Analysis of Corporations and Business Structures Legal Framework

This report analyzes a hypothetical business case involving SRT Pty Ltd, Tipping Trust, and a wholesale partnership, assessing potential breaches of the Corporations Act 2001 (Cth). It examines the legal duties of directors (Sam and Rosa) and partners (Mia and Charlotte), focusing on sections related to care, diligence, good faith, misuse of position, and insolvent trading. The report evaluates the actions of all parties, including the appointment of Phillipa, and determines whether legal responsibilities were violated. It references key cases like Daniels v. Anderson and ASIC v. Healy to support its analysis. The report identifies potential breaches of fiduciary duties, duty of care, and the responsibilities of trustees. The report also analyzes the consequences of the actions and provides recommendations to address legal responsibilities and prevent future breaches. The report concludes with a summary of the legal obligations and potential violations.

Running head: CORPORATIONS AND BUSNIESS STRUCTURES
Corporations and Business Structures
Name of the Student
Name of the University
Authors Note

1CORPORATIONS AND BUSNIESS STRUCTURES
Question 1
Issue
In this paper, the issue to be discussed is whether the parties have any legal duties under
the Corporations Act, 2001 (Cth) or not.
Rule
The present issue must be discussed in the light of the Corporations Act, 2001 (Cth). It
cannot be ignored that the directors plays the significant role in case of every business
organization. Not only are the directors, the shareholders also important to run a business
organization in an effective manner. Section 9 of the said Act1 defines the term director in the
following way, such as director is such a person who is selected:
 Legitimately either as a director or as an additional director;
 Not legitimately as a director, but perform his duties as a director by holding the similar
place as a ‘de facto’ director;
 Not legitimately as a director, but performs his duties as a director by keeping the
instructions receiving from the appropriate authority as ‘shadow director’2.
The said Act3 also states that the directors have certain responsibilities towards the organization
and its members. The responsibilities are discussed below:
Section 180 of the said Act4 describes that, it is the responsibility of every director to take
the vital decisions of the business organization diligently and carefully like a sensible person.
1 Corporations Act, 2001 (Cth)
2 Goddard, Robert. (2008) "Directors' Duties." Edinburgh L. Rev. 12: 468.
3 Corporations Act, 2001 (Cth)
4 Corporations Act, 2001 (Cth)

2CORPORATIONS AND BUSNIESS STRUCTURES
Many authors are of the view that this duty must be utilized at the time of preparing accounting
reports of the organization.
Section 181 of this Act5 elaborates that, it is the obligation of a director to act in good
faith for the welfare of the business organization along with a proper purpose. This obligation
includes the duty to resolve the disputes. According to many authors it is a duty of faithfulness
and belief, which is also recognized as a mandatory responsibility under the Corporations Act,
2001 (Cth).
Section 182 of the said Act describes that the directors of any business organization must
not utilize the position of him/her inappropriately for attaining any unfair advantage for
himself/herself or for the advantage of certain dissimilar persons which may affect the
organization6.
In the same way, section 183 discusses that it is the responsibility of the director to not to
utilize any material information for an unlawful purpose gained by him/her by taking the
unlawful advantage of the position of a director in the business organization for attaining any
unfair advantage for himself/herself or for the help of some dissimilar individuals which may
affect the organization.
Section 588G of the said Act7 deals with the problem of insider trading which states that
a director will be held liable for insolvent trading only when any deal has been finalized by the
director after taking debt when the business organization is insolvent or may turn insolvent or
there subsists justifiable grounds which specifies that the organization may turn insolvent.
5 Corporations Act, 2001 (Cth)
6 Noakes, David. "Corporate groups and the duties of directors: Protecting the employee or the insolvent
employer?." (2001) Australian Business Law Review 29.2: 124-124
7 Corporations Act, 2001 (Cth)

3CORPORATIONS AND BUSNIESS STRUCTURES
As per section 198 of the Corporations Act, 2001 (Cth), a director can exercise all the
powers of a director except those powers which are decided to exercise after an annual general
meeting.
According to the fiduciary obligations associated with the partners of a partnership firm it
can be stated that the partners have a lawful obligation to execute the functions for the best
interests of the firm8. All the partners shall be held lawfully and personally responsible relating
to the duties in the said business. It is also important to mention that the partners are also held
responsible for the agreements entered into by the other partners. It is vital for all the partners of
a firm that they should perform honestly and needs to display good faith and justice towards the
other partners of the firm. In relation to the duty of care, it is the responsibility of all the partners
to perform their functions in a sensible manner like a cautious person at the time of leading and
handling the business organization. It is an essential requirement for all the partners that they
must reveal all the material information regarding the transaction of the organization along with
the possible risks to the other partners so that they can take effective business decisions based on
those information9.
Analysis
In this provided situation, Sam and Rosa are considered to be the solitary directors and
shareholders of the business organization, namely, SRT Pty Ltd. both of them are also
considered to be the recipients of the trust, namely, Tipping Trust. The Trust deals with the
business of locksmith.
8 Lafferty, William M., Lisa A. Schmidt, and Donald J. Wolfe Jr. "A brief introduction to the fiduciary
duties of directors under Delaware law." (2011) Penn St. L. Rev. 116: 837.
9 McConvill, James. "Directors' duties to stakeholders: a reform proposal based on three false
assumptions." (2005) Australian journal of corporate law 18.1: 88-102.

4CORPORATIONS AND BUSNIESS STRUCTURES
Whereas, Mia and Charlotte are considered to be the partners of a wholesale business.
Sam and Rosa sold all their shares after a certain period and used a small part of the profit to tour
Australia. Mia and Charlotte merged their wholesale business with the locksmith business of
Sam and Rosa. Charlotte took a decision regarding the alteration of tax invoices and charged
extra ten percent without intimating Mia. The excess amount of payment is made through a bank
account which is operated by Charlotte. Phillipa, who is the niece of Sam and Rosa, is appointed
by them to manage and run the SRT Pty Ltd. Several major monetary decisions was taken by
Phillipa in order to better the situation of the business even though she has every material
information regarding the actual monetary position of the business. Hence, the decisions taken
by Phillipa ultimately failed to boost the financial position of the organization and resulted into
the liquidation of it. All loans remained unpaid to the creditors.
According to the provisions of section 180 of the said Act10, Rosa and Sam have certain
responsibilities towards their business and they must perform their duties with proper care and
diligence like a prudent person would perform. Similarly, according to section 181, both the
directors of the business organization must perform their duties in good faith and for a particular
purpose. As per the provisions of sections 182, Sam and Rosa must not use their positions to
attain any unlawful advantage as which may cause any harm to their business. Both the directors
also must not use any material information to attain any illegitimate personal advantage which
may cause any harm to their business. There exists a possibility regarding the violation of section
588G, because both of the directors have sufficient knowledge relating to the monetary condition
of SRT Pty Ltd.
10 Corporations Act, 2001 (Cth)

5CORPORATIONS AND BUSNIESS STRUCTURES
As a trust ship creates a fiduciary relationships between the trustees, therefore being the
trustees of the Tipping Trust, Sam and Rosa need to perform the duties of a trustee which
includes:
 The duty to act in good faith;
 The duty of fair dealing;
 The duty to perform for the welfare of the beneficiaries;
 The duty to reveal important matters of the trust ship; and
 The duty of trust and faithfulness.
In this given scenario, Phillipa was appointed by Sam and Rosa, who is not competent to
manage the activities of Tipping Trust and SRT Pty Ltd. because she has no previous experience
in this regard. Therefore, Sam and Rosa are held liable for the financial decisions taken by
Phillipa and rely on her decisions under the provisions of section 189 of the aforesaid Act11.
As a director Phillipa exercises the power of a director and took some financial decisions
for the SRT Pty Ltd which is not contrary to the constitution of the organization. Therefore, she
is exempted from the provisions of section 198 of the aforesaid Act12.
Similarly, Mia and Charlotte have the lawful obligation to perform their duties in the
benefit and best interest of the partnership firm. Both of them shall be held responsible both
lawfully and personally regarding their responsibilities towards the partnership business. They
shall also be held responsible regarding all contractual agreements entered upon the other
partners as well. It is vital that both of them must perform their functions honestly by showing
good faith and they needs to be impartial towards the members of the partnership business.
11 Corporations Act, 2001 (Cth)
12 Corporations Act, 2001 (Cth)

6CORPORATIONS AND BUSNIESS STRUCTURES
According to the provisions of duty of care, Mia and Charlotte needs to perform their duties just
like a rational person do in any situation at the time of administering and handling the
partnership business. It is also important that they must reveal all the possible risks or benefits
available to each other for taking vital decisions for the business.
Conclusion
Therefore, from the above discussion it can be concluded that all the lawful obligations
mentioned above shall be considered to be the lawful duties of the parties.
Question 2
Issue
In this paper, the issue to be discussed is whether any lawful duties of the parties are
violated under the Corporations Act, 2001 (Cth) or not.
Rule
The case of Daniels vs. Anderson [1995] 37 NSWLR 438 is an appropriate case in this
regard. In this specific case the primary issue was related to the conduct of a director at the time
when any dispute occurs within the organization. However, in this case the court was of the view
that it is the responsibility of the director to behave like a sensible person in any situation13.
In ASIC vs. Healy [2011] FCA 717 case the same observation was made, such as Section
180(1) of the Director’s breach of incorrect and unreliable economic and monetary records has
been accepted and decided14.
13 Daniels vs. Anderson [1995] 37 NSWLR 438
14 ASIC vs. Healy [2011] FCA 717

7CORPORATIONS AND BUSNIESS STRUCTURES
Many authors are of the view that, this responsibility is breached when the directors
perform beyond their authority and violating the constitution of the business organization. The
dissimilar view was observed in Mills vs. Mills [1938] 60 CLR 150 case. In this case the court
held that, if distinctive powers and private interest were exploited by the director, he/she will be
held accountable for the violation of his/her fiduciary obligations with the organization15.
The case of Advance Bank Australia Ltd v FAI Insurances Ltd [1987] 12 ACLR 118 is an
appropriate case in this regard. In this specific case the court stated that it is the obligation of the
directors to apply the incomes and capital of the organization for a proper purpose and it must be
utilized in the benefit of the organization. It is the duty of the directors must not use the incomes
and capital of the company for any purposes related to their private use only16.
The case of Martin v Australian Squash Club Pty Ltd [1996] case is a landmark case in
this regard, where it was defined by the court that destruction of the fiduciary responsibility
occurred when any misapplication occurs related to the incomes and capitals of the would take
place in case of misapplication of the resources and capitals of the workplace occurs17.
The case of MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990 is a famous
case in this regard where the court enlarges that it is the responsibility of the directors associated
with a business organization not to utilize his/her position incompetently for attaining any unfair
gain for himself/herself or for the interest of some different persons which may affect the interest
of the business organization18.
15 Mills vs. Mills [1938] 60 CLR 150
16 Advance Bank Australia Ltd v FAI Insurances Ltd [1987] 12 ACLR 118
17 Martin v Australian Squash Club Pty Ltd [1996]
18 MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990

8CORPORATIONS AND BUSNIESS STRUCTURES
The case of ASIC v Vizard [2005] 145 FCR 57 is one of the famous cases in this regard.
In this case the court discussed that a director must not utilize any material information for an
illegitimate purpose received by him/her by taking the benefit of his/her position in the business
organization as the director of that organization for attaining any baseless advantage for himself
or for the benefit of some different persons which may affect the interest of the business
organization19.
In relation to the provisions of sections 588G, the case of Commonwealth Bank of
Australia v Friedrich (1991) 5 ACSR 115 may be regarded as a pertinent case in this regard. In
this specific case, pursuant to section 588G as delivered for Corporations Act, 2001 (Cth) it was
recognized that the director should be held secretly accountable for the debts continued by the
organization because the loan conventional was sham and misleading and the annual reports
should not have been signed by the director, where the assets were listed and recorded20.
The case of Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd [2012] QSC 182
is famous case of partnership. The key issue in this case having a relation with the obligations of
a partner and the rights of a partnership company. The inquiry was whether, after the apartment
was transferred to the defendant, the defendant had a continuing responsibility for dealing with
the apartment for the advantage and benefit of the relationship. The claim of the plaintiff claim
was disallowed21.
In the case of Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309,
which is also a famous partnership case the court stated that if a partner failed to reveal any
19 ASIC v Vizard [2005] 145 FCR 57
20 Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115
21 Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd [2012] QSC 182

9CORPORATIONS AND BUSNIESS STRUCTURES
information which may be important to the business, then that partner will be held liable for the
violation of the fiduciary duty of the partners22.
In Achurch vs. The Queen [2013] S 276 case, the court held that it is the responsibility of
a trustee to act for the welfare of the trust ship. The prosperity of the trust ship depends upon the
conduct of the trustees23.
Analysis
Applying the case of Daniels vs. Anderson [1995] 37 NSWLR 438, it can be said that
Rosa and Sam failed to perform their actions with appropriate diligence and due care towards the
organization by violating section 180 of Corporations Act of 2001 (Cth).
Applying the case of Mills vs. Mills [1938] 60 CLR 150, it can be stated that Rosa, Sam
and Phillipa failed to perform their duties for a suitable purpose and in good faith related to their
organization by violating section 181 of the aforementioned Act24.
Applying the case of Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115
in the given scenario, it can be said that Rosa, Sam and Phillipa violated the provisions of section
588G because after knowing the financial position of SRT Pty Ltd they allowed expenses in
relation to the organization.
Through the application of Wright Prospecting Pty Ltd v Hancock Prospecting Pty
Ltd [2012] QSC 182 case, it can be said that Charlotte has violated the responsibility of a partner
to reveal major information to other partners.
22 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309
23 Achurch vs. The Queen [2013] S 276
24 Corporations Act, 2001 (Cth)

10CORPORATIONS AND BUSNIESS STRUCTURES
Through the application of Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005]
NSWCA 309 case, it can be said that Charlotte has violated the fiduciary accountability of the
partners regarding performing in the interests of the partnership business.
Applying the judgments of the Achurch vs. The Queen [2013] S 276 case, it can be said
that Sam and Rosa has violated the responsibilities of trustees as they failed to perform their
duties for the welfare of the trust ship.
Conclusion
Therefore, from the above discussion it can be concluded that regarding the lawful
obligations of the parties, the above-mentioned violations were caused by the parties.
Question 3
Issue
In this paper, the issue to be discussed is what may be the lawful consequences faced by
the parties for the violation of lawful obligations based on the provided scenario.
Rules
A person, whether an officer or a director associated with a business organization, for
violating any of the provisions provided in section 180, 181, 182, 183 and 588G of the
Corporations Act, 2001 (Cth) , shall be held criminally liable under section 184 of the said Act25
for carrying out their conduct to the organization in a careless and dishonest manner.
A director or other officer associated with a business organization, who violates any of
the provisions provided in section 180, 181, 182, 183 and 588G of the Corporations Act, 2001
25 Corporations Act, 2001 (Cth)

11CORPORATIONS AND BUSNIESS STRUCTURES
(Cth) shall be held liable with civil penalties according to the provisions of section 1317E of the
said Act.
At any point of time when fiduciary duties are violated by the partners of a partnership
business, a suit may be brought against those partners who instigated the breach of duties. In the
landmark case of Wang v Rong [2015] NSWSC 1419, it was claimed that partners infringed their
fiduciary duties in respect of which a lawsuit was lodged against the partners26.
Analysis
By implementing the provisions of section 184 of the Corporations Act, 2001 (Cth) it
may be claimed that under this section Rosa, Sam and Phillipa are held criminally responsible for
carrying out their duties carelessly and dishonestly towards the organization and the persons
associated with it.
Through the application of section 1317E as given in the Corporations Act, 2001 (Cth), it
may be claimed that under this provision Rosa, Sam and Phillipa are held to be liable for civil
penalties.
By applying the rule as given by the decisions of a famous case of Wang v Rong [2015]
NSWSC 1419, it may be claimed that Mia may lodge a claim against Charlotte because the
fiduciary duty to act in the benefit of the company and to reveal pertinent material information to
the other partners associated with the organization was infringed by Charlotte.
26 Wang v Rong [2015] NSWSC 1419