LAWS20059 Partnership and Company For Joint and Severable Liability

Partnership:

A partnership business is regulated under the provisions of the Partnerships Act 1982 (NSW). By far the partnership business structure is considered to be the most appropriate one for fulfilling daily business needs. In this regard, the advantages and disadvantages of partnership can be emphasized below.

The advantages can be emphasized as-

1. The structural framework of the partnership business is the major advantage. The matters relating to business are shared between the partners from time to time. The partners are wholly informed regarding any developmental and economical decisions. The risks arising out of business are informed to the shareholders in a timely manner.
2. The nature of partnership business is such that it is considered to be the cheapest form of business and free from complexities.
3. It is worthwhile to refer here that, in case of partnership business, certain discounts in regard to taxation can be observed. As a partnership firm is not a separate legal personality therefore; the partners are not liable to pay tax. There is ability on the part of the partners to reduce relative income and as a result of it; the partners are authorized to get rebate in tax returns.
4. The partners are authorized to make choices of their own in regard to business operations and in such process the prior consent of the higher authorities are not necessarily required.
5. The functioning of partnership business is simple, flexible and full of certainties. Therefore the partners are required to abide by the essentials of the partnership agreement.

There are certain disadvantages of the partnership business structure as well. These can be categorized as-

• As a result of the formation of partnership relationship between the partners, there is an existence of joint liability. In cases involving monetary shortage, the partners are sometimes liable to bear the financial losses. The partners are not at the authority to receive personal benefit from partnership relationship. In cases of breach of contract, the partners can be held to be personally liable.
• Any changes in the number of partners can disrupt business practices in the large extent. Therefore, the partnership agreement needs to be amended from time to time in order to ensure security in business.
• In regard to the business structure, the partners are not authorized to make any decisions of their own as prior consent of the existing partners is important.

Company:

The advantages of company can be summarized as-

1. The company being a separate legal entity can sue on its own and hence the members shall not be liable for the losses of the company.
2. The transfer of ownership is less time consuming and easier.

• The company does not rely upon the concept of joint liability.

The disadvantages on the part of the company can be emphasized as-

1. The incorporation of a company involves a lot of steps which is lengthy and costly.
2. In order to incorporate a company, various sources of laws and statements are relied upon. Therefore no secrecy can be maintained even in financial matters.

• In certain cases, the directors have gained personal benefit which is a major disadvantage as it forms the main reason for winding up of a company.

Recommendation:

It can be recommended that, partnership business is an appropriate form of business for the members of the family. However, the company has been protecting the interests of the shareholders from being personally liable. Partnership business being the simplest form of business is usually recommended in case of real estate because of fluctuation of housing prices at considerable rates.

ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72:

The legal significance of this case is that, executive and non-executive directors of a company are at the duty to maintain high standard of care. The directors and the officers of the company are bound by the provisions of both common and statutory laws. The case has been dealing with four different types of transactions. The defendants of the case were Rodney Adler, the non-executive director of HIH, Ray Williams (the founder of HIH) and Dominic Fodera (the director and Chief Financial Officer of HIH). In this case, the provisions of Section 260A of the Corporations Act 2001(Cth) have been contravened. The defendant Adler has caused multiple breaches of the duties of directors in accordance to the provisions of Sections 180, 181, 182 and 183 of the Corporations Act 2001 (Cth). Williams has breached the directors’ duties under the provisions of Section 180 and 182 of the Corporations Act 2001 (Cth). In this regard, Fodera has breached the duties of the directors under the provisions of Section 180(1) of the Corporations Act 2001 (Cth).

According to the provisions of Section 180 of the Corporations Act 2001 (Cth), a director is required to act with due care and diligence. In accordance to the provisions of Section 181, a director has not acted in good faith, if his actions were not for the best interests of the company. According to the provisions of Section 182, a director must not involve in improper use of position. In regard to the provisions of Section 183, a director must not use any information which would cause considerable loss to the company. The decision of the Court relies upon a subjective and objective test which is essential for the purpose of determining the breach of directors’ duties. In the case of ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72, there was contravention of directors’ duties on the part of Adler as he was supposed to act in good faith and for the best interests of both HIH and HIHC. In this regard, mention can be made about the fact that, Adler utilized a considerable amount in order to buy the shares of HIH for the purpose of gaining his own monetary benefit. The nature of the payment was such that it caused conflict of interests between Adler and the companies while pursuing interests out of profits. However, Adler intention of concealing the fact of purchasing the shares of HIH is a breach of directors’ duties.

Directors must ensure that they have not utilized their position improperly while discharging their duties. As a result of misuse of their position and information it is likely to cause detrimental harm to the organization. In this regard, the provisions of Section 183 of the Corporations Act, 2001 (Cth) can be referred which states that the information received by the director must be applied in accordance to the best interests of the company. In this scenario, the provision of Section 260A comes into light. In accordance to the provisions of Section 260A, a company is not at the authority to provide financial aid to an individual in order to gain personal interest and shares. In cases of breach of liabilities, the directors rely upon the business judgment rule which is contained in the provisions of Section 180(2) of the Corporations Act, 2001 (Cth).

In the conclusion, it can be stated that, the directors cannot rely upon the defense of best judgment rule in cases which are associated with conflict of interests. However, in the case of ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72, the best judgment rule is not applicable to Adler as there is an existence of conflict of interests. It is also noticeable that the acts performed by Adler were not done in good faith and proper purpose. The nature of the conflict of interests was such that it was related to financial interest in order to gain personal interest. Therefore such an action on the part of the defendants cannot be considered to be performed in good faith and for the benefits of the company. It can be finally concluded that, the present case has efficiently evaluated the statutory duties of the directors in the context of various judicial interpretations.

References:

Case:

ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72.

Journals:

Berge, Mari S. "How Do We Understand Partnership Working? Experiences from a Telecare Project." Social Policy & Administration 52.1 (2018): 50-66.

Cherif, Emna, and Delvin Grant. "Analysis of e-business models in real estate." Electronic Commerce Research 14.1 (2014): 25-50.

Fuschi, David. "A network based business partnership model for SMEs management." Entrepreneurship and sustainability issues 3.3 (2016): 282-289.

Henning, J. J. "Clarifying the distinction between partners and their creditors: The first reformative partnership legislation." Journal for Juridical Science 42.2 (2017): 104-119.

Luftman, Jerry, Kalle Lyytinen, and Tal ben Zvi. "Enhancing the measurement of information technology (IT) business alignment and its influence on company performance." Journal of Information Technology 32.1 (2017): 26-46.

Mitrega, Maciej, and Gregor Pfajfar. "Business relationship process management as company dynamic capability improving relationship portfolio." Industrial marketing management 46 (2015): 193-203.

Rae, David, and Catherine L. Wang. "The struggle for product development and innovation in a family-owned business: a knowledge transfer partnership approach." Entrepreneurial Learning. Routledge, 2015. 208-229.

Romani, Simona, Silvia Grappi, and Richard P. Bagozzi. "Corporate socially responsible initiatives and their effects on consumption of green products." Journal of Business Ethics135.2 (2016): 253-264.

Sellgren, John, and Robert Bennett. "Ownership and economic development: the partnership of business and local government 1." New Forms of Ownership. Routledge, 2017. 27-46.

Stadtler, Lea, and Luk N. Van Wassenhove. "Coopetition as a paradox: Integrative approaches in a multi-company, cross-sector partnership." Organization Studies 37.5 (2016): 655-685.