Comparison of Partnership and Company Law for Business Structures

This report provides a comprehensive comparison of partnership and company law, crucial for understanding business structures. Part A examines the distinct legal entities, liabilities to third parties, and the concept of the corporate veil, highlighting the advantages and disadvantages of each structure. Part B delves into fiduciary duties, contrasting the responsibilities of partners in a partnership with those of directors in a company. It explores statutory and common law duties, emphasizing mutual trust and good faith. Part C analyzes the case of ASIC v Vizard, illustrating directors' duties regarding insider trading and the misuse of information. The report underscores the importance of understanding these legal frameworks for making informed decisions about business structures, offering valuable insights for students studying law.

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

1PARTNERSHIP LAW
Part A:
The main issue involved in the part of the write up is discussing regarding the potential
liability arising out of partnership form of business in comparison with a company together with
their participants to the outsider third parties.
The company form of any business is generally governed under the provisions provided
in the Corporations Act1. The most significant and notable character of the company form of
business is its separate legal identity2. The company possesses a legal identity which is separate
from its directors and officers. This was for the first time seen in the landmark decision by the
House of Lords in the Salomon v Salomon & Company Ltd3 case. Due to the limited liability
principle, the company directors and the officers are never required to answer as well as bear the
liabilities of the company in general circumstances4. Thus the directors and officers are liable and
answerable only in some specific conditions. However in those conditions also, the directors or
the officers are liable only for the unpaid amount of shares and not for the obligation of the
company. This concept of separate legal identity given in the Salomon v Salomon & Co case is
regarded as the veil of Incorporation of the company or the corporate veil. This corporate veil
can be pierced in order to prevent the miscarriage of justice in certain situations. The company
bears an absolutely separate identity from that of its officer, shareholders or directors. The
company has its own name, seal and assets that are not to be mixed with those of directors or
officers. The company being a legal entity can even sue or be sued in its own name and not in the
1 Corporations Act 2001 (Cth).
2 PAMELA & RAMSAY HANRAHAN (IAN & STAPLEDON, GEOF.). Commercial Applications of Company
Law 2019. (OXFORD University Press, 2019) P. 113-119.
3 [1897] AC 2.
4 Yorston, Sir Robert Keith, Edward Eric Fortescue, and Clive Turner. Australian commercial law. (Law Book
Company, 1990) P. 167-169.

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directors' or officers' name5. Moreover the members' liabilities are limited as per the investment
of capital made by them. The corporate shield is pierced only it is seen that the directors of the
company breaches section 588G6.
However a partnership business has a completely different scenario. The partnership
business is governed by the provisions enumerated in the Partnership Act 1891 (Qld.)7. Section
128 of the Partnership Act states the liabilities possessed by the partners in a partnership
business. It provides that each and every partner of a partnership firm is liable jointly together
with other partners for all the obligations or debts incurred in the name of the firm and it also
binds the partner. In the same Act, section 89 provides the power possessed by the partners for
binding a company. As per this section, the act done by any partner not in the regular way of
business not only binds the firm but also other partners unless that partner has done it without
any authority and the third party with whom such partner is dealing has knowledge that the
partner is without any authority or has no knowledge or believes him to be the valid partner.
Hence it is seen that one partner is also responsible for that act of another partner. Again if third
party institutes a case against the partnership firm for claiming damages, then the personal
property and assets of the partners can be encroached which is not seen in a company where any
member’s assets or properties cannot be encroached unless such member is personally liable for
it. As per section 1510 of the Act, every partner of any partnership business is jointly liable with
other partners and also for everything severally for which the firm becomes liable when he
continues to be the partner of the firm.
5 PAMELA & RAMSAY HANRAHAN (IAN & STAPLEDON, GEOF.). Commercial Applications of Company
Law 2019. (OXFORD University Press, 2019) P. 23-24.
6 Corporations Act 2001 (Cth) s 588G.
7 Partnership Act 1891 (Qld.).
8 Ibid s12.
9 Ibid s8.
10 Ibid s15.

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From the facts given in the present case study it is seen that three family members are
planning to start a restaurant business for supplying food out of the three members two are
preferring the partnership structure of business whereas the other member is preferring company
form of business structure. The family members are concerned regarding the impact of any legal
step taken by the third party. This can be analysed in the light of the above discussion. It is
observed that the company structure of business has many advantages over the partnership
business structure. The company has a separate legal entity whereas partnership is not a legal
entity but the partners have legal identities. In case of liability towards outsiders, the company
possesses unlimited liability towards the outsiders whereas in a partnership business, unlimited
liability is possessed by the individual partners. Moreover the partners have joint liabilities
towards any contractual duties and they are severally and jointly liable for the wrongs. On the
other hand the company directors are not liable towards any third party until and unless they get
involved in insolvent trading and the members are also not liable to the third parties. In addition
to these, assets of the directors and the members of a company are safe unless they are involved
in some personal beneficial activities in the name of the company because of the corporate veil
doctrine. On the other hand in case of a partnership firm the partners are liable in their personal
capacity and even their assets can be encroached. In a company the directors of the members
cannot be considered to be its agent when they are making transactions with any third party but
in a partnership business all the partners while dealing with any third party act as the Agent of
the form as well as of other partners.
Thus, from the above discussion it can be rightly inferred that a company gives better
security and protection in case of transactions with third parties when compared to do partnership
business.

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Part B
The issue that has to be discussed and analyzed in this part is regarding the meaning of
fiduciary duty and its application in the two forms of business structures.
In a company the directors have fiduciary duties to the company. These duties are
generally based on mutual confidence understanding and trust11. The fiduciary duties owed by
the directors denote the confidence trust and repose they have towards the company. The
directors do not have fiduciary duties toward each other. However, these fiduciary duties can be
enforced by the members by means of a derivative action. The fiduciary duties of the directors
are given under both statute and common law. The statutory duties include that the directors will
be acting in good faith in the interest of the company for correct reasons. Further it is provided in
the statute that they will not misuse their position or information for gaining any personal gain or
causing detriment to the company. Under the common law, the directors must act in good faith in
the interest of the company for adequate reason and there must be no conflict of interest or
unauthorized gain12.
These duties are enshrined in the sections 180 to 18313 of the said Corporations Act. Section
18014 provides that the director has a civil duty to exercise their power and duties with due care
and diligence like a reasonable man. In this aspect, the director mast be applying the best
judgment rule such that they make the best judgment for the interest of the company. Moreover
the director shall not have material interest in the subject matter of the concerned judgment. The
judgment or decision shall be made by the directors in good faith for a proper cause.
11 PAMELA & RAMSAY HANRAHAN (IAN & STAPLEDON, GEOF.). Commercial Applications of Company
Law 2019. (OXFORD University Press, 2019) P. 22-45.
12 Yorston, Sir Robert Keith, Edward Eric Fortescue, and Clive Turner. Australian commercial law. (Law Book
Company, 1990) P. 45-67.
13 Corporations Act 2001 (Cth) s180-183.
14 Ibid s 180.

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Section 18115 enumerates that the officers and directors must use their powers in good faith
and for a right reason for performing their duties to result the best interest of the company. It is
given in the section 18216 that the directors and the officers must not mis-utilize their position to
gain any undue personal advantage which will be detrimental to the company.
Section 18317 says that in case a director or a member got to know any information because
of their position they shell not use them for their personal benefit as it may cause detriment to the
interest of the company. Hence it is seen that the directors as well as other members in a
company causes of fiduciary duty towards the company only and if such duty is breached they
will be liable for it.
Further, section 19118 provides that the director has a duty to reveal any matter of personal
interest due to which conflict arises to other directors. In addition to these, section 192-19619
provides the requirements to be fulfilled by directors to reveal certain interests to the other
directors.
Similar to the company in a partnership business there lies a fiduciary duty among the
partners of such firm. This was decided by Justice Dixon in the case of Birtchnell v Equity
Trustees, Executors and Agency Co Ltd20. It can be presumed in the partnership law that a
partnership business will succeed only when the partners have mutual trust and Faith towards
each other. In the case of Cameron v Murdoc21, it is seen that absolute good faith is the
fundamental character of success of any partnership business. Hence it is seen that fiduciary duty
15 Corporations Act 2001 (Cth) s 181.
16 Ibid s 182.
17 Ibid s 183.
18 Ibid s 191.
19 Ibid s 192-196.
20 (1929) 42 CLR 384 at 407-408.
21 (1986) 63 ALR 575 at 587.

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among the partners which include duty of care between them have equal liabilities towards the
profit or losses. Moreover the partners also have responsibility to indemnify one another for the
liabilities. But these fiduciary duties among the partners can be changed and modified by means
of an agreement and such agreement must be in the knowledge of all the partners as scene in the
case of Noranda Australia Ltd v Lachlan Resources NL22.
Moreover the fiduciary duty among the partners lies not only during the partnership business
but also exist when the business is dissolved. These duties cease existing only after the winding
up of the partnership business after the accounts have been settled finally. This was enshrined in
the case of Everingham v Everingham23.
The fiduciary duties of the partners are discussed below
 duty to act honestly in good faith as observed in Cameron v Murdoch24,
 duty to give account of every information and all the assets in position and control related
to the partnership business as observed in Wilson v Carmichael25,
 Duty to avoid any conflict of interest,
 Duty to not get any personal benefit out of the partnership business,
 Duty to account profits earned out of the business
Hence from the discussion made above it can be inferred that the partners have fiduciary
duties towards each other whereas the directors and the members have it towards the company
only.
Part C
22 (1988) 14 NSWLR 1.
23 (1911) 12 SR (NSW) 5; 28 WN (NSW) 172.
24 (1986) 63 ALR 575 at 587.
25 (1904) 2 CLR 190 at 195.

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In this part the case of ASIC v Vizard26 will be elaborated for analyzing the duties
possessed by the directors of the company. This case involved insider trading by a public
prominent figure and accepting civil penalty for causing the breach of duty of a director as given
in section 183 of the Corporations Act. The duties of the directors belonging to a company are
given in the Corporations Act27. Section 18328 states that the director shall not misuse any
information that he has collected because of his position in the company for gaining any personal
benefit which may result into detriment to the interest of the company. This is not only a
fiduciary duty but also a statutory one29.
In the present case Stephen Vizard was the previous nonexecutive director of a company
called Telstra. Being the director, he had free access to the information of board meeting and also
internal documents. These internal documents gave an outline of the acquisition strategy of few
information technology companies. He created a family trust which was controlled and operated
by an accountant. He then purchased shares of three companies in which the former company
also has interest and was planning to acquire. ASIC begin proceedings against him because of
the breach of section 183 of the said Act. This section imposes a civil obligation on the directors
that they shall use reasonable care and diligence while exercising their powers and discharging
their duties. The duty of not using the information of a company is not only enumerated in
section 183 but also in the general law.
The issue before the court was to decide whether Vizard has breached his duty by using
the information of Telstra improperly for gaining personal benefits. It was observed that he used
26 (2005) FCA 1037.
27 Corporations Act 2001(Cth).
28 Ibid s183.
29 Yorston, Sir Robert Keith, Edward Eric Fortescue, and Clive Turner. Australian commercial law. (Law Book
Company, 1990) P. 110-132.

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the information which he received because of the position he had in the company and used it for
gaining personal benefit. Similar type of scenario has occurred in the case of Australian
Securities and Investments Commission v Adler30. In the case, he admitted his liability for the
violation of section 183 for which the Federal Court made an order requiring him to pay 39000
dollars as penalty. Moreover he was also disqualified for acting as a director in the coming 10
years. The case provides a landmark judgment regarding the breach of Duty by a director of a
company for personal benefits. It was held that the directors must not misuse their position they
have in the company for an undue advantage for them or causing detriment to the company.31
While deciding the pecuniary penalty in the case, Finkelstein J said that though the sentence
awarded was certainly low as per him but if the penalty imposed seemed less the Parliament
could increase it further32.
30 (2002) 168 FLR 253.
31 Clarke v The Queen (2004) 50 ACSR 592.
32 ASIC v Vizard [2005] FCA 1037 at [45].