A Case Study on Business Structures and Directors' Duties in Law

This case study provides a legal analysis of business structures in Australia, including sole proprietorships, partnerships, companies, and trusts, highlighting the advantages and disadvantages of each. It includes a legal letter advising a client on the most suitable business structure, recommending a proprietary company for its benefits. Furthermore, the document delves into the duties of company directors under the Corporations Act 2001 (Cth), focusing on sections 180, 181, 182, and 183, which mandate care, diligence, good faith, and the avoidance of misuse of position or information. Relevant case law, such as ASIC v Sino Australia Oil and Gas Limited and Kokotovich Constructions Pty Ltd v Wallington, is cited to illustrate breaches of these duties and their legal consequences. The analysis underscores the importance of directors fulfilling their responsibilities to ensure the company's and its stakeholders' best interests are protected. Desklib offers similar solved assignments for students.

Commercial and
Corporations Law

TABLE OF CONTENTS
Part-A.................................................................................................................................................................... 2
Legal Letter to John Smith....................................................................................................................... 2
Part-B.................................................................................................................................................................... 6
Directors’ Duties.......................................................................................................................................... 6
Importance of Directors’ Duties............................................................................................................ 9
References........................................................................................................................................................ 10

PART-A
LEGAL LETTER TO JOHN SMITH
Sam White
28, Xyz Street
Sydney, Australia
John Smith
12-A, George Street
Sydney, Australia
27 May 2018
Dear John,
Before establishing your business in the fashion industry, it is important that you
learn about different business structures which are available in Australia. You can
choose between these structures to select the most appropriate structure for your
business. In this letter, different features of each structure are given in order to assist
you in differentiating between each structure. For small businesses, one of the most
common business structures is a sole trader. In this structure, the entire business is
owned and operated by a single person. The owner itself takes the decision regarding
the business and its operations and he/she can seek expert advice (ATO, 2018). The
owner can also hire employees, however, the decision making power remains in his/her
hands. The main advantage of this structure is lack of legal formalities than compared to
other structures. There are substantially less legal requirements which you need to
comply with a sole trading structure. Additionally, the setup of this structure is

relatively simple as well. However, the main disadvantage of this structure is lack of
separate personality of the business. The owner of a sole trading business is fully
responsible for its operations and a suit for repayment of the debts can be filed against
him by the creditors in case the business become insolvent (Legal123, 2016).
The partnership is another form of business structure which is relatively popular
in Australia. In this structure, two or more parties join together for operating a business
in common and their objective is to generate profits. The provisions regarding this
structure are given under the Partnership Act 1891 (SA), and its definition is given
under section 1. Its definition provides four key elements which are necessary to form a
partnership. The first element is a relationship between the partners. In the case of
Tiffin v Lester Aldridge LLP [2012] EWCA Civ 35, it was held by the court that a partner
receiving a share in profits and a salary has a relationship with other partners (Berry,
2017). Secondly, the partners must enter into a relationship in order to carry out or
operate a business. In the case of Khan v Miah [2000] 1 WLR 2123, the court provided
that an agreement which is constructed between parties for carrying out a business in
the future is not a valid agreement of partnership (Cheung, Chang & Kajewski, 2012).
Another element is that the partners must run the business “in common”. The
importance of this element was given in George Hall & Son v Platt [1954] TR 331 case in
which the court held that a contract for growing and selling of carrots between a farmer
and an agriculture merchant is considered as a partnership because the divided its risks
and profits equally (Roach, 2014). Furthermore, the objective of the partnership is to
generate profit for the parties. In the case of Cox v Hickman [1860] 11 ER 431, the court
provided that although the partners must have an objective to generate a profit
however only a right in the profits of a business is not enough to construct a partnership
(Henning, 2017). A partnership is divided into two types which include a limited and
unlimited partnership. Generally, the liability of partners is unlimited, and the debts of
the business bind them, however, in limited liability, the partners’ liability is limited
based on the amount of capital provided by them (section 48).
Another popular business structure is Australia is a company. The Corporations
Act 2001 (Cth) provides provisions regarding incorporation of a company and its rights.
A corporation has the ability to issue shares and raise capital and the people holding the
shares of a company are called shareholders. Although shareholders are considered as

owners of a company, however, they cannot be held liable for its debts. The company
has a separate legal personality from its owners based on which it has right to enter into
a contract with third parties, purchase or sell properties, and sue or get sued. In
Salomon v A Salomon & Co Ltd [1897] AC 22 case these principles are established. In the
judgement of this case, the House of Lords provided that a shareholder cannot be held
liable to repay the debts of a company and the shareholder is only liable to pay the
unpaid amount on its shares (Kershaw, 2012). A similar judgement was given in
Macaura v Northern Assurance Co Ltd [1925] AC 619 case, in which the court held that a
shareholder cannot insurance the company’s property under its name (Zuryati, Yusoff &
Azrae, 2009). The income of a company is taxed separately from its shareholders and
they receive return for their investment in the form of a dividend. There are two types
of corporations in Australia which include a public and proprietary company (section
112).
The main difference between the two is that a public company can issue its
shares to the public whereas a proprietary company cannot do that and its shares are
issues to close friends and family. There is a maximum limit of fifty members in a
proprietary company (section 113), whereas, minimum one member is enough to
incorporate a company (section 114). Section 117 provides the procedure for applying
of registration after which a corporation receives its rights (Jade, 2018). The legal
structure of a company is far more complex than other structures because it has to
comply with different legal requirements. Another advantage of a corporation is
perpetual succession. It means that even after the death of all of its members, a
corporation did not cease to exist. Trust is another business structure in Australia. In
this structure, a trustee holds property for the interest of a beneficiary. There are a
number of legal formalities which are required to be fulfilled by parties in order to form
trust. It is necessary that a trust deed is signed between the parties which include terms
of their agreement (Legal123, 2016). While holding a property under trust, a trustee can
be held liable for the debts of the property. These are the common business structure
which operates in Australia.
Mr Smith, you can choose between these business structures in order to start your
business in the fashion industry. A proprietary company is the most suitable business
structure for you to establish your business. Although the process of incorporating a

company is relatively more complex than compared to other structures, however, it
advantages overcome disadvantages. Firstly, you will be able to issue the share to close
family and friends to raise capital for your business which will assist in its expansion.
You will also be able to fully control the operations your business and register it under a
separate name. You will not be held liable for its debts, and you can issue dividends as a
return for your investments. As discussed above, one person is minimum to operate a
company based on which you will have full control over the operations of the company.
Furthermore, it is easier to expand your business in a proprietary company structure
than compared to other due to its advantages. I would be easier for you to raise capital
for its operations which would assist in its expansion. Although, there are more legal
requirements which you have to comply with, however, they are relatively less than
compared to a public company. It would be easier for you to grant an application for a
loan under the name of the company and joint with others to expand its operations.
Therefore, it is the most appropriate structure for your business.
Sincerely,
Sam White

PART-B
DIRECTORS’ DUTIES
Directors are at an apex position in a company, and they develop strategies for
the future of the company. In order to form such strategies, directors required many
powers which assist them in developing future plans of a company. However, along
with these powers, there are a number of responsibilities which are necessary to be
fulfilled by directors. It is easier for directors to avoid these responsibilities due to
which the Corporations Act 2001 (Cth) imposes a number of duties which ensure that
directors comply with their responsibilities (Jade, 2018). Following are different duties
which are mandatory to comply by directors for ensuring that they take business
decisions for the interest of the company and its stakeholders.
Section 180
Firstly, directors have a number of powers which they require while taking
business decisions. While using these powers or performing their duties, the directors
have to ensure that they maintain a level of care and diligence as per this section. A
degree of care and diligence means what any reasonable person would do in a similar
situation. They have to ensure that they comply with these duties in order to avoid legal
consequences. Furthermore, subsection (2) provides provision regarding duties of
directors while making a business judgment. It provides that they should make their in
good faith of the company and they should not take decisions which involve a material
interest (Jade, 2018). They should also inform themselves regarding any subject matter
which is important for them to understand in order to discharge their duties effectively.
They should also rationally believe in the judgement that they took to be in the best
interest of the corporation. In ASIC v Sino Australia Oil and Gas Limited (prov liq apptd)
[2016] FCA 42 case, the director was held liable by the court because while taking a
business judgment, he did not inform himself about the subject matter due to which the
company made a false announcement on the stock exchange. The court held the director
liable for breaching section 180 based on which appropriate penalty was imposed, and

the director was disqualified from acting as a director in any other company for a period
of ten years (Hibberd & Kingston, 2017).
Section 181
The section provides a duty of a director to act in good faith of the company
while discharging duties or exercising powers. While developing future business
strategies or taking daily business actions, the director should ensure that such
decisions are in the best interest of the company and the powers are used for the proper
purpose for which they are given to the director. It is a duty of the director to act
honestly while taking the business interest to ensure that the decisions taken by him are
in the genuine interest of the enterprise. Furthermore, powers should be used by the
directors for the purpose for which they were given. Misuse of the powers is considered
as a breach of this section. In the case of Kokotovich Constructions Pty Ltd & Ors v
Wallington [1995] 13 ACLC 1113, the court held that the director had breached section
181 because he had taken a business decision without acting in good faith of the
company (Bose, 2016). Furthermore, the director misused his power to issue shares for
gaining personal benefits rather than focusing on the interest of the company.
Section 182
This section provides that the directors are at an apex position in the company
and they should not misuse their position for personal gain. While performing their
duties, the directors should ensure that they did not misuse their position for personal
gain or the gain of others. They should not misuse their position in a way that could
cause potential harm to the company or its stakeholders. In the case of R v Byrnes
[1995] 130 ALR 529, the court held that it does not matter whether the actions of the
directors actually cause harm to the company or provide them personal gain;
irrespective of this fact they can be held liable for breaching this section (Mayanja,
2014).
Section 183
While acting at the top level position in the company, directors have many
powers to discharge their duties. This section provides that they should not misuse such
power for personal gain or the gain of others. They should not exercise their powers in

such a way that could cause potential harm to the organisation (Jade, 2018). They
should use their powers for taking corrective actions for the interest of the public, and
they should focus on the interest of the corporation and its stakeholders rather than
fulfilling their personal interest. They could be held liable for breaching this section
irrespective of the fact what the gain or harm has actually occurred or not.
Section 184
This section imposes criminal liability on directors based on which the court can
impose criminal penalties on directors for following reasons:
 They did not act in good faith of the company and take a business decision which
could cause potential harm the company or its stakeholders.
 Misuse of the position by the directors in order for personal or others gain or to
cause any sort of potential harm to the company.
 Misuse of the position of the directors in order for personal or others gain or
causing harm to the company (Jade, 2018).
Section 191-195
While making decisions regarding business transactions, directors should
disclose a material personal interest in order to avoid conflict of interest, and they
should maintain an “arm length” distance from such transactions (Jade, 2018).
Section 208-210
Directors should take approval from shareholders by disclosing proper
information about related party transactions after which they can retain any profit.
Section 285-318
Directors should be honest while issuing directors reports and other related
information and they should maintain a level of care and diligence while issuing these
reports.
Section 558G
Directors should avoid incurring debts in a company which could result in
making the company insolvent. They should also avoid incurring debts while the

company is insolvent or likely to be. In the case of Woodgate v Davis [2002] 55 NSWLR
22, the court held that criminal penalties could be imposed on directors who failed to
incur debt in the company which are dishonest (Wolff, 2009).
IMPORTANCE OF DIRECTORS’ DUTIES
Effective compliance with duties ensures that directors are correcting using their
powers and position while making business decisions. They are responsible for
governing the company based on which they have substantial powers to take decisions
in the company. However, these decisions should be focused on the interest of the
rather than the personal interest of directors. Effective compliance with these duties
ensures that the actions of the directors are focused towards achieving common
organisational objectives. Directors can be held liable under the Act for noncompliance
with these policies. As discussed above, the court can impose both civil and criminal
obligations on them in case they breach their duties. Therefore, duties assist directors in
effectively governing the company while fulfilling the interest of the company and its
stakeholders.

REFERENCES
ASIC v Sino Australia Oil and Gas Limited (prov liq apptd) [2016] FCA 42
ATO. (2018). Choosing your business structure. Retrieved from
https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-
started/Choosing-your-business-structure/
Berry, E. (2017). When is a partner/LLP member not a partner/LLP member? The
interface with employment and worker status. Industrial Law Journal, 46(3), 309-
334.
Bose, P. K. (2016). Corporate Governance & Plight of Minority Shareholders: An Attempt
to Reconcile. Journal of Advances in Social Science and Humanities, 2(05).
Cheung, E., Chan, A. P., & Kajewski, S. (2012). Factors contributing to successful public
private partnership projects: Comparing Hong Kong with Australia and the
United Kingdom. Journal of Facilities Management, 10(1), 45-58.
Corporations Act 2001 (Cth)
Cox v Hickman [1860] 11 ER 431
George Hall & Son v Platt [1954] TR 331
Henning, J. J. (2017). Clarifying the distinction between partners and their creditors:
The first reformative partnership legislation. Journal for Juridical Science, 42(2),
104-119.
Hibberd, M., & Kingston, S. (2017). Voluntary administration-Is your appointment
valid?. Australian Restructuring Insolvency & Turnaround Association
Journal, 29(1), 18.
Jade. (2018). Corporations Act 2001. Retrieved from https://jade.io/j/?
a=outline&id=216652
Kershaw, D. (2012). Company law in context: text and materials. England: Oxford
University Press.

Khan v Miah [2000] 1 WLR 2123
Kokotovich Constructions Pty Ltd & Ors v Wallington [1995] 13 ACLC 1113
Legal123. (2016). How to Choose the Right Business Structure in Australia. Retrieved
from https://legal123.com.au/how-to-guide/business-structure-australia/
Macaura v Northern Assurance Co Ltd [1925] AC 619
Mayanja, J. (2014). Clarifying the Object of Directors' Endeavors: What Australia Can
Learn from the United Kingdom. UNSWLJ, 37, 874.
Partnership Act 1891 (SA)
R v Byrnes [1995] 130 ALR 529
Roach, L. (2014). Card & James’ Business Law. England: Oxford University Press.
Salomon v A Salomon & Co Ltd [1897] AC 22
Tiffin v Lester Aldridge LLP [2012] EWCA Civ 35
Wolff, L. (2009). The dark side to Australia’s equity revolution: Credit crunch, creditor
protection and corporate law. Ritsumeikan Law Review, 26, 95-109.
Woodgate v Davis [2002] 55 NSWLR 22
Zuryati, Z. A., Yusoff, M., & Azrae, A. N. (2009). Separate legal entity under Syariah law
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of Banking and Finance, 6(2), 8.