Report on Corporations and Business Structures: Legal Analysis

This report provides a comparative analysis of corporations and partnerships as business structures, examining their respective liabilities to third parties and the fiduciary duties of their key personnel. It delves into the legal definition of both structures, highlighting the directors' responsibilities within a company, as defined by the Corporations Act 2001, and the liabilities of partners. The report further explores the concept of 'Lifting the Veil' in relation to corporate liabilities. Fiduciary duties within both structures, including the duties of care, good faith, and disclosure, are discussed in detail. The report also advises a client on the responsibilities of company directors, using the case of ASIC v Vizard [2005] as a case study to illustrate breaches of directors' duties and the implications of using confidential information for personal gain. The report emphasizes the importance of good corporate governance and the legal consequences of failing to adhere to these duties.

Running head: CORPORATIONS AND BUSINESS STRUCTURE
CORPORATIONS AND BUSINESS STRUCTURE
Name of Student
Name of University
Author Note

1CORPORATIONS AND BUSINESS STRUCTURE
Introduction
A partnership business can be described as the type of business where two or more
people could be seen to share the ownership, the responsibility for managing the business as well
as the profits or losses that are generated. On the other hand, a company is a legal entity made up
of an association of natural or legal people to carry on any industrial or commercial enterprise.
This report analyzes briefly about the business structures of a company and a partnership in
relation to the liabilities and the fiduciary duties present in both the structures. A further analysis
has been done in the report for advising the client about the directors’ duties in a company in
relation to a case.
Part A
Potential Liabilities to Third Parties
In a business the term liabilities can be described as the financial debts or obligations of
any business arising during the course of business operations. In both the company business
structure and the partnership business structure, liabilities towards third parties are present. The
liabilities of both the business structures are discussed below.
Company
According to the provision of section 9 of the Corporations Act 20011 a company has
been defined as a company formed and registered under this Act’s provision. The directors in a
company have no personal liability on the company’s behalf, since it is seen as a separate legal
1 Corporations Act 2001, s.9

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entity. However any director would be seen as collectively and jointly held for any act or
omission of any act which is found as prejudicial towards the company’s interests and further is
in violation of the duties that are discharged by the directors. The directors’ fiduciary duties are
mentioned in the sections 180-183 of the Corporations Act2.
The directors are seen as owing a liability of acting for the collective interest of all the
members. In certain circumstances, however, the directors can be needing to take into
consideration other interests as well. A director of any company, as per the Australian Securities
and Investment Commission3, would be held liable for any breach of their duties or obligations
long after the existence of the company ceases. According to section 588G of the Act4, under
certain circumstances a director might be held responsible towards the debts that have been
incurred by the company and the company is seen as unable of paying the debts. The term
‘Lifting the Veil’ is often used for referring any situation in which a shareholder is held
responsible for the debts incurred by the company despite of the rules being present of separate
personality or legal liability of the company. In furtherance a company can make the directors
liable for any third party liabilities.
Partnership
Partnership has been defined in the section 6 of the Partnership Act 19635 as relationship
between two or more individuals starting a business together with the common interest to earn
profit and also includes incorporated limited partnership. When a liability can be seen as arising
2 Ibid, ss.180-183
3 Australian Securities and Investment Commission
4 Corporations Act 2001, s.588G
5 Partnership Act 1963, s.6

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because of the action of a single partner, it would affect all the partners similarly. Every partner
can be seen as acting as an agent towards the business as well as the other partners for the
purpose of the business and for the conducts of the other partners for carrying on the usual
business as per section 5 of the Partnership Act 19586. The provisions of this section is not
applicable if the partner does not have any authority for acting any particular matter of the
business or if the person dealing with the partner either is aware that the partner does not have
any authority to be acting for the business or is unaware that he is a partner in the firm. The
partners are seen as jointly liable for incurring any debt and only one single action can be
brought against the partners by the creditors. The liabilities of the limited partners are mentioned
in the section 53 of the Partnership Act 19817 as “A limited partner in a limited partnership is
liable to contribute towards the liabilities of the firm but so as not to exceed the amount shown in
relation to that limited partner in the register as the extent to which that limited partner is liable
to contribute or the part of that amount that remains unpaid.” This was mentioned in the case
Wang v Rong [2015]8. Further it could be seen in the judgment of the case Walker v European
Electronics Pty Ltd (in liq) (1990)9 that for the fraudulent conduct of one partner all other
partners would be held liable.
Part B
Fiduciary Duties
The legal obligations of any individual to act in the best interest of another party can be
described as fiduciary duties. When any individual or any company is required to put the
6 Partnership Act 1958, s.5
7 Partnership Act 1981, s. 53
8 Wang v Rong [2015]NSWSC 1419
9 Walker v European Electronics PtyLtd (in liq) (1990) 23 NSWLR 1

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interests of someone else before their own interest, fiduciary duties are seen to be arising then.
Because of the relation of mutual trust and confidence between two or more people the fiduciary
duties arise. This report analyzes in brief the various fiduciary duties of the partnership and the
company business structures.
Company
The fiduciary duties of the directors of a company are given under the sections 180-183
of the Corporations Act 2001. Section 180 of the Act10 requires a director to act with diligence
and care up to a certain degree that is expected by any reasonable person. In the common law
also a similar duty can be found. The breach of the duty to act in due care and diligence was seen
as being discussed in the case ASIC v Flugge (No2) [2017]11. For the breach of duty under this
section a ‘safe harbor’ is provided to the directors by way of the business judgment rule. Section
181 of the Act12 provides the duties of a director to act in good faith and avoid conflict of interest
for the best interest of the company as was held in the case Greenhalgh v Arderne Cinemas Ltd
[1951]13. Section 182 of the Act 14 prohibits a director for any improper use of his position for
any personal advantage or gain as was held in the case Parke v Daily News Ltd [1962]15. Section
183 can be seen as refraining a director further from misusing any confidential information
gained from the company to use it for any personal advantage or gain as was seen to be
happening in the case MG Corrosion Consultants Pty Ltd v Gilmour (2014)16. According to
section 588G of the Act17, under certain circumstances a director might be held responsible
10 Corporations Act 2001, s. 180
11 ASIC v Flugge (No2) [2017] VSC 117
12 Corporations Act 2001, s. 181
13 Greenhalgh v Arderne Cinemas Ltd [1951]
14 Corporations Act 2001, s. 182
15 Parke v Daily News Ltd [1962]
16 MG Corrosion Consultants Pty Ltd v Gilmour (2014) FCA 990
17 Corporations Act 2001, s.588G

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towards the debts that have been incurred by the company and the company is seen as unable of
paying the debts. According to the provisions of this section the duty of a director involves to be
preventing insolvent trading of the company if the company is either already insolvent or a
reasonable ground is present for the director to suspect future insolvency of the company.
Section 588GA18 a defense of safe harbor is provided for the protection of the directors.
Partnership
Partnership is described as carrying on business with the common intention of earning
profit by two or more individuals. The partners are always fiduciaries for each other in a
partnership business and can be seen to be owing duties to each other and the business. in every
matter relating to the business there exists a fiduciary relation between the partners. Partnership
requires honesty, good faith, loyalty, and fairness. The fiduciary duties of the partners in a
partnership can be seen as including the duty of care, duty of good faith and fair dealings, duty
for being loyal, duty for full disclosure of presuming fraud and undue influence. The duty of
good faith and fair dealing is seen to be requiring the partners to continue exercising the highest
standard of good faith in all the transactions relating to the partnership business. A partner is
seen as required placing the interest of business over their own interests and should avoid any
kind of conflict in interest. The duty of a partner is to be disclosing to the other partners fully
about any information in relation to the business. It is the duty of a partner to act in a prudent
manner that is considered as reasonable. The burden of proof in claims for the allegation of
breach of any fiduciary duty in any unfair advantage in any business transaction lies with the
partner himself and no one else.
18 Ibid, s. 588GA

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Part C
Advice to the Client
To advice the client on the responsibilities of the directors of a company an illustration of
a case has been provided in this report. The case in question is ASIC v Vizard [2005]19. The facts
of this case are seen as falling under the corporate governance. The case can be seen as
highlighting the responsibilities and the duties of a director significantly.
ASIC v Vizard
The primary concern of the case ASIC v Vizard [2005]20 was the liability of a director.
The Corporations Act 2001 provides that the companies that have been listed under the Act are
subjected to be complying with the duties and responsibilities mentioned in the Act. The Act
does not bound only the company’s operations but the directors and the officers can also be seen
to be held obligated towards the company for following several duties. The case was seen to be
coming under the category of corporate governance. In the case several potent layers for the
duties and the responsibilities of the directors had been significantly highlighted. The fiduciary
duties of any director and officer of the corporation were provided by way of statutory force by
the provisions that can be seen to be contained in the second chapter of the Corporations Act.
The provisions that regulate the conduct of the directors are given immense importance. In this
case a significant instance of the breach of duty of a director for preventing a corporation from
trading while being in insolvency had been provided. The defendant of the case Stephen William
Vizard was seen as a non-executive director of Telstra, which was incorporated under the
Corporations Law of Australia. The company involved in the transaction of large sums of
19 ASIC v Vizard [2005] 145 FCR 57
20 Ibid

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money. Decisions in regard to the sale and purchase of investments had been considered by the
board of directors. To make an informed decision the directors were given highly confidential
information in relation to the nature of the transaction and the strengths and weaknesses of the
particular transaction . According to the section 107 of the Corporations Act 195821 a director
should be acting honestly and should not make use of any information that he has acquired for
the gain of any undue advantage for himself. According to the judgment of the case Angas Law
Services Pty Ltd (in liq) v Carabelas (2005)22 the object of the provisions of section 107 and its
successors can be seen to be present for encouraging good corporate governance by deterrence.
As per the facts of the case the defendant was in breach of section 232 of the Corporations Act
199423 and section 183 of the Corporations Act 200124. As per the provisions of the section 183
(1)25 a person having the capability for obtaining any information by way of the power of his
position of director or an officer would be subjected for the protection of the confidential and
important information that have been in association with the operations in an organization.
Vizard was seen to be using the information obtained for buying shares in three different
companies. In this case Vizard, being a director of Telstra, was in breach of his duties as he
could be seen as being involved in the following activities:
 He was guilty for obtaining information that was confidential by the use of his position of
being a director of the company.
 He was also seen as making improper use of the information obtained by basing his
decision to purchase or sell the subsequent shares on the information he had.
21 Corporations Act 1958, s.107
22 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507
23 Corporations Act, 1994, s.232
24 Corporations Act 2001,s.183
25 Ibid, s. 183 (1)

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 This improper use of information could be seen to be indicating towards his opportunity
for gaining profit or advantage.
Later the breach of the duties was admitted by the defendant and he was ordered to pay a
sum of $390000 as civil penalty. Further he was disqualified from being the director of any
company for the subsequent 10 years.
Conclusion
Thus it can be concluded that in both the business structures advantages and
disadvantages are present. Further observing the ASIC v Vizard case the client is reminded that
each and every duty of a director in a company structure is important and mistake in following
any of the duties would be leading to complications and legal actions.

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Reference
Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507
ASIC v Flugge (No2) [2017] VSC 117
ASIC v Vizard [2005] 145 FCR 57
Australian Securities and Investment Commission
Corporations Act 1958
Corporations Act 2001
Corporations Act 2001
Corporations Act, 1994
Greenhalgh v Arderne Cinemas Ltd [1951]
MG Corrosion Consultants Pty Ltd v Gilmour (2014) FCA 990
Parke v Daily News Ltd [1962]
Partnership Act 1958
Partnership Act 1963
Partnership Act 1981
Walker v European Electronics PtyLtd (in liq) (1990) 23 NSWLR 1
Wang v Rong [2015]NSWSC 1419

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