University Contract Law Assignment: Business Structures and Duties

This assignment delves into the realm of contract law, specifically examining the potential liabilities associated with different business structures: partnerships and companies. Part A contrasts the legal implications of these structures, highlighting the corporate veil and its limitations, alongside the liabilities of partners. Part B explores fiduciary duties, detailing the obligations of directors and partners, and their relevance in maintaining ethical business practices. Part C analyzes the case of ASIC v Vizard to examine the duties of company directors. The assignment covers key legal concepts such as insolvent trading, the powers of partners, and the significance of acting in good faith. This comprehensive analysis provides insights into the legal frameworks governing business operations and the responsibilities of key stakeholders.

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

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Part A:
The issue to be discussed in this part of the assignment is describing the potential liability
of business structure of partnership and company and their participants towards the 3rd parties.
The company structure of any business is given in the Corporations Act1. The best part of
a company structure is its separate legal entity which is separate from its directors, shareholders
and officers. This was laid down for the first time in the case of Salomon v Salomon & Company
Ltd2 by the House of Lords. Due to this limited liability concept, the owners of the company are
never answerable or liable for the liabilities of the company in general situations. Hence the
shareholders or the owners can be made liable only in certain situations and only for the unpaid
shares amount and not for the company’s obligation. This principle given in the case of Salomon
v Salomon & Co is called the corporate veil3 or veil of incorporation. This veil of incorporation
can be lifted or pierced if it is required to prevent injustice4. The entity of the company is
absolutely distinct from the entity of its shareholders. The company has a separate name, seal, its
assets are separate and distinct from that of its members, the company can sue or be sued in its
own name and not in the name of its members. Further the liability of the members is limited to
the capital investment made by them.
However the corporate veil that safeguards the interest of the directors of the company
can be lifted when the directors are involved in insolvent trading5. This has been enshrined in the
section 588G6 of the said Corporations Act. This section states that a duty to prevent insolvent
1 Corporations Act 2001 (Cth).
2 [1897] AC 2.
3 Macey, Joshua C. "What Corporate Veil." (2018) Mich. L. Rev. 117: 1195.
4 Yadav, Prashant. "Lifting of Corporate Veil." (2017) Available at SSRN 2951569.
5 Jackson, Kody. "Behind the Corporate Veil." (2015) ReVista (Cambridge) 15.1: 5.
6 Corporations Act 2001 (Cth) s 588G.

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trading is possessed by the director of a company. A company is regarded as insolvent if it its
financial position is so poor that it is unable to pay its debts and such debts become due and not
payable by such company. Insolvent has been defined in section 95 A (2)7 of the Act. This
section comes into play when the following conditions are fulfilled; that the company when
incurs a debt, the person concerned is the director of such company, that the company turns
insolvent or is insolvent as a result of incurring such debt and that in that condition, it can be
suspected that the company is already turned into insolvency or has a possibility to turn into
insolvency. Moreover, if the director fails to prevent such insolvent trading due to some
dishonest intention, then the director is said to commit an offence as given in section 588G(3)8.
However, the directors will not be considered to be liable if the conditions given in 588H9 are
satisfied by the director. The conditions are that when the company took the debt, there were
grounds to believe that the company is solvent; the director did not take part in management
because of sickness or any other valid cause or has taken measures for preventing the company
from taking debts.
However, in case of any partnership business, the scenario is completely different. The
partnership business in Australia is given in the Partnership Act10. Section 1311 of the said Act
provides the liability of the partners of a partnership business. It states that every partner of the
firm is jointly liable along with other partners of the firm for the firm’s obligations and debts
incurred when that partner continues to be the partner of the firm. The partners are also jointly
and severally liable such that a partner is liable to the acts done by other partners of the
7 Corporations Act 2001 (Cth) s 95 A(2).
8 Ibid s588G(3).
9 Ibid s588H.
10 Partnership Act 1963 (Cth).
11 Ibid s13.

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business12. It shows that one partner can be made responsible for the acts done by any other
partner. Further, when a third party sues the partnership firm claiming damages, then the
personal property of the partners can be encroached which are not possible in case of a company
unless the member of the company is personally responsible for this. Section 913 of the Act
provides the powers of the partners to bind the firm as well as other partners. Partners can be
made liable to the outsider in certain situations like when a person, may or may not be a partner
have been authorized by the partners to enter into a transaction with an outsider on their behalf.
Again if the partners authorize one of the partners to act on their behalf with an outsider, then
every partner is bound by the act of such partner. Again if one partner of a firm without any
express authorization has acted in the circumstances mentioned in section 5 then other partners
will be bound by the act of such partner.
From the facts of the case it is seen that if the three members of the family wish to start a
restaurant food supply business for them. Of the three members, two members prefer the
partnership structure whereas the other one prefers company as the proper business structure. In
regard to the concern of the members in relation to whether the third parties can take legal steps
against them, the above mentioned rules can be discussed. It is seen that the company business
structure has some advantages over the partnership structure. Due to the separate legal identity of
the company, the company possesses separate legal identity than its members which is absent in
the case of a partnership business. The advantage of the company structure is that the members
have separate entity from the company. The members cannot be sued or their personal property
cannot be encroached upon by any third party due to the corporate veil. Moreover, one member
cannot be made liable jointly and severally for the act of the other members, But these are not
12 Ghatak, Maitreesh. "Screening by the company you keep: Joint liability lending and the peer selection effect." The
Economic Journal 110.465: 601-631.
13 Partnership Act 1963 (Cth) s9.

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present in the partnership business where the partners are liable to the loss of the firm, liable for
the act of the other members. In fact, their assets can be encroached too. In case of a company,
the shareholder cannot be regarded as its agent when dealing with third parties whereas in a
partnership business, the partnership is regarded as the agent of other partners and also of the
firm while dealing with 3rd parties.
Thus considering these, it can be concluded that the company provides better
protection to its members in comparison to a partnership firm against the acts of any third
party.
Part B:
The issue to be discussed in this part of the assignment is the meaning of the term
fiduciary duty and its relevancy in the two business structures.
In a company, the directors possess fiduciary duties towards the company. The
fiduciary duties are based on mutual trust and understanding towards one other. The
directors’ fiduciary status indicates the trust and confidence held by the directors towards
each other and also to the company. These fiduciary duties underpin legal relationship
between the company and its directors. The fiduciary duties that are owed by the
directors to the company are as follows;
 The duty to act in the company’s interest as a whole,
 Duty of not acting for any incorrect or improper reason,
 Duty of care and diligence,
 Duty of acting in good faith,
 Duty of retaining discretion,

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 Duty of not disclosing confidential information related to the company,
 Duty of avoiding conflicts of interest,
 Duty to use position in proper manner.
Some of the fiduciary duties are enumerated in the Corporations Act in sections 180
to 18314. Section 18015 states that the directors of a company have a civil obligation to use
their powers and perform their duties with care and diligence like a reasonable person
would do in such position and situation. In this regard, the directors must use the best
judgment rule such that they are required to make any judgment; it must be for the best
interest of the company. Further, the director must not have any material interest in the
judgment’s subject matter. The judgment must be made in good faith by the directors for
a proper reason.
Section 18116 of the Act further states that the directors or any officers must use
their powers and perform their duties in the company’s best interest in good faith and for
a proper reason.
Section 18217 provides that the directors, employees or any other employee of the
company shall not misuse their position to incur any undue advantage for them, causing
detriment to the company.
Section 18318 states that if any director, officer or employee receives any
information by the virtue of their position, they must not misuse such information to
incur any undue advantage for them, causing detriment to the company. Thus the
14 Corporations Act 2001 (Cth) s180-183.
15 Ibid s 180.
16 Ibid s 181.
17 Corporations Act 2001 (Cth) s182.
18 Ibid s 183.

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directors and other members of the company possess a fiduciary duty breach of which
can make them liable to actions in the court of law. Further as per section 19119, the
company director possesses a duty to inform other directors about any personal material
interest in case any conflict occurs between the company affairs and the director’s
personal interest.
Like the company, in a partnership firm, there lies a fiduciary relation among the
partners of the firm. It was held in the case of Birtchnell v Equity Trustees, Executors and
Agency Co Ltd20 by Justice Dixon. It is being presumed by the partnership law that
partnership lies on the basis of mutual trust among the partners. It is observed in the case
of Cameron v Murdoc21 that utmost good faith is the fundamental element of this relation
of partnership.
However, the fiduciary duties among the partners among the partners can be
modified and varied by an agreement which must be disclosed to all the parties as
observed in the decision of Noranda Australia Ltd v Lachlan Resources NL22.
However, the fiduciary duties lie among the partners not only during the business
life but also during the dissolution of the partnership business as seen in the case of
Everingham v Everingham23. The fiduciary duties cease to exist after the final settlement
of the accounts on the partnership’s winding up.
The fiduciary duties of the partners24 owed towards one another include the
following;
19 Ibid s 191.
20 (1929) 42 CLR 384 at 407-408.
21 (1986) 63 ALR 575 at 587.
22 (1988) 14 NSWLR 1.
23 (1911) 12 SR (NSW) 5; 28 WN (NSW) 172.
24 Manesh, Mohsen. "Fiduciary Principles in Unincorporated Entity Law." (2018).

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 Duty to act honestly in good faith as observed in the case of Cameron v
Murdoch25,
 Duty to give full account of all assets and information in the possession or control
of the partner in relation to the partnership business as seen in Wilson v
Carmichael26,
 Duty of avoiding any conflicts of interest,
 Duty to prevent making of any personal gains from partnership business,
 Duty of accounting benefits incurred out of the partnership business.
Thus, from the above discussion, it can be concluded that the fiduciary duties of the
partners and the directors or members of the company. However, the main difference is that the
members (shareholders) of the company may not act in good faith with each other and it is
expected out of them, however, the partners are bound to act in good faith and honestly with
each other.
Part C:
In this part of the assignment, the case of ASIC v Vizard 27will be discussed to examine
the duties of the directors of the company. The directors of a company have certain duties that
are embodied in the Corporations Act28. The Act in the section 18329 states that the directors of
the company must not misuse any information gathered out of his position in order to gain
personal benefit causing detriment to the company’s interest. This is also a fiduciary duty apart
from being a statutory one. In this case, Stephen Vizard was the former nonexecutive director of
25 (1986) 63 ALR 575 at 587.
26 (1904) 2 CLR 190 at 195.
27 (2005) FCA 1037.
28 Corporations Act 2001(Cth).
29 Ibid s183.

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the Telstra. Being the director, he received information from the briefing documents as well as
board meetings. He formed a family trust that was operated by his accountant. He bought shares
in 3 other companies in which Telstra also showed interest in. ASIC started proceedings against
him for breaching of section 183 of the said Act. This is because he breached the duty of
avoiding any conflict of interest. Vizard admitted his liability of violating section 183due to
which the Federal Court ordered him to pay penalty of 400,000 $ and was further disqualified to
act as a director for the next 10 years.
Part D:
The issue I have determined for the first part is to describe the potential liability of
business structure of partnership and company and their participants towards the 3rd parties.
The company structure of any business is given in the Corporations Act 2001 (Cth).
It is seen that the best part of a company structure is its separate legal entity which is
separate from its directors, shareholders and officers.
I have seen this was laid down for the first time in the case of Salomon v Salomon &
Company Ltd [1897] AC 2 by the House of Lords.
The main rule is given in the limited liability concept. I analyzed that the owners of the
company are never answerable or liable for the liabilities of the company in general situations.
Hence the shareholders or the owners can be made liable only in certain situations and only for
the unpaid shares amount and not for the company’s obligation.
I found that this veil of incorporation can be lifted or pierced if it is required to prevent
injustice. The entity of the company is absolutely distinct from the entity of its shareholders.

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But it is seen that in case of any partnership business, the scenario is completely different.
The partnership business in Australia is given in the Partnership Act 1963 (Cth).
Section 13 of the said Act provides the liability of the partners of a partnership business.
It states that every partner of the firm is jointly liable along with other partners of the firm for the
firm’s obligations and debts incurred when that partner continues to be the partner of the firm.
The partners are also jointly and severally liable such that a partner is liable to the acts done by
other partners of the business.
It shows that one partner can be made responsible for the acts done by any other partner.
Section 9 of the Act provides the powers of the partners to bind the firm as well as other
partners.
Again if one partner of a firm without any express authorization has acted in the
circumstances mentioned in section 5 then other partners will be bound by the act of such
partner.
From the facts of the case it is seen that if the three members of the family wish to start a
restaurant food supply business for them. Of the three members, two members prefer the
partnership structure whereas the other one prefers company as the proper business structure.
It is seen that the company business structure has some advantages over the partnership
structure.
Due to the separate legal identity of the company, it is seen that the company possesses
separate legal identity than its members which is absent in the case of a partnership business.

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The members cannot be sued or their personal property cannot be encroached upon by
any third party due to the corporate veil30.
Moreover, one member cannot be made liable jointly and severally for the act of the other
members.
But these are not present in the partnership business where the partners are liable to the
loss of the firm, liable for the act of the other members.
In fact, their assets can be encroached too.
In case of a company, the shareholder cannot be regarded as its agent when dealing with
third parties whereas in a partnership business, the partnership is regarded as the agent of other
partners and also of the firm while dealing with 3rd parties.
Thus considering these, it can be concluded that the company provides better protection
to its members in comparison to a partnership firm against the acts of any third party.
Further considering the Part B, the issue I determine to discuss is the meaning of the term
fiduciary duty and its relevancy in the two business structures.
The fiduciary duties that are owed by the directors to the company are as follows;
 Duty of not acting for any incorrect or improper reason,
 Duty of care and diligence,
 Duty of acting in good faith,
 Duty of retaining discretion,
 Duty of not disclosing confidential information related to the company,
 Duty of avoiding conflicts of interest,
30 Jackson, Kody. "Behind the Corporate Veil." (2015) ReVista (Cambridge) 15.1: 50.

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 Duty to use position in proper manner.
Like the company, in a partnership firm, I found that there lies a fiduciary relation
among the partners of the firm. It was held in the case of Birtchnell v Equity Trustees, Executors
and Agency Co Ltd.
The fiduciary duties of the partners owed towards one another include the
following;
 Duty to act honestly in good faith as observed in the case of Cameron v Murdoch
(1986) 63 ALR 575 at 587,
 Duty to give full account of all assets and information in the possession or control
of the partner in relation to the partnership business as seen in Wilson v
Carmichael (1904) 2 CLR 190 at 195,
 Duty of avoiding any conflicts of interest,
 Duty to prevent making of any personal gains from partnership business,
 Duty of accounting benefits incurred out of the partnership business.
Thus, I can conclude that the fiduciary duties of the partners and the directors or members
of the company.
However, I must mention that the main difference according to me is that the members
(shareholders) of the company may not act in good faith with each other and it is expected out of
them, however, the partners are bound to act in good faith and honestly with each other.
Now the third part deals with the case of ASIC v Vizard (2005) FCA 1037 to examine the
duties of the directors of the company.

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The directors of a company have certain statutory duties that are embodied in the
Corporations Act 2001(Cth).
The Act in the section 183 states that the directors of the company must not misuse any
information gathered out of his position in order to gain personal benefit causing detriment to the
company’s interest.
In this case, Stephen Vizard was the former nonexecutive director of the Telstra. ASIC started
proceedings against him for breaching of section 183 of the said Act. This is because he
breached the duty of avoiding any conflict of interest. Vizard admitted his liability of violating
section 183 due to which the Federal Court ordered him to pay penalty of 400,000 $ and was
further disqualified to act as a director for the next 10 years.

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References:
Books and Journals:
Ghatak, Maitreesh. "Screening by the company you keep: Joint liability lending and the peer
selection effect." The Economic Journal 110.465: 601-631.
Jackson, Kody. "Behind the Corporate Veil." (2015) ReVista (Cambridge) 15.1: 50.
Macey, Joshua C. "What Corporate Veil." (2018) Mich. L. Rev. 117: 1195.
Manesh, Mohsen. "Fiduciary Principles in Unincorporated Entity Law." (2018).
Yadav, Prashant. "Lifting of Corporate Veil." (2017) Available at SSRN 2951569.
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).

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Partnership Act 1963 (Cth).