe this fiduciary
duty to firm and other partners. Further section 31 of the act makes every partner of the firm
liable to prepare and present true accounts of the firm. The next section i.e. section 32 of the act
instructed partners to not to earn any private profit using the name of the firm. One another
6 Business.vic.gov.au, Company, <https://www.business.vic.gov.au/setting-up-a-business/business-structure/
company>

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fiduciary duty that a partner of the partners owes to firm and other partners is mentioned under s
33. The section believes that a partner must be dedicated to the firm and its business and
therefore it becomes the duty of the same to not to compete with the firm's business. Kak Loui
Chan v Zacharia7 is an important case to discuss here when is about fiduciary duties of partners.
In this case, one of the partners developed a lease for himself and in such a situation, created a
conflict of interest. The court holds him responsible for the breach of fiduciary obligations.
Therefore, to say that in a summarized way, a partner has a fiduciary duty to act in the best
interest of the firm and other partners setting aside the personal benefit and interest.
Not only the partners of the firm, but directors of the company also have such duties that they
owe to the company and all the stakeholders. Similar to the duties of partners, fiduciary duties of
directors are also mentioned under the legislation and common law. Most of the duties are
common in nature. Firstly, to discuss common law duty, these are four in number. These duties
are presented hereunder:-
Duty to put their best efforts with good intention
Duty to perform their promises for a sensible purpose
Duty to not to bond discretion
Duty to neglect the battle of interest with the company8
Apart from the above, one more duty is also there which seems to be a fiduciary duty but is not
identified as one because it derives from the law of negligence. The duty states that every
director must act with due care while performing their functions. Secondly, to discuss the
7 Kak Loui Chan v Zacharia (1984) 154 CLR 178
8 Bakermckenzie.Com, Duties and liabilities of directors of Australian companies,
<https://www.bakermckenzie.com/-/media/files/locations/australia/bk_australia_dutiesliabilitiesofdirectors_dec17.p
df?la=en>

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fiduciary duties mentioned under CA 2001, this is to state that these duties are four in number
and exist because of trustworthy and significant position directors hold in companies. The same
is mentioned in four sections namely sections 180, 181, 182 and 183. Section 180 and 181
reassure common law duties and state that directors are required to follow due care and diligence
and must work in the best suitable interest of directors. Section 182 and 183 raise another
concern and highlight the duty of not to use the company's information or their position and
fiduciary duties9. Section 185 of CA 2001 is an important section, which assures the applicability
of common law duties in conjunction with the fiduciary duties given in section 180-183 of the
act.
In this manner, it is to say that different fiduciary duties are there in case of firm and company
and directors are not exempt from the same as they are in respect to dealings with outsiders.
However, the fiduciary duties of a director to other directors are not clearly mentioned anywhere
as the duty of a partner to other partners do.
Part C
In the case of a company, the situation seems to be beneficial at first instance because of the
separate personality of the company and limited liability of directors but the case is not like this.
As mentioned earlier directors may be held personally liable for their conducts where they
breach their duties. Here it is necessary to inform the client the fiduciary duties, as well as other
duties of the act, have a significant influence in practice. Examples of different cases are there
when directors faced heavy penalties and litigation for the reason for noncompliance with the
duties and regulations identified by the act. ASIC v Vizard10 is one of the illustrations of such
9 Williamroberts.com.au, Directors' Duties,
<https://www.williamroberts.com.au/News-and-Resources/News/Articles/Directors--Duties>.
10 ASIC v Vizard (2005)145 FCR 57

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cases. A director named Vizard was in question under this case. The person was employed at the
position of non-executive director of Telstra Company. Due to his position in the company, he
had access to all the briefings of the board and their future decisions. During the course of his
directorship, he came to know about the projected takeover of some other firms by the company.
He was aware of the fact that due to the result of such acquisition, prices of shares of those firms
were expected to be rise. To take the benefit out of this price sensitive information, he created a
family trust and purchased the shares of targeted firms. As soon as The Australian Securities and
Investments Commission reached up to this information, the same initiated proceedings against
Vizard for the breach of section 183 of the act, which prohibits directors from using the
information of the company for personal benefit11. However, Vizard has not used any fund of
Telstra in the whole dealings yet has been liable as used business information for personal use.
The significance of the case can be understood by the fact that it has set an example before
directors of other Australian company that how significant the compliance with CA 2001 is. As
per the section 181 (2), in case of any breach of the provisions of section 181 (1), court has
power to assign civil penalties under section 1317 E. In the decision of the case, the subjective
director holds liable for a civil penalty of nearly worth $400,000 and also declared as disqualified
for holding a position of director for the next 10 years12. The result of the case set a lesson before
directors that even a small incident and failure with the compliances can place the directors in a
bad space.
11 Lawcasesummaries.com, ASIC v Vizard (2005)145 FCR 57,
<https://lawcasesummaries.com/knowledge-base/asic-v-vizard-2005145-fcr-57/>
12 Caron Beaton-Wells and Brent Fisse, Australian Cartel Regulation: Law, Policy and Practice in an International
Context (Cambridge University Press, 2011) 465.

Partnership and Business Structures 8
This is not the only case where directors hold liable for the breach of regulation of CA 2001.
ASIC v Healey13 is also such a case. In this case, directors and CFO of the company failed to
maintain due care in their activities and approved a financial statement that did not contain a
significant amount of short-term liability. In the decision of the case, directors hold liable for the
breach of section 180 of the company and ordered to pay the penalties. It becomes the duty of a
director to do the acts in the best interest of the company. This shows that directors must not act
for their personal benefits and must avoid conflict of interest. This is a statutory requirement and
breach of the same again attracts penalties. In the case of South Australia v Clark14, the court
found a director liable for the breach of this duty as he made a banking arrangement in the name
of the company for personal benefit.
All the sections where duties of directors reflect attract penalties in case of any breach with the
same. For instance, section, 588G (1) prevents directors to pursue insolvent trading15. If directors
fail to do so they may be held liable for penalties. After the discussion on ASIC v Vizard and
other cases mentioned for reference, it is to assume that significance of regulations mentioned
under CA 2001 is clear and breach of any such provisions may bring negative consequences to
directors as well as to other officers of the company.
13 ASIC v Healey (2011) 278 ALR 618
14 South Australia v Clark (1996) 66 SASR 199
15 Stephen Bottomley, Kath Hall, Peta Spender and Beth Nosworthy, Contemporary Australian Corporate Law
(Cambridge University Press, 2017).

Partnership and Business Structures 9
Bibliography
Books/Journals
Beaton-Wells Caron and Brent Fisse, Australian Cartel Regulation: Law, Policy and Practice in
an International Context (Cambridge University Press, 2011)
Bottomley Stephen, Kath Hall, Peta Spender and Beth Nosworthy, Contemporary Australian
Corporate Law (Cambridge University Press, 2017)
Pamela Hanrahan, Ian Ramsay and Geof Stapledon, Commercial Applications of Company Law
20th (Oxford University Press, 20th ed, 2019)
Case Laws
ASIC v Healey (2011) 278 ALR 618
ASIC v Vizard (2005)145 FCR 57
Kak Loui Chan v Zacharia (1984) 154 CLR 178
Mercantile Credit Co Ltd v Garrod (1962) 3 ALL ER 1103
South Australia v Clark (1996) 66 SASR 199
Other Resources
Bakermckenzie.Com, Duties and liabilities of directors of Australian companies,
<https://www.bakermckenzie.com/-/media/files/locations/australia/bk_australia_dutiesliabilitiesofdirector
s_dec17.pdf?la=en>
Business.vic.gov.au, Company, <https://www.business.vic.gov.au/setting-up-a-business/business-
structure/company>
Classic.austlii.edu.au, Partnership Act 1891 - Sect 13, <
http://classic.austlii.edu.au/au/legis/qld/consol_act/pa1891154/s13.html>

Partnership and Business Structures 10
Lawcasesummaries.com, ASIC v Vizard (2005)145 FCR 57, <https://lawcasesummaries.com/knowledge-
base/asic-v-vizard-2005145-fcr-57/>
Williamroberts.com.au, Directors' Duties,
<https://www.williamroberts.com.au/News-and-Resources/News/Articles/Directors--Duties>
Legislation
Corporations Act 2001 (Cth)
Partnership Act 1981 (Qld)

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