LAWS20059 - Corporations and Business Structures: Liabilities Report

This report provides a comprehensive analysis of corporations and partnership business structures, exploring the associated liabilities and fiduciary duties. It begins by defining and differentiating between a company and a partnership, elaborating on the liabilities of each, including those towards third parties. The report then delves into the fiduciary duties of directors in companies and partners in partnerships, referencing relevant sections of the Corporations Act and Partnership Act, respectively. Part C offers client advice based on the case of ASIC v Vizard, highlighting the legal implications of breaching director duties. The report incorporates key cases such as Wang v Rong, Walker v European Electronics Pty Ltd, ASIC v Cassimatis, and others to illustrate legal principles and practical applications. In conclusion, the report emphasizes the significance of adhering to the legal obligations for both business structures. This assignment was prepared for LAWS20059.

Running head: CORPORATIONS AND BUSINESS STRUCTURE
CORPORATIONS AND BUSINESS STRUCTURE
Name of Students
Name of University
Author Notes

1CORPORATIONS AND BUSINESS STRUCTURE
Introduction
In this report the partnership and company business structures have been discussed with
special mention towards the liabilities and the fiduciary duties that can be seen as present in both
the business types. A partnership is a business started by two or more individuals with a common
goal of earning profit and sharing ownership and the responsibilities for the profits and loss
generated and the management of business. On other hand company is a business which is a
legal entity for carrying on commercial or industrial enterprise and is made up of an association
of people both natural and legal. In the report an illustration has further been provided for
providing advice to the client about the duties of the directors in a company by way of a case.
Part A
Under the business law the term ‘liability’ means any financial debt or obligation of the
business that arises in the course of the operations of the business. Liabilities include mortgages,
loans, accrued expenses and deferred revenues. The liabilities towards the third parties are
present in both partnership and company business structures. The liabilities present in both
business structures have been discussed as follows:
Company
Any company that has been formed and registered under the provisions of the
Corporation Act is defined as a company under section 9 Corporations Act1. A company is a
separate ‘legal entity’ from its owners, unlike a sole-trader or a partnership business, and has the
1 Corporations Act 2001, s.9

2CORPORATIONS AND BUSINESS STRUCTURE
same rights as any normal individual can have. The company’s capacity includes incurring debts,
to sue or be sued. As the company is a separate legal entity there are no personal liabilities on the
director of a company on the company’s behalf. Nonetheless the company can held a director
responsible jointly and collectively for any act or omission thereof which can be prejudicial for
the interests of the company and is a violation to the duties discharged by the director. The
fiduciary duties of the directors are mentioned in the Corporations Act, sections 180-1832.
The duty of a director, can typically be seen as to act for the company’s benefit as a
whole. There is the liability to act for the collective interest of all members that is owed by the
director. The director, however, needs to consider other interests as well under certain situations.
According to the Australian Securities and Investment Commission (ASIC)3 any director can be
held responsible for the breach of any obligation even when the company has long been ceased
to be existing. Section 588G4 states that a director would be held liable for the debts incurred by
the company under certain situations if the company is unable to pay off the debts. The duty of a
director under this section is to prevent the company from performing insolvent trading if the
director has the reasons to believe that the company either is already insolvent or is suspected to
be insolvent in the future. ‘Lifting the Veil’ refers to the circumstances where the shareholders
can be held liable for the debts that the company has incurred in spite of the rules of separate
legal liability of the company being present. The director of any company can be held liable to
the liabilities towards the third parties by the company. The exception of such liability is present
only in a pecuniary penalty order or a compensation or if the liability does not arise out of the
acts conducted in the good faith.
2 Ibid, s.180-183
3 Australian Securities and Investment Commission
4 Corporations Act 2001, s.588G

3CORPORATIONS AND BUSINESS STRUCTURE
Partnership
The relation between two or more individuals to start a business with the common goal of
earning profit as well as sharing the responsibilities and the liabilities is defined as ‘Partnership’
under section 6 of Partnership Act5, it also includes the incorporated limited partnerships. All
partners would be affected in a similar way if a liability arises for the actions of any single
partner. According to section 5 Partnership Act6 all the partners act as an agent of the business
and the other partners for business purpose and the conducts of the partners to carry out the usual
business. This section would not be applicable if there is authority of the partner to act in any
particular matter in the business or if the person with whom the partner is dealing either knows
that the partner does not have any authority to act as such or does not have the knowledge of him
to be a partner in the firm. In other words, the element of this section is that the act or omission
of any partner is only binding towards the other partners in the limitation of the knowledge of the
third parties. Any third party creditor can bring only one single action against the partners as the
partners in a partnership business are jointly and severally liable for incurring debts. In the
provisions of section 53 of the Partnership Act7 the limited liabilities of a limited partner is
defined 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 section was seen to be discussed in the case Wang v Rong
[2015]8. The fraudulent conduct of one partner would give rise to the liabilities for all the
5 Partnership Act 1963, s.6
6 Partnership Act 1958, s.5
7 Partnership Act 1981, s.53
8 Wang v Rong [2015]NSWSC 1419

4CORPORATIONS AND BUSINESS STRUCTURE
partners in the business. This was discussed by the court in the case Walker v European
Electronics Pty Ltd (in liq) (1990)9.
Part B
Fiduciary Duties
Fiduciary duty can be defined as the legal term which describes the relationship between
two or more parties in which they are obligated to be acting in the best interest of the other. The
fiduciary duties can be seen as arising when a company or an individual is seen as requiring to be
putting the interests of the others before the interests of their own. Fiduciary duties are the
relation of mutual trust and mutual confidence between two individuals. The fiduciary duties of a
company business structure and a partnership business structure are discussed in brief as follows:
Company
Under the provisions of the Corporations Act 2001, section 180-183 the fiduciary duties
of the directors have been mentioned. According to the section 180 of the Act10 a director should
act with diligence and care to an extent which is expected from a reasonable person. Under
common law Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8)
[2016]11 states a similar duty. In the case the breach of the duty of a director to act in due care
and diligence had been discussed by the court. For the breach of duty under section 180, the
‘business judgment rule’ provides a ‘safe harbor’ to the directors. Under section 181 of the Act12
the duty of director is mentioned to be acting in good faith and for the company’s best interest
9 Walker v European Electronics PtyLtd (in liq) (1990) 23 NSWLR 1
10 Corporations Act 2001, s. 180
11 Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023
12 Corporations Act 2001, s. 181

5CORPORATIONS AND BUSINESS STRUCTURE
and avoid any conflict in interest. This section was discussed in the case RBC Investor Services
Australia Nominees Pty Limited v Brickworks Limited [2017]13. The case Forty Two
International Pty Limited v Barnes [2014]14 was seen as discussing the provisions of section 182
of the Act15, which prohibits a director to improperly use his position to take any personal
advantage or any gain. In the section 18316 a director is further refrained from the misuse of any
information received from the company that is deemed confidential for any kind of personal gain
or advantage as held by the court in the case SAI Global Property Division Pty Limited v
Johnstone [2016]17. Section 588G18 states that a director would be held liable for the debts
incurred by the company under certain situations if the company is unable to pay off the debts.
The duty of a director under this section is to prevent the company from performing insolvent
trading if the director has the reasons to believe that the company either is already insolvent or is
suspected to be insolvent in the future. This section was discussed in the case Inner West
Demolition (NSW) Pty Ltd v Silk [2018]19. A ‘defense of safe harbor’ can be seen to be provided
to the directors for their protection under the section 588GA20.
Partnership
The relation between two or more individuals to start a business with the common goal of
earning profit as well as sharing the responsibilities and the liabilities is defined as ‘Partnership’
under section 6 of Partnership Act21. The partners in a business would always be fiduciary
towards each other. All the partners owe duties towards each other and the business. A fiduciary
13 RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756
14 Forty Two International Pty Limited v Barnes [2014] FCA 85
15 Corporations Act 2001, s. 182
16 Ibid, s.183
17 SAI Global Property Division Pty Limited v Johnstone [2016] FCA 1333
18 Corporations Act 2001, s.588G
19 Inner West Demolition (NSW) Pty Ltd v Silk [2018] NSWDC 136
20 Ibid, s. 588GA
21 Partnership Act 1963, s.6

6CORPORATIONS AND BUSINESS STRUCTURE
duty is present in every matter of the business in the partnership structure. In partnership
business honesty, good faith, loyalty, and fairness is required from the partners. In partnership
the fiduciary duties of the partners include the duty for being loyal, duty of care, duty for full
disclosure, duty of good faith and fair dealings, presumption of fraud and undue influence. The
breach of a partner’s duties has been discussed in the case Wright Prospecting Pty Ltd v Hancock
Prospecting Pty Ltd (No 9) [2012]22.
Part C
Client Advice
For advising the client about the duties of the directors of the company a case has been
illustrated in this report. The case illustrated is ASIC v Vizard [2005]23. In this case the duties of
the directors have been highlighted.
ASIC v Vizard
The liabilities of a director was seen as the primary concern in the case ASIC v Vizard
[2005]24. Stephen William Vizard, the defendant in the case, had been acting as a non-executive
director of Telstra, incorporated under the Corporations Law of Australia. An investment for a
large sum of money was planned to be conducted by the company. The decisions for the
purchase and sale in regard to the investment was to be considered by the board of directors and
for that highly confidential information for the nature of the transaction was given to them.
Vizard used the information for buying shares in three separate companies. Section 107 of the
22 Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd (No 9) [2012] QSC 182
23 ASIC v Vizard [2005] 145 FCR 57
24 Ibid

7CORPORATIONS AND BUSINESS STRUCTURE
Corporations Act 195825 states that a director is required to act honestly and should not use of
any information that has been acquired by him, from his position, for the gain of any undue
advantage for himself. As per the case Angas Law Services Pty Ltd (in liq) v Carabelas (2005)26
the object of section 107 and its successors encourage the good corporate governance by
deterrence. Observing the facts of the case the judges held the defendant liable for the breach of
232 of the Corporations Act 199427 and section 183 of the Corporations Act 200128. Vizard was
seen to be admitting the breach and the court ordered for a penalty of a sum of $390000 as civil
penalty and was disqualified for being a director of any company for the next 10 years.
Conclusion
Thus in conclusion from the above discussion it can be seen that both the business
structures have their advantages and disadvantages. In furtherance by observing the ASIC v
Vizard case it is advisable to the client that each of the duties of a director in a company is
crucial and if breached would lead to serious complications and legal troubles.
25 Corporations Act 1958, s.107
26 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507
27 Corporations Act, 1994, s.232
28 Corporations Act 2001,s.183

8CORPORATIONS AND BUSINESS STRUCTURE
Reference
Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 50
ASIC v Vizard [2005] 145 FCR 57
Australian Securities and Investment Commission
Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA
1023
Corporations Act 1958
Corporations Act 2001
Corporations Act, 1994
Forty Two International Pty Limited v Barnes [2014] FCA 85
Inner West Demolition (NSW) Pty Ltd v Silk [2018] NSWDC 136
Partnership Act 1958
Partnership Act 1963
Partnership Act 1981
RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756
SAI Global Property Division Pty Limited v Johnstone [2016] FCA 1333
Walker v European Electronics PtyLtd (in liq) (1990) 23 NSWLR 1

9CORPORATIONS AND BUSINESS STRUCTURE
Wang v Rong [2015]NSWSC 1419
Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd (No 9) [2012] QSC 182