Corporate Law: Partnership Act 1963 and Director's Duties in Australia

This report provides a comprehensive analysis of key aspects of Australian corporate law. It begins by examining a factual scenario to determine the existence of a partnership under the Partnership Act 1963, focusing on elements such as shared intention to earn profits and mutual business transactions. The analysis references relevant case law, including Smith v Anderson, to support the conclusion. The report then shifts to exploring the statutory duties of directors under the Corporations Act 2001, specifically the duty of care and diligence (Section 180(1)) and the duty to act in good faith (Section 181). It details the potential consequences of breaching these duties, including fines, compensation orders, and disqualification from managing companies, referencing cases like ASIC v Cassimatis and ASIC v Lindberg. The report emphasizes the importance of directors acting in the best interests of the company and adhering to disclosure obligations, highlighting the role of the Australian Securities and Exchange Commission (ASIC) in enforcing these duties. This document is available on Desklib, a platform offering a wide range of study resources for students.

Running head: CORPORATE LAW
CORPORATE LAW
Name of the Student
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Author Note

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Executive Summary
The purpose of this report is to establish the statutory duties provided in the Corporations Act,
2001 and the importance of other business structures that function within the Australian
commonwealth. The first part of this report analyzes a factual scenario based on the provisions of
the Partnership Act, 1963. The second part of this report analyzes the statutory duties of directors
and lays down circumstances under which such a breach can be inferred by the court.

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Question 1
Issue
The issue here is to determine if there is a partnership between Thomas, Samuel and Peta.
Rule
A partnership that is carrying on business activities within the jurisdiction of the
Australian commonwealth is governed and regulated by the provisions of the Partnership Act,
1963 (Hannigan2015). According to the provision of Section 6 of the Act, partnership can be
defined as the form of business structure in which involves business operations between two or
more individuals with an intention to earn profits (Benn and Dunphy2013). Section 7 of the act
lays down circumstances that would aid in inferring a partnership between individuals.
Section 7 (2) of the act provides that a partnership would not be created by merely
holding property together such as a tenancy in common or a joint tenancy or partly or wholly
owning a piece of property together even if the individuals derive profits from their joint holding
of the property (Gospel, Pendleton and Vitols2014). Section 7 (3) of the act lays down a similar
provision relating to gross earnings from a piece of property and states that a partnership is not
created by merely sharing gross earning earned from a property (Clarke 2018). Section 7 (4) of
the act further clarifies the circumstances under which a person would not be regarded as a
partner of a venture. These state that a particular individual would not be regarded as a partner if
(Stephens 2017):
 He receives any form of liquidated damages or debts from the partnerships profits.
 He receives part of the partnerships profits as a child or spouse of a deceased partner.

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 He is an employee or an agent of the partnership and receives a part of the profits.
 He provides a written loan to the partnership with interest which is signed by all the
partners.
The landmark judgment of Smith v Anderson (1880) 15 Ch D 247 laid down ways in
which a partnership can be inferred from a particular business relationship (Clarke 2013). These
are the act of carrying on business in common for the purpose of earning profits. In the absence
of these requisites it may be inferred that no partnership exists between the parties. The intention
of the parties to enter into business transactions mutually with a view of earning profits must be
present for a partnership to be inferred between the parties (Vandekerckhove2016). Thus
position has been clarified in the judgment in Wise v Perpetual Trustee Co Ltd [1903] AC 139.
Thus for a partnership to be determined from a business relationship between individuals
the elements of Section 6 and 7 of the Partnership Act, 1963 must be present. If the same cannot
be inferred it would not constitute a legally valid partnership between the parties as laid down by
the above judicial interpretations.
Application
In the given set of facts and circumstances a company was going into liquidation.
Samuel, Peta and Thomas entered into transactions selling the assets of the company on the
internet. A partnership can be inferred from the conduct of the parties and through the
transactions undertaken by them as they mutually agreed to undertake these business transactions
with a view of earning profits. This also follows the judgment in Smith v Anderson (1880) 15 Ch
D 247 where it was laid down that when individuals enter into business transactions which are to
be undertaken mutually with an aim of earning profits it would be considered a partnership. This

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also has the requisites of Section 6 of the Partnership Act, 1963 and thus maybe deemed a
partnership as per the provisions of the act. Section 7 (4) of the act further provides that when a
person receives a share of profits from the partnership and it is everything the individual would
be considered a partner of the venture. It has also been stated in Section 7 (4) of the act that an
individual who receives a share of the profits for giving a loan to the business venture with
interest would not be regarded as a partner however the amount brought into the business by Peta
($100,000) would not be considered a loan to the business venture as it does not have the
provision of payment of interest on the same. Thus the business structure that Thomas, Peta and
Samuel were transacting under would be considered a partnership business and would be
governed and regulated by the provisions of the Partnership Act, 1963.
Conclusion
To conclude there was a partnership between Thomas, Peta and Samuel and thus their
business structure would be governed by the provision of the Partnership Act, 1963.
Question 2
Director’s duties under the Corporation Act, 2001
Duty of care and diligence
The Corporations Act, 2001 prescribes various duties and obligations which must be
observed by the administration of the company (Klettner, Clarke and Boersma2014). A company
is generally administrated by the board of directors who’re tasked with the decision making
process. Diligence refers to an intelligible perusal and understanding of the implications and
effects of all documents reviewed and approved by the board of directors. A duty of care as

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defined in common law is an obligation owed to an individual or entity to observe the basic
standards of care and diligence a man of ordinary prudence would when acting in a particular
capacity. Thus a duty of care and diligence refers to a duty of the directors to ensure that when
they act on behalf of the company they observe a certain degree of diligence and intellect which
ensures that the rights of the company and the shareholders and other stakeholders are taken into
consideration (Herbohn, Walker and Loo 2014). The statutory provision for this is duty is
provided in Section 180 (1) of the Corporations Act, 2001. The Corporations Act, 2001 provides
a wide range of powers to the directors by virtue of their position in the organizational structure.
Thus when the directors of a company act or exercise these powers conferred upon them by
virtue of the act they must ensure that they do so with due care and diligence which safeguards
the rights and interests of the company. In case of civil penalties a “declaration of contravention”
by virtue of the provision of Section 1317E is made by the court (Edwardset al. 2013). The
governing body that takes cognizance of such an offence is the Australian Securities and
Exchange Commission (ASIC). After the declarations is made by the court as per the provisions
of Section 1317E of the Corporations Act, 2001 the ASIC would be able to apply for an order
awarding penalties prescribed under Section 1317H, 1317S, 206C of the act. The provisions of
Section 1317H of the act provides for a $200,000 fine that is payable to the commonwealth in
case of such a breach. Section 1317S of the act lays down that when a director is in breach of his
duty to observe due care and diligence under Section 180 (1) of the act he may be asked by the
court to pay compensation to any party that has faced legal injury for the same. It is also
provided for in the act that in case of such a breach the ASIC may bring a claim for proceedings
to the court in case of an order that disqualifies the individual from managing the affairs of
companies in the future. The underlying rationale behind the provision of a duty is that the

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interests of the company is of utmost importance and supersedes the interests of the shareholders.
It was held in the case ASIC v Cassimatis (No. 8) [2016] FCA 1023that a loss to the company
would be deemed a breach of the provisions of Section 180 (1) of the act and a loss to reputation
is also such a loss. It has also been held that when financial statements of a company are not
approved with regard to due process of law it would constitute a breach of this section. This was
held in the case Australian Securities and Investments Commission v Healey[2011] FCA 717
(Ferran and Ho 2014). Sections 728, 674 and 1041H of the Corporations Act, 2001 set out
various disclosure obligations which must be observed by the company. It has been held that a
failure to observe the disclosure obligations prescribed in these sections would also constitute a
breach of the director’s duty under Section 180 (1) of the Corporations Act, 2001. In the case of
ASIC v Lindberg[2012] VSC 332 the court had awarded a $200,000 fine and a 2 year ban from
managing companies due to a breach of the statutory duties under Section 180 (1) of the
Corporations Act, 2001 (Hendersonet al. 2015).
Director’s duty to act in good faith
The common law duties imposed on directors with relation to loyalty and good faith are
statutory provided for just as the duty to observe care and diligence. The duty to act in good faith
is statutorily provided for in Section 181 of the Corporations Act, 2001 (Lee and Fargher2013).
Thus the administration of a company (Board of Directors), when acting on behalf of the
company must do so in good faith. This provision safeguards the interests of the company and
ensures that the directors of company avoid conflicts of interests especially relating to financial
self-interests. This has been further judicially pronounced in ASIC v Hellicar [2012] HCA 17
where the court held that the ultimate rationale behind this duty was the protection of the
company’s interests (Cranston 2018).Thus in the event that the acts of the administration of the

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company do cause detriment to the interests of the company the ASIC can apply to the court to
award appropriate remedies (Du Plessis, Hargovanand Harris 2018). This also means that the
director’s obligation in relation to the acts of the company must comprise of decisions that
ultimately protect the rights of the company above all else. Thus the board of directors of a
company is placed at the apex of the organizational hierarchy due to the obligations that they are
entrusted (Whincop2017). Thus the purport of this obligation is to ensure that the powers
conferred upon the directors by virtue of their position are not misused or abused by the directors
relying on the protection provided by the corporate veil.

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Reference list
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governance.Cambridge University Press.
Edwards, M., Halligan, J., Horrigan, B. and Nicoll, G., 2013. Public sector governance in
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Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.
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accounting.Pearson Higher Education AU.

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Herbohn, K., Walker, J. and Loo, H.Y.M., 2014. Corporate social responsibility: the link
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