LAWS20059 Business Law: Liabilities of Partnership and Companies

This report, prepared for Legal Help LLP, examines the liabilities associated with different business structures, specifically partnerships and companies. It addresses the concerns of clients regarding their potential liabilities to third parties, emphasizing the differing levels of risk in each structure. The report delves into the legal aspects, referencing the Partnership Act 1891 and the Corporations Act 2001 to clarify the roles and responsibilities of partners and directors, including fiduciary duties. It highlights the concept of separate legal personality in companies, which limits the personal liability of owners, and contrasts it with the unlimited liability of partners. The report further explores fiduciary duties, both under common law and the Corporations Act, and the responsibilities of directors, including case studies like ASIC v Vizard and ASIC v Cassimatis, to illustrate the consequences of breaching these duties. The analysis provides a comprehensive overview of the legal landscape concerning business structures in Australia.

Business Law
Student’s Name
8/24/2019

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Letter
To,
Mr. Mark,
Senior Partner, Legal Help LLP
Sub:- Liabilities under Partnership Firm and Companies
Ref:- E-mail received on 20 August 2019
Dear Sir,
In reference to the referred mail in which liabilities of people under various business structures
have been asked, this is to state that a proper research has been conducted. The key finding of the
conducted study is summarized hereby under Annexure A, which is attached with this letter. The
report is divided in three parts addressing specific issues. This is to hope that you will find the
same in order and it will answer all of the queries made by you in refereed E-mail.
Yours Sincerely
Julie Bush

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Annexure A
Part A: Liability to third party
Clients are concerned with respect to their liabilities towards the third party under Partnership as
well as in Company structure. While addressing their concern this is to start that in both of these
structures, they would have a different level of risk. These liabilities are common for each
business and will be applied equally to their restaurant business. Staring the discussion over the
topic, firstly to say that a partnership firm does not get any separate identification at the event of
formation. Partners are equivalent to the firm. A third party deals with the firm but in actual
he/she deals with the partner, as there is no difference between the firm and partner. In such a
manner, it is not wrong to state that in the case of a partnership, the client would have greater
liability towards the third party. References of sections seem to be important for a proper study.
Partnership Act1 will apply to the client's business if the same would choose a partnership
structure for their restaurant business. Firstly to say that every partner plays the role of an agent
for the firm as well as of co-partners while dealing with the outsiders. Section 8 of PA 1891
outlines the contractual liabilities of partners towards the third party. As per this section, every
partner is liable towards the third party for the conduct of other partners that they do within the
given authority and comes under the limit of the firm's ordinary business. Further section 12
states that every partner is liable in an unlimited manner to the third party in respect of the debts
of the firm. Nevertheless, partners share this liability with other partners. If to discuss the
liabilities under Tort, again partners do not seem to be in a safe space. Section 13 of PA 1981
provides that every partner is liable in several as well in a joint manner for the tort committed by
1 Partnership Act 1891 (Qld)

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other partners. In addition to this section 15 states that in any partner founds to be engaged in the
practices of misapplication of money, then the third party may sue other partners jointly as well
as severally if the default is made within the given authority and firm’s business. Polkinghorne v
Holland & Whitington2 is one of such case where one of the partners of the firm developed a
sham company and informed that he was investing his money in that company. As the fraud was
made within the scope of the law firm, hence all the partner have been held liable.
Now, to discuss the liability of the client towards the third party under a company structure, this
is to state that the company is a separate legal person in the eyes of law. In the case of Salomon v
Salomon3, it was given that a company is a separate personality. Further, a company has all the
legal power such as an individual. It runs a business in its own name and enters into a contract
with third parties by its name. Therefore, whoever deals with a company has an idea that the
company will be held liable for any kind of breach and not the directors. This is one of the most
attractive features of company business structure. If the client would choose this structure then
the third party would have very limited rights in against of them. However, it is not the situation
that a third party will never be able to sue the client personally in their capacity of directors.
Corporations Act 20014 provides some duties and liabilities of directors. If a director breaches
such duties then they may be held personally liable. Similarly, sometimes director thinks that
they may take advantage of separate legal personality of the company; the court may held them
personally liable for such conduct because ultimately they are the people who take decisions on
behalf of the company. Hence, to state that under both structures, the client will be liable to the
third party but chances are less in case of company structure.
2 Polkinghorne v Holland & Whitington (1934) 51 CLR 143
3 Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
4 Corporations Act 2001 (Cth)

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Part B: Fiduciary Duties
Fiduciary duty refers to those duties that exist because of a relationship of proximity and trust.
Partners of the firm as well as directors of a company owe these duties to their business and other
workgroups. In this part, the fiduciary duty client will have under both of the subjective structure
will be discussed. One of such duty is defined under common law, which states that partners of
the firm have a fiduciary duty of extreme good faith to firm and co-partners. They must be
honest and always work in the best interest of firm setting aside their personal interest. This duty
exists because partners have a relationship of trust and agency. Other duties are defined under
PA 1981. These duties state the obligations of partners that they need to perform. Section 23 of
the act demands every partner to use the property of partnership for the purpose of the business
of the firm only. Section 31 is an important section of the act that states partners are liable to
render their accounts before other partners and firm. As per section 32 of the act, no partner must
make any secret profits out of the business of the firm. Further, the section states that if any
partner secretly makes any profit, it becomes the liability of the same to disclose it to firm and
other partners.
Section 33 outlines much significant obligations for partners. The section prevents partners from
engaging in unethical or fraudulent dealings. It says that it is duty of each partner to not to do any
activities in competition of firm’s business and should avoid conflict of interest.
Similar to a partnership firm, the client would also have fiduciary duties if opt corporation
structure. Directors of a company remain in a strong position as the same manage all the business
activities. In such a situation common law as well as Corporations Act, mention some fiduciary

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duties for them. In other words, this is to say that these duties derive from the fact that directors
owe a duty of good faith and remain in the position of trust. In the case of Hospital Products v
the United States Surgical Corp5 it was given that owing the fiduciary duty mean that a person
who owes the same would act in the best interest of the party to whom such duty is owed. Staring
the discussion from fiduciary duties of directors mentioned under common law, this is to state
that the same are mentioned below:-
Duty to act bona find and for the best interest of the company
Duty to escalate conflict of interest
Duty not to restraint discretion
Duty to perform the functions for a proper purpose
The fifth common law duty does not classify as a fiduciary duty as it comes from the law of
negligence and states that every director has a duty of care. This duty imposes a burden on
directors and expects them to maintain a good balance of preservation of the company's assets
and risk taking.
In addition to these duties, the Corporations Act also prescribes some fiduciary duties. These are
similar to the duties mentioned above. The act contains these duties under four sections. These
are mentioned as below:-
Section 180- Duty to perform functions with skills, reasonable care, and diligence
Section 181- Duty to perform functions in good faith, proper purpose and best interest
of the company
5 Hospital Products v United States Surgical Corp (1984) 156 CLR 41.

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Section 182- Duty to not to misuse their position in the company in order to gain
personal advantages
Section 183- Duty to not to use the information of the company to gain personal
advantages
The above-mentioned duties are also known as general duties of directors. These duties are
specific and determined under the decision of various cases. For instance in the case of Bailey v
Mandala Private Hospital Pty Ltd6 it was given that issue of share for a specific purpose cannot
be treated as in good faith unless it brings greater good to the company. Similarly in the case of
Scottish Co-operative Wholesale Society Ltd v Meyer7 it was given that directors owe a duty to
act in good faith to the board of the company in which they are appointed and not to that who has
made such appointment (case of nominee director).
Part C: Responsibility of Directors
As discussed in the above-mentioned Part, directors of the company owe some duties to
company. These were general duties that have been discussed and some other duties are also
there in conjunction with the general duties. It is to inform that duties mentioned CA 2001 are
mandatory in nature and make the directors obliged to follow the same. Many of the cases are
there in which court decided the matter against of directors and held them liable for civil and
other penalties. These cases provides a lesson that directors must not breach their duties and if
they do so, they may be liable to face serious consequences.
6 Bailey v Mandala Private Hospital Pty Ltd (1987) 12 ACLR 64.
7 Scottish Co-operative Wholesale Society Ltd v Meyer [1958] 3 All ER 66.

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One of such case is ASIC v Vizard8. This case came into light due to a breach of duties by the
director under Corporations Act 2001. The duty mentioned under section 183 of the act been
highlighted. The section strictly prevents directors to not to use the information of a company for
personal purpose. In this case, the director of the company used the information related to future
takeover by the company for his benefit. He knew the fact that the company was going to acquire
some firms and knew that after such acquisition, the share price of the company was going to
rise. It was price sensitive information and was not available to the public at that time. He
purchased shares of targeted firms. In the inquiry made by ASIC, be found guilty of breach of
section 183 of the act.
The case is very significant in the direction of director’s duty as director faced heavy penalties.
In addition to decide duties of directors, this act also stipulates provisions of penalties. It is
mentioned in subsection 2 of section 181, it is mentioned that contravention with the provisions
of this section attracts civil penalty under section 1317E. In the decision of the subjective case,
court held the directors for penalty of $390000. Further, the court also held the director
disqualified for being a director for 10 years9.
The case is significant as it spread fear among Australian directors and made assure what
consequences can be for breach of the director’s duty. Similarly, in the case of ASIC v
Cassimatis10, directors held personally liable, as they have suggested the wrong financial model
to customers. The decision of the case reminded directors that they are required to consider the
risk-benefit test in their workings. The case of Cassimatis is far recent but before this too, cases
8 ASIC v Vizard (2005) FCA 1037.
9 Jean Jacques du Plessis, Anil Hargovan and Mirko Bagaric, Principles of Contemporary Corporate Governance
(Cambridge University Press 2010) 186.
10 ASIC v Cassimatis (No 8) [2016] FCA 1023.

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of breach of responsibility and duties were normal. The case of ASIC V Adler11 is an important
example of the same. In this case, a person named Adler was a common director in various
companies. He borrowed some funds and lent out the same to other company of the group. Being
a director he was aware of the financial condition of each company and owed duties to all. In the
decision of the case, the court held him liable for breach of section 180, 182, 183 and declared
him liable for a civil penalty under section 1317G.
Another recent case is ASIC v Sino Australia Oil and Gas Limited12. In this case, the director of
the listed company failed to submit timely disclosures as were required under section 674 of the
act and also breached section 728 that prevent directors to issue any securities under deceptive
statement. As the result of the conduct of director, he had to pay $5,539,758 and he has also been
banned to hold a position of director for next 20 years13.
In this manner, it is clear that duties mentioned under CA 2001 are significant and any non-
compliance with the same brings serious consequences.
11 ASIC v Adler [2002] NSWSC 171.
12 ASIC v Sino Australia Oil and Gas Limited (prov liq apptd) [2016] FCA 42.
13David Jacobson, Case Note: Liability Of Non-English Speaking Director (Bright Law) <
https://www.brightlaw.com.au/case-note-liability-of-non-english-speaking-director>.

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Bibliography
Books/Journals
Plessis Jean Jacques du, Anil Hargovan and Mirko Bagaric, Principles of Contemporary
Corporate Governance (Cambridge University Press 2010) 186.
Case Laws
ASIC v Adler [2002] NSWSC 171
ASIC v Cassimatis (No 8) [2016] FCA 1023
ASIC v Sino Australia Oil and Gas Limited (prov liq apptd) [2016] FCA 42
ASIC v Vizard (2005) FCA 1037
Bailey v Mandala Private Hospital Pty Ltd (1987) 12 ACLR 64.
Hospital Products v United States Surgical Corp (1984) 156 CLR 41.
Polkinghorne v Holland & Whitington (1934) 51 CLR 143
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
Scottish Co-operative Wholesale Society Ltd v Meyer [1958] 3 All ER 66
Other Resources
David Jacobson, Case Note: Liability Of Non-English Speaking Director (Bright Law) <
https://www.brightlaw.com.au/case-note-liability-of-non-english-speaking-director>.
Legislation
Corporations Act 2001 (Cth)
Partnership Act 1891 (Qld)