Detailed Report: Partnership Formation & Director's Duties Under Law

This report provides a comprehensive legal analysis of partnership formation and director's duties in Australia. It examines the criteria for establishing a partnership under the Partnership Act 1963, focusing on key elements such as agreement, shared profits, and intention to conduct business for profit, referencing the case of John Grimes Partnership Limited v Gubbins. The report further explores the duties of directors, including the duty of care and diligence as outlined in Section 180(1) of the Corporations Act 2001, and the duties of good faith and loyalty under Section 181, citing relevant cases like ASIC v Adler and ASIC v Hellicar. It discusses the potential penalties for breaching these duties, including fines and disqualification from managing companies, emphasizing the importance of directors acting in the best interests of the company and its stakeholders. The report concludes by applying these legal principles to a hypothetical scenario, determining whether a partnership was formed and evaluating the directors' compliance with their duties.

Running head: CORPORATE LAW
Corporate Law
Name of the Student
Name of the University
Author note

1CORPORATE LAW
Answer 1:
Issue
The issue of this scenario is related to whether there a partnership was formed
between Peta, Samuel and Thomas.
Rule
For the aim to govern a partnership business, the rules and regulations of The
Partnership Act 1963 must be followed in Australia. The term partnership has been defined
under Section 6 of the Partnership Act, 1963. This section illustrates the fact that a
partnership is a relationship between individuals who agree on carrying on transaction with
mutual interest of ensuring economic prosperity. Thereafter, Section 7 of the said act lays
down the regulations and rules through which a partnership is supposed to be created. The
provisions of Section 7(1) of the Partnership Act, 1963 the rules mentioned have
determined and explained whether a relationship can be called a partnership as per the
provisions of 7(2) and 7(4). Therefore to ensure that there is partnership, a few factors need to
be taken into consideration. For partnership to exist, it is important that there is a valid
agreement to that effect between the parties which is enforceable in law. Partnership is not
similar to an independent transaction and for partnership to exist, it is important to state that
the partners come together in a joint venture to execute their common goals. In partnership,
the rights and obligations between the parties are equally divided and there is similarity of
rights and duties and no one is placed at a higher pedestal than the others. The aim of
partnership is to work together with a view to make profit.
As per Section 7(2) of the Partnership Act, 1963 the concept of joint tenancy,
common tenancy and a part ownership does not result in forming a partnership in itself in

2CORPORATE LAW
relation to anything that is owned by tenants who have either shared or not shared the profits
with the use of things owned. The definition of partnership does not change with the change
in jurisdiction and it is uniform across the whole of Australia. Under Section 7(3) of the said
act, the profits that are shared are the gross returns which do not create any kind of
partnership despite the individual who has shared the returns. It is said that they share the
common interests in the property from where the returns are obtained. According to Section
7(4) of the mentioned act, an individual will gain shares of the profit through company’s gain
itself. Generally, it shall encompass everything when a person is treated to be especially a a
business partner when the company is incorporated. However, achieving these shares will not
make the individual a partner. Section 7(4)(a)(e) states that there are a few situations when an
individual will not be treated as a partner.
Firstly, when an individual gains other kinds of liquidated damages or a debt from the
exact profits of the organization, it will not make him a partner of the company. Secondly, if
an agent or any employee has provided the share of profit, then they will not be considered to
be a partner of that company. Thirdly, when in a written format, an individual produces a loan
to the business and it has the ascent of all the partners then the interest for these loans will not
be treated as a partner only because a loan was provided. Lastly, a child of a partner who is
no more because of the periodic payments shall be a part of the profits that have been made
by the business will not make him a partner of the company even if he has obtained the
profits.
It was observed in the case of John Grimes Partnership Limited v Gubbins [2013] it
was stated that there were a certain specific essentials though which a partnership can be
established. While carrying out the business, the purpose was to make the profit. If any of
these constituents do not exist then it will not be considered a valid partnership. The
partnership created by the legislation need to have the above mentioned conditions. If

3CORPORATE LAW
individuals do not have the intention for making profit from the business then they will not be
considered to be partners.
Application
Thomas, Samuel and Peta in this scenario had initiated a business where they take the
help of the internet for reselling the assets of the business that had gone through liquidation.
It was thereafter provided that an investment of $100,000 was produced by Peta in the
business and she was provided with an amount of $6,000 per month gratuity. However, she
did not receive any money in the formative years. It has been observed that Thomas and
Samuel were not being paid if the form of the employees but by taking the help of the
consultancy arrangements if the case of John Grimes Partnership Limited v Gubbins is
applied. In this case, partnership existed because the significant elements were present and it
intended to continue the business for the common purpose of making profit. Thereafter, it
was stated that as per Section 7(4) when an individual gets a part of the profit from the
business, then it is believed that it shall be everything that the person aims to be considered as
the business partner. Since, the profits are shared and the activities are carried out, those
persons will be treated to be as partners. In the mentioned provision, when an individual
produces a loan to the business not orally but in a written format that is signed by all the
partners then it is suppose to receive an interest for any kind of loan that will not make him
the partner. As per this section, Peta was given an amount of $100,000 would not be treated
as a loan since she had received no interest amount for it and there was no written contract in
place existed in the on going company.
Conclusion
Lastly, it can be concluded stating that partnership was formed between Thomas,
Samuel and Peta.

4CORPORATE LAW
Answer 2:
 The director’s duties of diligence and care
In Australia, there is a duty that the director is imposed with while executing his
functions in companies but not in the provisions of common law under the
Corporations Act, 2001. Section 180(1) of the Corporations Act, 2001 discusses the
duties of a director. The rules and regulations of the directors and officers should
work with duty of care and diligence while carrying out the activities that were
provided by the organization. Other duties were imposed on the directors as per the
provisions of the Corporations Act, 2001. This general duty is considered to be one of
the most legislated of the other duties that were imposed on all the existing directors
as per the provisions of the said act. Under this particular section, there is a test that
makes the application of this section wider. It has been observed that this section was
considered to have been violated when a director is put in power based on the same
reasons and his actions can be differentiated from which is already taken by the
director by the director who had committed the breach. In this broader scope of duty,
there are plenty of circumstances where the directors are were held to have violated
their duties. The directors were observed to have contravened and breached the
provisions for a civil penalty. In this scenario, there was a civil penalty provision as
per the Corporations Act where if there is a violation where the Court stated the
declaration of contravention based on the rules as per Section 1317E of the above
mentioned act. When the Court has provided the declaration for breaching the
provisions of the Australian Securities and Investment Commission (ASIC) based on
the sections 1317H, 1317S, 206C of the mentioned act and ask for the penalties of the
Act. Therefore, as per Section 1317H, the directors who were held liable of
contravention for paying a fine to the commonwealth and the maximum limit was

5CORPORATE LAW
$200,000. Additionally, the Court had asked the directors for providing the
compensation to any party who had detriments because of the breach of duty care and
diligence by the directors as per Section 1317S of the Act. The Australian Securities
and Investment Commission have the power and order to impose a ban of the
defendant directors for managing the operations of any kind of companies in
Australia. As per the relevant Section of 180(1) can be held to be violative are many
in number and a some have been explained because of the rulings that were made
proved in law cases of Australia. The company owns the duty of care and diligence by
not the shareholders of the company and not the directors. Hence, the directors who
are in charge of the maximum number of shares in a company are considered for the
contravention of the mentioned section. In the case of ASIC v Adler such a situation
was noticed. It was held by the Court that there was a loss in the company, which is a
requirement for invoking a section but a loss of reputation is treated to be an actual
loss. In such cases, the judges had given the rules that state the financial statements of
the company that was not approved in a legal manner and therefore, the duty was
considered to be contravened. Thereafter, in the matter of Australian Securities and
Investments Commission v Rich, it was observed that when there was approval from
the Board regarding misstatements, it is treated to be a breach of duty. Sections 674,
728 and 1041H explained the obligations of disclosure and the Court held that as a
violation of this duty. The directors were imposed with penalties that consist of heavy
fines and restrictions of the management. There was a significant breach of the duty
the Court had imposed a ban of two years.
 The director’s duties of good faith and loyalty
The duty of care and diligence is similar of the duty of good faith and loyalty and both
in provisions of the Corporation Act and common laws. The legislation mandates that

6CORPORATE LAW
the directors are obligated to work with diligence and care and in good faith. The
directors have to put the interests of the company and the employees ahead of them
and they need to ensure that their acts are directed to reach a common good. The
director has to act in the best interest of the company and the employees and their
intention should be bona fide. Section 181 of the Corporations Act, 2001 contains the
duties of the directors wherein it is stated that the director has to act in good faith and
the purpose of the decisions undertaken by the director should be reach a common
good and interest of the company. This section states that the discharge of the duties
and the executing the powers in the relation to the organization has to be in proper
faith and in the best interest of the organization. The activities must be directed for the
achievement of a good reason. However, this particular section illustrates the concept
of flexibility. It was noticed in the case of ASIC v Hellicar [2012] that the Court had
focused on the duties and interest of the company. It was therefore observed that the
directors had emphasized on other aspects instead of increasing the profit that resulted
in giving relevance. Thereafter, in the case of Australian Securities and Investments
Commission v Adler it was observed that the directors involved with the company
might not spend all the findings for the interest of the organization. Hence, where the
directors have not spend by the funds of the company that are in favor of the
shareholders who have invested in the interest of the company for improving the
reputation of the directors who have contravened the best interest of the organization.
Based on this particular duty, the directors should never go ahead with any kind of
personal interest. Therefore, there were transactions that had appeared between the
third party and interest of the family. Thus, when the duties are contravened for a
penalty the similar penalties are paid in managing business.

7CORPORATE LAW
References:
ASIC v Adler
ASIC v Hellicar
Australian Securities and Investments Commission v Rich
Australian Securities and Investments Commission v Adler
John Grimes Partnership Limited v Gubbins [2013
The Partnership Act 1963 (Cth)