LAWS20059 Term 1: Corporations and Business Structures Assignment

This assignment report, completed for the LAWS20059 Corporations and Business Structures course, analyzes various business structures, including sole proprietorships, partnerships, and proprietary companies, comparing their startup and administrative costs. It examines the concept of personal liability arising from unsettled business debts, differentiating between structures with and without separate legal entities and referencing the Salomon v A Salomon and Co Ltd case. The report further explores the fiduciary duties of partners and company directors, highlighting agency relationships, duties of care, and the importance of avoiding conflicts of interest, as established by both common law and the Corporations Act 2001.

COMMERCIAL AND CORPORATION LAW
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PART A
The startup costs associated with different business structure tend to vary with the prime reason
being the different extent of legal formalities involved in the incorporation. Perhaps the most
simplest of all business structures is the sole trader which has minimal legal formalities
associated with starting the business. The business name ought to be registered which involves a
nominal fee of only $ 361. In the context of partnership business also, the start up costs are quite
less. This is especially the case in general partnership where there is no need to get the
partnership agreement registered even. However, registration is mandatory in case of limited
partnerships and LLP that involves minimal charges2. For the incorporation of a proprietary
company, the legal formalities required are quite cumbersome. This is apparent because there are
a host of documents required such as article of association, consent from directors, company
constitution (if available), company directors and shareholders details along with appointment of
company secretary. The implementation ot these documents takes time and also legal fees.
Besides, the host of documents required, registration is mandatory with a fee paid to ASIC to the
tune of $ 5003.
After the business structure is set, regular costs related to administration may be incurred which
are also linked to the underlying structure in place. In case of sole trader, the costs of
administration on an ongoing basis are practically zero besides the annual registration fee of $ 36
which is required as there is no compliance or reporting burden on this structure. A similar
situation is witnessed for the partnership structure since overhead regulation is minimal and if the
agreement is unregistered, then no registration fee is required periodically. However, in case of
proprietary company, there is a need to comply with the provisions of Corporations Act4 besides
annual submission of accounts. Also, the annual review fee paid to ASIC for renewal of
registration is in excess of $2505.
PART B
1 Robert Bryan Vermeesch and Kevin Edmund Lindgren, Business Law of Australia (Butterworths, 12th ed. 2014) 190
2 Andy Gibson & Douglas Fraser, Business Law (Pearson Publications., 8th ed, 2014) 143
3 Julie, Cassidy, Corporations Law Text and Essential Cases, (Federation Press, 4th ed., 2015) 112
4 Corporations Act 2001 (Cth)
5 Shayne Davenport, Business and Law in Australia (Thomson Reuters, 4th ed, 2014) 165

The personal liability that arises for owners from unsettled business liabilities would essentially
be driven by the legal status of the structure in question. This is pivotal because if the business
structure possesses a legal entity that is independent from the underlying owners, then it would
imply a separation between the business structure and the owners. This separation would prevent
the claims on the business structure to automatically pass on to the owners for settlement6.
Consider the case of partnership firm which does not have an independent legal status. As a
result, it cannot be defined without the underlying partners. This makes the partners vital to the
existence of the partnership firm. As a result, if any of the partner decides to retire or sell the
stake, the existing partnership needs to be dissolved so that a new partnership can be formed7.
Also, any business related contracts that are enacted by the partnership firm are executed in the
partners’ name only as the partnership firm is not a legal entity and thus not capable to executing
contracts. This practically would imply that all contracts entered for the partnership business are
not applicable on the firm but the partners jointly in accordance with their shares in the profit8.
This essentially places unlimited personal liability on the partners with regards to any business
liability that is not discharged by the firm as the partners and the firm are used interchangeably.
The assets and liabilities of the partnership firm belong directly to the partners and are not
separate assets since there is only one legal entity which corresponds to the partners.
Considering that there are different forms of partnership that are possible, hence personal
liability of partners can be lessened through usage of limited partnership and LLP (Limited
Liable Partnership) instead of a general partnership9.
The company structure is quite different from partnership owing to the fact that is has a corporate
personality and thereby is considered a separate entity legally from the shareholders. Evidence in
this regards can be provided by referring to relevant statutory provisions. The key meaning of
this legal status is that the various contracts that are required for conducting business can be
entered by the company in its name and does not require any mention of the underlying
owner(s). This allows owners the flexibility in relation to the share transfer which now can be
flexible without impacting the existence of the company. Also, the separate legal entities also
6 Ibid 1, 178
7 Clive Turner & John Trone, Australian Commercial Law, (Thomas Reuters, 32nd ed., 2019) 171
8 Athule Pathinayake , Commercial and Corporations Law, (Thomson-Reuters, 2nd ed., 2014) 189
9 Wayne Pendleton & Roger Vickery, , Australian business law: principles and applications, (Pearson Publications,
5th ed., 2015) 219

leads to the conclusion that the assets of company and that of the owners are essentially separate
and cannot be interchangeably used. The natural corollary that is derived from the previous
statement is that the contractual benefits and obligations are to be borne by the company and not
directly by the owner10. If the contracts are entered into by the company and it enjoys the profits
or benefits derived from the same, then it would mean that the losses or liabilities arising from
this should be applicable to the company only. As a result, the personal assets of the owners are
safe as they only have limited liability. This limited liability would comprise of the amount that
they have invested in the company which may not be recoverable if the company is declared
bankrupt11.
The leading case which is indicative of limited liability for the owners is Salomon
v A Salomon and Co Ltd12 case. This case involved that the defendant (Mr. Salomon) had a
leather shoe business which was run using a sole trader business structure. However, a company
was established so as to provide ownership rights to the family members of the defendant. The
shoe business was purchased by the company and shares distributed as compensation to
defendant who owned 20,000 shares out of 20,006 total shares. Additional money was lend by
defendant for which debentures were issued. Soon after, the financial performance of the
company deteriorated and it was declared bankrupt. The outstanding creditors of the company
claimed that defendant should settle the dues as company structure was a sham but the court
ruled in favor of the defendant citing limited liability of owners. This limited liability can be
used by individuals to conduct frauds and illegal activities in the protection of the company
structure. As a result, there is a provision of unveiling the corporate veil which was indicated in
Gilford Motor Co Ltd v Horne13 where company structure was used for providing protection
against breach of restraint of trade clause.
PART C
The duties that the partners owe to each other would be determined on the basis of the agency
relationship that the partners share. The impact of this agency relationship is that fiduciary duties
10 Ibid. 5. 199
11 Ibid. 6. 188
12 Salomon v A Salomon and Co Ltd [1897] AC 22
13 Gilford Motor Co Ltd v Horne [1933] Ch 935

arise for every partner directed towards the other partners as has been indicated in the verdict of
Birtchnell v Equity Trustees, Executors and Agency Co14 case. In a partnership relation, a key
aspect is that the partners should have mutual trust on each other that neither of the partners
would take an adverse action which would impact the partners jointly in an adverse manner. The
importance of trust in a partnership business structure has been highlighted in the Cameron v
Murdoch case. With regards to enacting business contracts, partners have the requisite authority
for contract enactment. Since any of the partners is essentially acting as an agent of the other
partners, hence any contractual agreement implemented would hold the partners jointly liable.
Owing to this arrangement, there is a duty on every partner so as to discharge the business
related duties in good faith so that the innocent partners do not suffer any harm. Additionally, it
is expected that the partners should not make any secret profit which would have adverse impact
on the profitability of the partnership firm and thereby does not serve the best interest of the
other partners (principal)15. The partners also have the duty not to engage in any action that could
potentially lead to conflict of interest. This is especially true in relation to running a competing
business without informing the other partners. Considering that agent (partner) is required to
further the interest of the principal (other partners), hence situations involving conflicting
interest ought to be avoided16.
In the context of company while it has been established in the previous section that it has a
separate legal entity but despite this it requires the assistance of agents to implement the business
contracts. The key role in this quest is essentially played by the company directors who are the
primary agents appointed by the company. Owing to this agency relationship arising between the
company directors and directors, fiduciary duties tend to arise which need to be discharged by
the directors17. A key requirement is that the power given to the directors ought to be used for
proper purpose and should be aimed at enhancing the value of the company. Considering that
critical actions are taken by directors with regards to company processes and strategy, it is
essential that directors should act independently and should not be unduly influenced by any
outsider. As the agent, it is essential that the directors must bring in business for the company
and should not aim to earn secret profit from the business operations. Situations where conflict of
14 Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384
15 Ibid. 2, 190
16 Ibid. 4, 143
17 Ibid. 3, 158

interest is present may result in the interest of the company being compromised owing to
personal interest being considered more significant. As a result, directors should aim to avoid
such situations18.
The fiduciary duties outlined above tend to arise on account of common law. However, unlike
other agents directors play a pivotal role in the healthy functioning of big corporations and lapses
(intentional or otherwise) can have significant implications not only on the company but the
various shareholders. As a result, Corporations Act 2001 highlights statutory duties on the
directors19. One of the duties that directors are expected to discharge through their conduct is the
duty to care which they have towards the company. The various business decisions should not
taken in a reckless manner and appropriate due diligence ought to be carried out20. Additionally,
the directors must conduct themselves in a honest manner along with good faith so that the
powers provided is used only for the correct purpose21.
A host of confidential private information is available to the directors which should not be
misused for generation of profit or benefits22. The decisions taken by the directors ought to be
driven by the interest of the company in mind which would not be the case if there is material
personal interest involved. Hence the directors should avoid all such situations. If such a
situation cannot be avoided, then the same should be informed to the board of directors through a
written notice 23. There is also a general duty on the directors to attend the director meeting and
use their vote in an independent and judicious manner. Further, it is imperative to keep the
company solvent and thereby no debt that cannot be serviced by the company should be assumed
by the directors24.
18 Ibid. 5, 190
19 Ibid. 7, 149
20 Austlii, Corporations Act 2001- Sec 180 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s180.html
21 Austlii, Corporations Act 2001- Sec 181 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s181.html
22 Austlii, Corporations Act 2001- Sec 182 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s182.html
23 Austlii, Corporations Act 2001- Sec 195 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s195.html
24 Austlii, Corporations Act 2001- Sec 588G
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/588G.html