Company and Association Law Assignment: Liability and Duties Analysis

This assignment report, prepared for LAWS19032, delves into the intricacies of company and association law. Part A examines the establishment and administrative costs associated with different business structures, including sole traders, partnerships, and companies, highlighting the simplicity and cost-effectiveness of sole trader setups while acknowledging the liabilities involved. Part B contrasts the liabilities of partners with those of individuals in proprietary companies, especially concerning contracts with external parties, emphasizing the unlimited liability of partners compared to the limited liability of shareholders and directors. Part C then compares the duties imposed on partners, including fiduciary duties like honesty, good faith, and loyalty, with the duties of corporate directors, as defined by the Corporations Act and common law, such as the duty of good faith and the duty to act in the best interests of the corporation. The report underscores the importance of understanding these legal frameworks for effective business operations and risk management.

Part A. Business structures need to be set up and administered through the life of the
business.
In part A of the present assignment, there is a need to discuss the setting up and administrative
costs related with different business structures like sole traders, companies and partnerships need
to be explored. In this context, it is worth mentioning that the business structure of sole trader is
the easiest to establish. As a result, it can be stated that running the business through the business
structure of sole trader is easiest and also most inexpensive. Probably, due to this reason, the
business structure of sole trader has proved to be the most popular. When the business is being
run in the form of sole trader, the owner of the business enjoys more control and flexibility in
terms of managing the business. Similarly there are less taxes and legal issues present in case of
sole trader business. But it is also worth mentioning that what the business is being run as a sole
trader, the owner of the business has complete liability for the responsibilities of the business.
These include the debts and other obligations incurred by the business. Consequently, the owner
is going to be completely responsible for these obligations and the personal assets of the owner
may also be at risk. However in this case, it is possible to trade under the name of the owner. The
other option is to register the name of the business with the ASIC.
The next business structure is that of a partnership. In this case, generally two or more parties run
the business jointly, for the purpose of making profit. In this case, it has been agreed between the

partners that they will contribute investment, skills and labor.1 Similarly, the profit or loss made
by's is also going to be shared by the partners and they will also share the responsibility of
managing the business. However, a major difference that exists between the partnership and the
corporation is that under the law, a partnership is not treated as a separate entity, distinct from its
owners. The result is that all the partners share the responsibility for different aspects related
with the management of the partnership business. In this regard, it is also significant that a
written agreement should be present between the parties, even if it is not compulsory under the
law.2
On the other hand, a corporation is treated by the law as a legal entity separate from its owners.
Due to this reason, a corporation is permitted by the law to own assets in its own name. The
owners of the company can be described as the shareholders and the directors have the
responsibility to manage the affairs of the company. A company can also initiate legal
proceedings in its own name. But there are certain circumstances when the directors of the
company can be held personally liable. In order to create a corporation, the law requires that an
entity should be incorporated in accordance with the provisions of Corporations Act, and it needs
to be registered with the ASIC. It is possible to register a company in the form of a proprietary
company or as a public company.
Part B. Compare the liability of partners to the liability of individuals involved in a
proprietary company when contracts are entered into with outside parties
1 Baxt, Robert, L Bialkower and R. J Morgan, Guidebook To Partnership Law (CCH Australia Ltd., 1984)
2 Fletcher, K. L and K. L Fletcher, The Law Of Partnership In Australia (Lawbook Co, 2007)

The relationship of partnership is a relationship or Association present between two or more
parties. That has been created for making profit. Such persons can be individuals or other
entities. Therefore as against a company, the partnership is not incorporated under the law. The
result is that the rights and obligations that have been imposed on the partners are mentioned in
the partnership agreement. The law provides that the partnership agreement can be created in
writing or it it can be present orally also.
In case of the contracts that have been created with outside parties, the law provides that all the
partners are to be treated as having unlimited responsibility towards the outside parties. As a
result of this position, all the partners of the firm can be held jointly liable for the debts of the
firm. Therefore it can be stated that the business structure of partnership has much more liability
towards the outsiders as against a corporation. The reason behind this position is that a partner is
not only held liable for the contracts that have been created by him, but all the partners are held
liable for the acts of the other partners even if they did not have any control on them.3
In order to deal with this situation, it has been provided by the Partnership Act that each and
every partner is allowed by the law to enter a contract or to create liability that will be binding
for each and every partner of the firm as if the search partner has created the contract himself.
The law provides that any outsider, while dealing with a partner of the firm may presume that all
the other partners are going to be completely and equally responsible for the promise made to the
outsider.4
There are a lot of commercial entities operating as partnerships. Generally these entities are
required to deal with outsiders and third parties in the course of the business. In view of the
nature of the relationship that is created under the partnership, when the issue arises regarding
3 Higgins, Patrick F. P and Keith Lloyd Fletcher, The Law Of Partnership In Australia And New Zealand (LBC
Information Services, 2001)
4 Prine, T and Scanlan, G, The Law of Partnership, 1995, London: Butterworths

liability, the actions of liability are going to affect the other partners. In view of this situation, it
is worth mentioning that some liabilities that may arise in the context of the dealings with
outsiders, may have an impact on all the other partners of the firm.5
As compared to this situation, in case of a corporation, it has been provided by the law that
shareholders are not accountable for the obligations of the corporation. Reliability is restricted to
any amount that may be unpaid on their shares. In the same way, regarding the directors of the
corporation, the law provides that generally the directors are not liable. However, the directors
can be held responsible in following cases. Regarding the debts that were incurred by the
corporation at a time when it was insolvent; (b) to compensate the corporation for any loss
suffered by the corporation due to a breach of duty by the director; (c) in certain cases, on
account of the fact that liabilities have been incurred by the corporation when it was acting as a
trustee; or (d) in case of civil or criminal penalties. At the same time, the liability of the directors
may also arise when any personal guarantee has been given by the directors. While conducting
the business, the banks or the investors of the company may want that a personal guarantee of
security should be given by the directors over their personal assets in order to secure the
obligations incurred by the corporation. Therefore in such a case also, in the event of and the
failure of the company to repay its debts, the directors may be held personally responsible in
view of the personal guarantee given by and they face the risk of losing their personal assets. The
result is that the directors are under an obligation of maintaining diligent control and keep an eye
on the financial condition of the corporation for the purpose of making sure that a debt is not
incurred by the company if it is not in a position to repay such debt.
Part C
5 Varzaly, Jenifer, "The Enforcement Of Directors’ Duties In Australia: An Empirical Analysis" (2015) 16(2)
European Business Organization Law Review

in this question, a comparison has to be made between the duties that are imposed on partners
and the duties that have been imposed on the directors. Therefore in this regard, it is considered
that the partners are fiduciaries to each other in case of a partnership. The result is that there are
certain basic duties owed by the partners towards each other. The fiduciary duties of partners can
be described as follows. The partners stand in a fiduciary relationship towards each other in case
of all the matters that are concerned with partnership. The result is that honesty, good faith and
loyalty are the features of the relationship of partnership. Consequently, a very high level of
standard of care is present in case of the partners. There is also a duty present on part of the
partners according to which they should act for common benefit. Another duty requires the
partners to desist from taking into each other by conceding any effects on making a
misrepresentation or adverse pressure.6
At the same time, the duty of good faith is also applicable in case of partners. The duty is present
from the preliminary negotiations that take place at the formation of the partnership and it
continues along with the relationship of partnership, even in cases where the relations between
the partners are strained. Therefore, the partners are under an obligation to exercise ideas level of
good faith. This duty is present even in case of the dissolution of partnership.7
The duty of loyalty has also been imposed on the partners. Consequently, the partners are under
an obligation to refer the interests of partnership business as against their own interests. The duty
of loyalty also requires that the partners should not allow any conflicts of interest and there
should be no self-dealing. If any conflict of interest arises, the partners are under an obligation to
6 Morse, G, Partnership Law, 4th edn, 1998, London: Blackstone
7 Banks, R and Anson, C (eds), Lindley on Partnership, 1995, London: Sweet & Maxwell

disclose such conflict to the other partners. Therefore, the partners should refrain from the
activity completely
Duty of Care: the purpose of this duty is to impose an obligation on the partners according to
which they should act reasonably regarding the obligations that have been imposed on them to
manage the business of the partnership. Generally it is required under this duty that the acts of
the partners should be reasonable and they should take place in good faith. Consequently, when
the partners are making decisions for the business of the firm, there should be no conflict of
interest.8
Duty of Disclosure: it is required by the partnership law that all information related with the
business of the partnership should be were the partners if such information is going to affect the
interests of the partners. Therefore, this information includes the facts that are related with any
potential business opportunities, contracts that have been created by the contributions made to
partnership. The partners are also under an obligation to disclose the presence of any potential
conflict of interest with a partner, who may be going to receive a personal advantage from the
transaction.
At the same time, certain duties have also been imposed on the directors of corporations.
Therefore, a number of duties are prescribed for the directors by the Corporations Act and
common law. Some of the major duties that are present on part of the directors of corporations
can be described as follows:
8 Fletcher, K. L and P. F. P Higgins, Higgins And Fletcher The Law Of Partnership In Australia And New Zealand
(Thomson Legal & Regulatory Group Asia Pacific, 2001)

Good Faith: it is provided by this duty that the directors should act in good faith. It is also
required that the directors should prefer the interests of the corporation. This duty can be found
in s181, Corporations Act.
No Improper use of Positions: basically, it requires that the director should not be involved in
any improper use of their position in the company. It can be considered as an improper use of
position if the directors have used their position for attaining a personal advantage or to cause
any harm to the interests of the company. This duty is also present in section 182.
No improper use of information: This duty requires that the directors should not be involved in
any improper use of information that the information is received by the directors in course of the
business of the company. The use of the information will be improper, if it has been used for
making any personal advantage for the director.
Part D
Interview
Question 1: how many persons are going to start the new business?
Ans: the new business will be started by only one person.
Question 2: Have your decided the business structure

Ans: No, the business structure for the new business has not been selected yet. However, I
believe that the business structure of sole trader and the registration of a company are available
in this regard.
Question 3: are you looking for any particular benefit from the business structure. That is going
to be adopted?
Ans: There are certain benefits that I want from the new business structure. However, the most
important benefit that I am looking for from the new business structure is the benefit of Limited
liability. The reason is that I do not want my personal assets to be liable for the debts of the
business. In this way, I am looking for the business structure where my personal assets cannot be
used for the purpose of repaying the debts of the business.
Question 4: how are you going to raise funds for the new business?
Ans: the funds for the new business will be arranged from my personal savings. At the same time
and have inherited a house, which I plan to sell and the money will be used for the establishment
of the new business. At the same time, I also plan to take a loan from the bank.
Question 5: are you aware of the difference that is present in the liability of sole traders and
corporations?
Ans: I'm not aware of this difference. I believe that the owner of the business has to repay the
debts in all the cases.
Question 6: do you expect that other persons may join the business later on?
Ans: yes it is highly probable. I am aware that some friends of mine may be willing to join the
business after it has been established. The main concern that they have in this regard is that they

do not want their personal assets to be liable for the obligations of the business. A friend has
recently purchased a house. Therefore he is willing to join the business, but he does not want
access, like his house to be liable for the obligations of the business.

Bibliography
Banks, R and Anson, C (eds), Lindley on Partnership, 1995, London: Sweet & Maxwell
Baxt, Robert, L Bialkower and R. J Morgan, Guidebook To Partnership Law (CCH Australia
Ltd., 1984)
Fletcher, K. L and K. L Fletcher, The Law Of Partnership In Australia (Lawbook Co, 2007)
Fletcher, K. L and P. F. P Higgins, Higgins And Fletcher The Law Of Partnership In Australia
And New Zealand (Thomson Legal & Regulatory Group Asia Pacific, 2001)
Higgins, Patrick F. P and Keith Lloyd Fletcher, The Law Of Partnership In Australia And New
Zealand (LBC Information Services, 2001)
Morse, G, Partnership Law, 4th edn, 1998, London: Blackstone
Prine, T and Scanlan, G, The Law of Partnership, 1995, London: Butterworths
Varzaly, Jenifer, "The Enforcement Of Directors’ Duties In Australia: An Empirical Analysis"
(2015) 16(2) European Business Organization Law Review