Corporate Law The Partnership Structure

Question: Describe about the Corporate Law for The Partnership Structure. Answer: Part A 1(a): Aysha and Dilara currently operating the partnership structure for their winery which named as Ankita. We can say this because partnership is formed when two or more persons agree to carry the business with a view to earn profit. In this partners agree to share the profit and loss mutually. Following are the important aspects of partnership: In partnership there must be an agreement between the partners, which contain all the terms and conditions of the partnership which is mutually agreed by the partners. In partnership partners share profit and loss mutually. In partnership partner share agent principle relationship with each other, as all the partners are agents of the firm as well as of other partners. In partnership there is no need to use the word limited, in this case name of the firm is just Ankita. There is no need of minimum capital in the partnership. In this form of business structure there is no separate legal entity of the firm, and partners have unlimited liability[1]. So it is clear after considering the above aspects of partnership that Aysha and Dilara are operating partnership because they both are sharing their profits equally, and in the name of the winery no limited word is used. Therefore, we can say that Aysha and Dilara are operating partnership form of structure[2]. (b) Aysha and Dilara decided to sell part of their business to Mr. Polat for arranging the working capital for their business. After considering the facts of the case, we can say that partnership is not the correct form of business if Aysha and Dilara decided to sell the part of the business. For Aysha and Dilara the appropriate business structure which supports their decision is company. Company is a separate legal entity, which require higher set up and administration cost because there are number of legal formalities to form a company. In Australia, companies are registered and regulated by ASIC. Company is a form of organization which is run by its directors, and owned by the shareholders of the company. In this form of structure shareholders of the company have limited liability, and except in some cases they are not liable for the debts of the company[3]. All the profits and losses of the company, and also all the assets and liabilities of the company are owned by company separately from its shareholders. Company has power to sue and sued by others, and company can buy and purchase property on its own name. It is necessary that company must have at least one director or shareholder to start the company. Directors of the company can also be the shareholders of the company, and it is must that they must be of age 18. Any person who is insolvent and convicted in an offence which is related to company cannot form company. Following are the advantages of the company: Shareholders of the company have limited liabilities. Ownership or part of the company can be easily transferred by selling shares of the company. Shareholders of the company can be employed by the company. Tax rates are lenient. It is easy to access capital in this form of business[4]. As we mention above, it is easy in case of the company to transfer the ownership of the company by transfer the shares. In three situations a person can transfer or sell the part of its business to another person: To expand the business: Idea of selling a part of the business to get some cash inflow in the business is good. Such cash inflow will help in expanding the business. Company can access those resources which create value: through the proceedings of sale company can access those resources which create value for the business. Reduction of risk: by selling the part of the business a person can reduce the risk, and get better resources to manage the risk[5]. In this case, both the partners can transfer the ownership of Ankita by transfer the shares of the company, which is beneficial for them. 2: In this case it is clear that Leo is the shareholder of the Thomas The Tank Engine Pty Ltd and holds two shares of the company for $500,000. In this case, Ruby and Amanda are the two executive directors of the company, and they are also the shareholders of the company. This year both the executive directors have decided that they are not paying the dividend for this year, and they both voted themselves a large pay rise in their salary and bonus also. They also lease two luxury cars for their exclusive use. Leo asked questions about the dividend policy and also raise objection on the lease of the cars. It must be noted that payment of dividend are the right of directors and directors are not obliged to declare and pay the dividend to the shareholders of the company. Directors are authorize to decide whether or not to pay the dividend, and for this purpose approval of shareholders are not required. But it must be noted that f directors declare the dividend it is necessary that they declare equal dividend for particular class of shares. Directors cannot pay higher value of dividend to some shares in same class, and lower value of shares in other class. In this case, Leo cannot raise objection on the decision of dividend against the directors, but he can raise objection for the unethical acts of directors[6]. It must be noted that as per section 254T, company cannot pay dividend unless it clear solvency test[7]. Following are the rights of the shareholders in company against the directors of the company, shareholders can claim against the directors of the company if they found that directors are breaching their duties towards the company. If members found that directors are breaching their duties, and make personal profit from their position then they can access to the court. There is an obligation on the directors of the company that they act in the interest of the company and its members. Shareholder can sue the company and its directors for their wrongful act. Shareholders can also seek injunction against the acts of the director which are in the nature which cause harm to company or shareholders. Shareholders can also rescind the contract in which directors has undisclosed interest. In general shareholders have following rights: Shareholders can challenge the resolution passed in a general meeting of the company if that resolution was against the interest of members of the company. any resolution passed by the directors and approved by members in general meeting can be questioned by the directors of the company. Shareholders can challenge the decision of directors, but could not question the validity of the decision. Shareholders can apply to the court for relief in case when companys affairs are not in the interest of the members, because of the resolution passed by the directors of the company. No minimum shareholding is required for seeking the relief in the court, its just that shareholder must have at least one share. Shareholders can also convene resolution in general meeting for removing the directors if shareholders think that directors are not acting in the interest of the shareholders[8]. In this case Leo can file application against the resolution passed by directors. Leo can question the rise in pay scale of the directors, and also question the purchase of luxury cars for the company, which are for the exclusive use of directors of the company. 3: directors duties ensure the good governance, and designed to ensure that directors are acting in the interest of the company. Section 198A of the Corporation Act 2001 states the powers of directors. The companys business is managed by the directors of the company by giving directions[9]. This power comes along with some responsibilities and duties. These duties are imposed on directors by the Corporation Act 2001. One of the most important duties of director is act with due care and diligence. This duty is imposed on directors by the common law, and equity terms. Section 180 of the Corporation Act 2001 states that any director or officer of the company must exercise their power and discharge their duties with due care and diligence that a person would exercise in the capacity of director or officer of the company. This section also covers the duty of care and diligence which are described in the common law and considered as general duties of directors[10]. It must be noted that on contravenes of this section civil penalty provisions are applied which are specified in section 1317E. Section 180(2) states the business management rule, according to this rule if any director of the company make any decision then it is necessary that they follow the requirements of section 180(1), common law duties and general considerations. Duty of care and diligence: it is the duty of director that they are informed about the companys financial position, including the information about the solvency of the company. Directors cannot delegate this duty by delegating the responsibility to any other officer or employee of the company. Directors cannot save themselves by the penal provisions in case of ignorance of companys affairs, especially in case when ignorance is on their own part. Directors of the company are liable towards the company, and also towards the members of the company. It is their duty that they act in the best interest of the company. Any negligence from the directors side in analyzing the financial statements of the company, and take decision which is not informed will result in great loss to the company. It is important for directors that they ask questions on the financial statements of the company if they think that financial statements are not correct. It is necessary that they analyze the financial statements of the company on their own, and just did not accept the financial statements which are prepared by the employees of the company. We can understand this with the help of the example, if director gets a balance which is not matching with the casual status of the company then it is the breach of the duty if director would not ask questions on that balance sheet. It is necessary that directors of the company make independent and informed decision regarding the affairs of the company. Directors guide the management of the company; therefore it is necessary that directors of the company are properly informed about the decision[11]. Directors can delegate number of responsibilities to another person, for example accounts preparation, and other matters which are related to day to d ay management of the company. In case of care and diligence duty, directors are expected that they take active interest in the financial affairs of the company, and just do not rely on the employees of the company. Directors of the company cannot delegate the responsibility of financial affairs of the company to any other person. It is necessary that they make judgment in accordance of good faith, directors must not have any personal interest in the decision, decision is informed and taken after analyzing the complete facts, and in last directors must believe that decision is in the best interest of company[12]. Any breach of this duty will attract provisions of civil penalty, and directors are penalized under the civil liability. Directors are penalized up to $ 200000 for the breach of section 180 of the Corporation Act 2001[13]. We can understand this with the help of the case law, Australian Securities and Investment Commission (ASIC) v Cassimatis. In this case the Federal Court of Australia determines the duty of care and diligence of directors which are defined under section 180(1) of the Corporation Act 2001. In this case court found that directors of the company breached their duties as directors, because in normal cases directors of the company are informed and aware that company breaches the provisions of corporation act. Court also applied test in this case to find whether or not director take reasonable care and diligence in exercising his power. Court held that application of this section is depend on the circumstances in which foreseeable risk is analyzed. It also includes the directors conduct at that time and effect of the decision of directors on the company[14]. In this case, it is found that directors of the company do not analyze the balance sheet of the company, and make wrong decision of investing more. In this case it is clear that directors of the company breach the section 180 of the Corporation Act 2001, because directors of the company that is Erol who failed to tell the directors about the loss and Vanessa failed to ask any questions about the financial statements, and Kurt as mentioned was absent from the meeting. In the present case, Erol, Vanessa and Kurt breach their duties on the position of directors. Directors of the company can be held liable for the breach of their duties under section 180 of the Corporation Act 2001. Therefore, directors of TACH Ltd are penalized under the provisions of civil liability. Part B Introduction: Auditors prepare accounts generally for its client, but some other parties are also relying on the accounts prepared by the auditors such as creditors and investors. Auditor owns a duty of care under tort and liability under contract towards its client, but towards the third party it only owns duty of care under tort. In this essay, we are discussing the concept that auditor is liable only towards its client only not towards third party. Auditors liability: It is clear that auditors are liable towards their clients only, but the issue related to liability of auditor towards the third party are discussing now a days at a high level. This issue was raised because not only clients but the third parties such as investors and creditors are also taken their decision on the report of the auditors. In recent years, there are global economic crises which collapse number of corporate around the world. These economic crises generate claims by third parties towards the auditors. Time is really uncertain for auditors from last few years because of the claims against auditors such as claims against KPMG and Ernst Young. The new provisions of company law limit the liability of auditors towards the third parties, which results in reduction of number of claims which are against the audit firms. This step is necessary because it is unfair to hold the auditors accountable for the accounts of the company. Directors of the company prepare the accounts of the company, and auditors only verify those accounts, and it is not possible in practical sense that auditors check and cross verify every single transaction. It must be noted that auditors are watchdogs but only for their clients, and not of creditors and investors of the company. we can understand this with the help of the case law that is Hercules Managements Ltd. v. Ernst Young, [1997] 2 S.C.R. 165 (Hercules Managements). In this case, shareholders claim against the auditors of the company, because of the negligence in audit report on which they relied. In this case, court applied two stages test to consider whether or not auditors owned duty of care towards the employees[15]. At first stag court consider whether any relationship is exist between plaintiff and auditors, which prove that plaintiff is relied on the work of the auditor, and court, found that yes relationship, exist between the shareholders and auditors because of which auditor owned duty of care towards shareholder. Under the second stage of the test court consider the policy of spectre of indeterminate liability, in this court held that plaintiff owns duty of care only in two situations towards the third party: Shareholder is known to the auditors, and he is the member of limited class of plaintiff known to the auditors. Shareholder relied exclusively on that statement, which was made by auditor[16]. In last we conclude that auditor should not hold liable exclusively towards the third parties, and it is necessary that auditors liability must be limited. Conclusion: In this essay we deal with the issue whether or not auditor should be held liable towards the third party, and in this essay we conclude that auditor owns duty of care towards the third party but only in some limited situations which are described in essay.