LAWS20059 - Corporations & Business Structures: A Legal Perspective

This essay provides a comprehensive legal analysis of corporations and business structures, comparing partnerships and companies, and discussing the fiduciary duties of partners and directors. It highlights the concept of a separate legal entity for companies, offering protection to directors and shareholders through a 'corporate veil,' referencing the landmark case of Salomon v A Salomon & Co Ltd. The essay further contrasts the liability of partners in a partnership, where personal assets can be reached, with the limited liability in a company. It also explores the fiduciary duties imposed on both partners and company directors, emphasizing the importance of acting in good faith and avoiding conflicts of interest, citing relevant sections of the Corporations Act 2001 (Cth) and cases like ASIC v Rich and Birtchnell v Equity Trustees. The essay concludes by discussing the responsibilities of company directors and the legal consequences of breaching these duties, as illustrated in the case of ASIC v Vizard, where a director was found liable for using confidential information for personal gain.

Running head: CORPORATIONS AND BUSINESS STRUCTURES
Corporations and Business Structure
Name of the Student
Name of the University
Author Note

2CORPORATIONS AND BUSINESS STRUCTURES
Part A
Any business carried out by two or more individuals can take the form of either the
business structure of partnership or a company. The main points of distinction between the
partnership and the company lies in the liability that the participants of these form of business
structure has towards the outsiders third parties with respect to the liabilities incurred on
behalf of the company. Although, both the structure of partnership as well as company are
widely prevalent, but from the perspective of the liability of the members, company has a
better acceptance than that of the partnership business structure. This wide acceptance of the
business structure of company over any other business structure of similar nature is owing to
the distinct entity nature of this form of business before the law. A company is considered as
a separate individual and its identity should not be inflicted as the identity of shareholders,
directors or officers associated with it. The separate legal entity that a company is to be
considered as is extending a protection to the individuals associated with the management of
the company. Although the directors of the company and indirectly the shareholders are
vested with the authority to carry out transactions and the name of the company but it does
not render them to be liable for any obligations that has been incurred by the company. The
courts are not to reach the management of the company under any circumstances for any
discrepancies caused by the company towards their power to act on behalf of the company in
relation to third parties. This can be assured by a virtual corporate veil being casted upon the
management of the company providing immunity to them. This concept of corporate veil
being casted upon the management of the company has evolved in the case of Salomon v A
Salomon & Co Ltd [1896] UKHL 11. This provides immunity to the directors and the
shareholders from being incurred with the personal liability for actions taken by them in the
furtherance of conducting the business of the company. This corporate veil is casted upon the
1 Salomon v A Salomon & Co Ltd [1896] UKHL 1

3CORPORATIONS AND BUSINESS STRUCTURES
company as soon as it is incorporated on the provisions of the Corporations Act 2001 (Cth)2.
Again, this legislation restricts to the corporate veil to be considered as valid to the extent to
which the directors are not exceeding their power to act under the name of the company.
The another structure that can be discussed in case more than one person needs to form
business structure is the partnership. The liability casted upon the partners in case of a
partnership business is different from that of the liability of the persons associated with the
company. The liability that the partners are included with under the partnership business has
been provided in s 13 of the Partnership Act 1963 (Cth)3. This section renders all the partners
to be inferred as liable jointly as well as severally for the actions of any of the partners taken
under the authority that has been extended upon him being a partner of a particular. However,
this liability will only be extended to other partners if the partner acting in behalf of the
business has confined his actions to the authority conferred upon him by virtue of his position
as a partner in a particular business. This also incurs liability to other partners for the acts of
one of the partners. In case of the liabilities towards the third parties, the personal assets of
the partners can be reached in this form of business structure. Moreover, the partners of this
form of business has the ability to make their acts with third parties to be held binding on
other partners and also on the business. This is evident from the provisions contained in s 9 of
the Partnership Act 1963 (Cth)4. All the actions taken under the name of the business would
hold each and every partner liable.
In this present situation, Jekyll, Hyde and Pat has been interested in initiating of restaurant
food supply business and has been concerned with the structure of business they should select
for the same. In case they choose to select partnership, although the structure would allowed
them to carry out business with more than one partner but all the actions taken by any of the
2 The Corporations Act 2001 (Cth)
3 The Partnership Act 1963 (Cth), s 13.
4 The Partnership Act 1963 (Cth), s 9.

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partner or on behalf of the business will be held to be personal liabilities of each of the
partner. On the other hand, company would provide immunity to hold each of them liable for
the liabilities in court by the company. Hence, company would be appropriate for them.
Part B
A company as well as a partnership business are concerned with a business being carried
out by other individuals acting on behalf of the business. However, in case of a company
there is a limitation of the liability of the person acting under its name. But in case of
partnership the liability is unlimited and the partners are jointly and severally liable. Although
there is a difference in liability for both the individuals acting under a partnership business as
well as company, but both partners as well as the management of the company are to be
imposed with the fiduciary duty. This is because both of these business structures depicts on
agency relationship existing among the persons acting on behalf of them to that of the
business.
The directors of the company are interested with the management of the business as well
as other commercial affairs of the company. This power conferred upon the directors requires
the directors to have an agency relationship with the company and ensure fiduciary duties
towards the company as a consequence. The Corporations Act 2001 (Cth)5 also provides for
certain fiduciary duties that the directors of a company are required to satisfy for the purpose
of being rendered as compliant with the agency relationship. The term fiduciary duty implies
trust mutually existing between an agent with its principle. This applicability of fiduciary
duties in the actions of the directors is significant owing to the trust that the shareholders of
the company are having over the directors with respect to the affairs of the company. Under
the fiduciary duty, the directors of the company are under an obligation to ensure the best
5 The Corporations Act 2001 (Cth)

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interest pertaining to the company in all their actions while conducting the affairs of the
company. The actions of the directors of a company needs to be supported by a cause, which
is apt with the purpose of the company. Moreover, s 180(1) of the Corporations Act 2001
(Cth)6 requires the action of the directors of a company to be tainted with diligence and care.
The fiduciary duties pertaining to the directors of a company requires their actions taken on
behalf of the company to be for proper purpose and to be abstained from serving their
personal interest. This can be supported with the case of ASIC v Rich (2003) 44 ACSR 3417.
In case of partnership, each of the partners belonging to a partnership business is required
to be treated as the agent of both the business as well as other partners. Owing to this agency
relationship the fiduciary duty has been inflicted within the actions of the partners taken
under the name of the partnership business. There are several duties imposed upon the
partners that inflicts fiduciary nature. Such fiduciary duties are to be exercise by the partners
in accordance with the partnership agreement through which they have created their business
of partnership. The first fiduciary duty that the partner of a firm is supposed to ensure is the
duty to act in an honest way ensuring utmost good faith. There is a duty of each of the partner
acting on behalf of the company to ensure full disclosure of all the accounts to other partners
of the assets as well as information that the partner has revealed through their position in the
business. The partners are required to avoid all forms of conflict of interest in their actions
under the authority of the firm. No personal gain needs to be accrued to any of the partner of
a partnership business from the affairs of the business. In case of partnership business, the
actions of the partners are not to be inflicted with good faith but are required to act on the
authority that has been conferred upon them being a partner and not to exceed such authority.
This depicts the actions of the partners to be following the authorisation of the form and not
ensuring the utmost wellbeing of the firm. The fiduciary duties that extends towards the
6 The Corporations Act 2001 (Cth), s 180(1).
7 ASIC v Rich (2003) 44 ACSR 341

6CORPORATIONS AND BUSINESS STRUCTURES
partners in relation to the partnership business extends towards the authorisation that is
concerned with respect to the particular situation. It does not involve any good faith that
backs the adherence to the authorisation. This can be supported with the case of Birtchnell v
Equity Trustees, Executors and Agency Co Ltd [1929] 42 CLR 3848.
It can be stated from the above discussion that the duties of the directors are more
concerned with good faith to that of the partners. This is because partners of a business are
required to act under the authority of the agreement but the directors have discretionary
power which needs to be assessed under the scale of good faith.
Part C
The directors of a company are conferred with certain responsibilities as per the provisions
contained in the Corporations Act 2001 (Cth)9. In case any of these duties are breached by
directors of a company, the same would render them personally liable for the detriments of
the company. One such illustration of the duties of a director can be seen in the case of ASIC
v Vizard [2005] FCA 1037. In this proceeding, the director has been accused of utilising his
position as a director for serving an improper purpose and use the information he has availed
being a director in an improper way. All these have landed the director with legal
consequences holding him liable. The director under the proceeding has contravened his duty
to abstain from using confidential information as made available to him by virtue of his
position as a director. The director in this case also used the information in an improper
manner for the purchasing of subsequent shares by using the information. The main intention
underlying the use of the information to make a purchase of the shares was to obtain personal
benefits, which does not have any purpose for the benefits of the company. The director
8 Birtchnell v Equity Trustees, Executors and Agency Co Ltd [1929] 42 CLR 384
9 The Corporations Act 2001 (Cth)

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involved in this present proceeding has pleaded guilty for the contravention of section 183 as
well as 2329 of the Corporations Act 2001 (Cth)10.
In this proceeding several breaches of the duties of a director under the act has been
presented. The provisions contained in s 183 of the Corporations Act 2001 (Cth)11 requires
the directors of a company to abstain from indulging into any activity that involves the use of
information which is confidential to the directors of the company for personal benefit that has
no purpose to serve for the company. Again, as per the provisions contained in s 180(1) of the
Corporations Act 2001 (Cth)12, director of the company is required to ensure their actions to
be tainted it with the extent of care and diligence as that of a man of ordinary and reasonable
conscience. A director is also obligated to refrain from taking advantage of their designation
in the company for ensuring their personal benefits which has a consequence of resulting in
detriment of the company as for the provisions contained in s 182 of the Corporations Act
2001 (Cth)13. Moreover, a good faith needs to be ensured in all the activities of the directors
in furtherance of their functions as a director u/s 181 of the Corporations Act 2001 (Cth)14. By
contravening his duty of refraining from using his designation as a director for the purpose of
serving his own benefit has resulted in the director of the present case to be held liable for a
civil penalty.
This case has an immense impact in the further proceedings invoked from the breach of
duty that has been committed by the directors. The concept of insider trading and its position
under the corporations law has been strength with this decision. Moreover, stringent
enforcement of the directors duties has been ensure from the judgement delivered in this case
and to be extended to the further cases.
10 The Corporations Act 2001 (Cth), s 183 & s 2329
11 The Corporations Act 2001 (Cth), s 183
12 The Corporations Act 2001 (Cth), s 180(1)
13 The Corporations Act 2001 (Cth), s 182
14 The Corporations Act 2001 (Cth), s 181

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Part D
 I have been asked to advice a family where three adults comprising of Jekyll and
Hyde, two brothers and Pat a sister were proposing to open a restaurant business.
 They have been proposing to pursue the structure of partnership.
 However, there has been a concern among them regarding the consequences that they
might land into in the absence of a partnership agreements.
 The liability casted upon the partners in case of a partnership business is different
from that of the liability of the persons associated with the company.
 The liability that the partners are includes the liability that is connected with the firm
and the same can be traced to the personal property of the partners.
 The partners to be inferred as liable jointly as well as severally for the actions of any
of the partners taken under the authority that has been extended upon him being a
partner of a particular.
 However, this liability will only be extended to other partners if the partner acting in
behalf of the business has confined his actions to the authority conferred upon him by
virtue of his position as a partner in a particular business.
 This also incurs liability to other partners for the acts of one of the partners. In case of
the liabilities towards the third parties, the personal assets of the partners can be
reached in this form of business structure.
 Moreover, the partners of this form of business has the ability to make their acts with
third parties to be held binding on other partners and also on the business.
 All the actions taken under the name of the business would hold each and every
partner liable.
 This can only be avoided by the creation of the partnership agreement to specify the
extent to which the liability of the partners would be stretched.

9CORPORATIONS AND BUSINESS STRUCTURES
 Moreover, the extension of liability of the partners can affect the partners as the acts
done by other partners would hold all the partners liable.
 Moreover, the profit sharing ratio and other aspects relating to the partnership are to
be given within the partnership agreement.
 Moreover, in case of disputes arising out of partnership, a previously declared and
enumerated rights within the partnership agreement would assist the proper
administration and settlement of the situation.
 Moreover, the denying of liability under the partnership cannot be supported in the
presence of a partnership agreement.
 Moreover, defining the terms of the partnership agreement is also supported by the
presence of a proper partnership agreement.
 The institution of a proper partnership agreement would ensure the rights and
liabilities of the partners in question.
 Moreover, it would also avoid the probability of dispute that might arise owing to the
rights of the partners not being defined in a solid manner.
 All these requires the partnership to be carried out with the institution of a proper
partnership agreement consisting of all the terms clearly defined.