Commercial and Corporation Law Partnership Act

Question: Describe about the Commercial and Corporation Law for Partnership Act. Answer: The type of business organisation currently operated by Aysha and Dilara is Partnership. As per Section 5 of the Partnership Act, 1958(Vic), General Partnerships are the types of organisations which include the relationship between two or more persons carrying on a similar business with a sole objective of earning huge profits and expanding their organisation globally. The Partnership should be legal and should not contain the features such as: Being registered under any Acts related to registration or incorporation of a Company. Being formed under any Act or Royal Charter. As per Section 6 of the above stated Act, there are rules for the determination of partnership existence which are as under: Rental contracts or common lease contracts does not lead to partnership even if the profit is shared proportionately. A Partnership is not created merely by the share of returns calculated in a gross manner. Even, if the above returns are arrived from a property which is held jointly or commonly, there is no chance of considering the same as a partnership organisation. Contingent payments or changing profits of an organisation do not lead to Partnerships. For example, Receipts of debt amount or instalments and other such amounts from the amount of profits earned do not constitute an act of partnership. Also, annuity or other such amounts received by spouse or children of deceased do not relate to an act of partnership. The above needs are met by business organisation formed by Dilara and Aysha and hence as per the stated Acts of The Partnership Act, 1958(Vic), it is a Partnership. It can be summarised as under: Dilara and Aysha have a common goal of running the winery as a going concern. They share profits equally as per their mutual consent. They do not fall under any Act of Company or Royal Charter. Current business structure is not suitable for the sale of a part of the wine business i.e Brothersglen Winery to Polat. The form of Incorporated Limited Partnerships must be adopted by Dilara and Aysha. According to section 50 of the Partnership Act, 1958, when at least one general and one limited partner come together, they form a limited partnership. Unlike, the general partnership which constitutes two or more general partners and profits are shared on the basis of the capital invested, Limited partnerships are limited to the part of amount invested by the investor. The type of limited partnership which helps in the effective continuation of risky ventures or projects for high growth and development is found in the incorporated limited partnerships. They are formed in order to acquire control and grip over such risky ventures. They are recognized after the registration procedure conducted by the Consumer Affairs Victoria in which an appropriate form is filed to get registered. Not more than twenty general partners can represent such type of partnership. In other forms of partnerships, there is no specific requirement of entering into a written agreement but in incorporated limited partnerships one need to obtain an agreement in writing. Also, the rules and plans decided to carry on the specific business needs to be mentioned in the agreement. The share of profit details along with the liabilities and functioning after dissolution must be mentioned. Also, the partners who enter on the basis of limited liabilities are not considered liable for the amount outstanding by the partnership. Such projects are undertaken in order to help other people facing a risky situation without taking any burden on themselves. Sections 50 to 67 of the Partnership Act, 1958 defines the limited partnerships which is suitable for Polat and the Winery. According to section 54 of the Act, one must lodge his application for registering under the Limited Partnership with the Commissioner by obtaining signatures of every partner whether current or proposed. Details such as name, address, relationship if any, capital contributed and other required information are to be provided in the form approved by the Commissioner. As per Section 58 of the said Act, a certificate of registration is provided by the Commissioner which states that the partnership formed is legal and lawful in all aspects. The formed organisation takes its place in the register which is the main evidence regarding such formation. The Liability of such Limited partner is restricted to the amount contributed by such partners. A Limited partner is not allowed to participate in the functioning of the business unless mentioned in the agreement. A limited partner is not regarded as a contributory to such business merely because of the following situations: When the limited partner is an employee, officer or a contractor of the general partner. When the partner just provide advices on behalf of the business and its general partners in a professional capacity or activities dealing with the partnership. Thus, Dilara and Aysha shall concentrate on the formation of a limited partnership to decrease their risk and increase the growth of their business. 2. Corporate Governance has become a major focus of all people after the great collapses such as Enron, WorldCom, and other highly qualified organizations across the globe. After, the increase in the bias towards the major shareholders and relatives there is a major need of the corporate governance. The board of directors is required to manage the company with significant responsibilities and duties. There has always been a variance in the interests of the directors and managers and thus to protect the interests of the shareholders and company there has been an introduction of corporate governance. A Non-executive member has full rights to exercise his independence, and he is considered to be a guarantee towards the accountability and permanence of the company. Such member keeps a check on the actions of the executive members of the enterprise and helps identify the opportunities which would prove to be a significant benefit towards the company. In the Listed companies of Australia, it was found that there would be a major reduction in fraud if the members exercise independence. The fraud will disappear if no duality in the position of the board and its members exist. The population of the independent or non-executive directors should form a major part of any organization. HIH Insurance and OneTel were among the major collapses and gave rise to Corporate Law Economic Reform Program which was related to the disclosures and reforms in the audit. The Australian Stock Exchange also adopted the International Financial Reporting Standards along with the formation of a Corporate Governance Council. Australia wanted to reinstate the public confidence by adopting ten major principles of Corporate Governance and performance. The Australian Stock Exchange recommends the nonexecutive directors to be independent in every -decision making process and not to be employed or to be a principal shareholder of the Company. The conflicts such as relations with the society could lead to the non-exercise of the independence along with depriving themselves of the duties and responsibilities required to maintain the corporate governance which is known as the resume independence. In this case, Leo is a non-executive director and is not a substantial shareholder as he holds only two shares in Thomas The Tank Engine Pty Ltd. He has the right to sustain his independence and guide the company in following the corporate governance procedures and principles. He has full powers to act against any illegal activities undertaken by the Board or executive members. Leo has been facing improper behaviour from the executive directors of Thomas The Tank Engine Pty Ltd in the form of: Not receiving dividends even if the revenue of the company increased 300%. A large pay raise and bonus have been voted by both directors Ruby and Amanda. They have arranged for a lease of two expensive cars which would be for their fashionable use. When Leo turned up against the above misbehaviour, he was decided to be removed, and after a meeting of members, he was removed from the board. The above is an act of proper misconduct by Ruby and Amanda as the non-executive member; Leo was just exercising his independent behaviour as per the Act of Corporate Governance. Leo being a non-executive member has full rights of knowing about the company so as to take part in the continuous development and meeting the needs strategically on a daily basis. Leo is required to: Exercise his independent capabilities in an efficient manner. Challenge the propositions of the executive members. Set and amend continuously, the goals and objectives strategically. Make sure that risk management and internal controls are implemented in a proper and efficient manner. Consider the plans of management in forecasting the future. Leo has full rights to: Participate and contribute to the interests of the company. Receive all the notice of Board meetings and papers containing additional information if any. Stand by the independent decisions and if any disagreement or wrong doings occur, can resign. Ensure that there is an active risk management control so as to face any risks encountered. Ensure avoidance of wrongful activities being undertaken inside the organization. Receive notice before being terminated by the company. The notice must be not less than three months and if necessary can be terminated without any notice. In the given case, Leo had been maintaining his due diligence and was not wrong in expressing his free view. According to the responsibilities mentioned under the act of corporate governance, a member has to monitor the illegal activities occurring within the company. Such member cannot be disqualified on the grounds of forwarding an independent view. Leo was correct in mentioning the issues faced such as the non-payment of dividends, high pay and the bonus of Ruby and Amanda, lease of expensive cars for personal use. He cannot be removed and can take appropriate action against the step undertaken by Ruby and Amanda. He requires proper notice of minimum three months along with the suitable reason of removal. 3. The Australian Corporation Act (ACA) has incorporated Section 180 which contains rules and regulations related to the duties and responsibilities to be discharged by the directors. It also includes the defense mechanism framed for the directors who acts in a careful manner but somehow skips his duty unintentionally. Subsection 1 to 180 of the ACA monitors the functions and responsibilities carried on by the directors. It expects a director to perform his duties in a manner expected from a rational man under the same circumstances. No specific requirement for consideration to education and background is mentioned in the subsection. Subsection 2 to 180 of the ACA offers a defense to the directors who unknowingly avoided certain duties as per the necessities of the Act. He can get protection of this section and avoid liability for breach of duties only under the following situations: He exercised his opinions and obligations in good faith and for suitable reasons. He had no substantial interest in the decision making which would have benefitted him personally. He had passed on his decisions to all other directors of the Company. His rational mind gave him permission to move ahead with the decisions which according to him would prove to be the best for the Company. Also, the Section 190 (2) contains matters wherein a director will not be held responsible for any acts if he has delegated the powers to another person only when the act is done in real belief, the grounds were logical, and a proper inquiry was carried on by such director. A court is granted power of providing relief to directors from civil liabilities under sections 1317S and 1318 only under appropriate circumstances. He had a belief that the company was not insolvent. He lacked participation in the management of company even after being an independent director. The Corporate Affairs Commission imposes a penalty of $200,000 on the breach of civil duties, and further criminal actions can be undertaken if required by the Commission. Such action is framed under the section 26 (2) of the Corporate Affairs Commission. Under the section 588(H) of the ACA, a director can get a safeguard against a breach of duty which resulted from the following mentioned under the section 588 (G): Insolvency already appeared or arose after the introduction of the director to the company. There was an existence of suspected grounds of an insolvency of the company. There was a failure on the part of the director to prevent such insolvency of the company. In the given case, there has been a discrepancy on the part of the directors with respect to the preparation and maintenance of the financial statements. The statements showed a profit instead of loss which occurred due to substantial investments in loss-making projects. Erol, the non-executive member, had failed in giving an accurate and fair view of the financial conditions of the company which was a breach regarding the Corporations Act and ACA. The management did not consider it necessary to go through and discuss the financial statements which proved to be a breach of duties required by the directors. The negligence of such directors leads to violation of duties and responsibilities as per the statutes. It was held in the recent case of Australian Securities and Investments Commission v Rich that even a non-executive director had the full responsibility towards the corporation and he should be accountable for any breach conducted without his due diligence. Hence, Kurt was also responsible for the violation carried out in respect of the financial misstatements. Erol being the executive director and also the Chief Financial Officer of TACH Ltd had major responsibilities of Keeping and maintaining the updated financial records containing all its transactions and helps explain the position and performance of the organization and presentation of a true and fair view of the financial statements. In this case, the directors did not intend to gain any personal interest. There was a lack of due diligence but not any deceitful purpose behind misstating the financial records. There was improper functioning of their managerial duties and capabilities as they overlook an important matter which led to a breach. The decision was made in a hurry, and due to time constraint, there was a skip of certain important issues, the main being considering the massive losses as profits. Thus, the director ignored the importance of section 180 (2) of the act by not acting in a careful manner. In the above mentioned case, ASIC v Rich, it explained that the delegated director was responsible, but the person who entrusted will be equally responsible as he did not take any steps to inquire into the final decision making. Time constraint is not at all acceptable; one has to follow the statute liabilities in a complete manner. Erol must have prepared and checked well whether why profit is being shown when there is a substantial incurrence of losses. Also, Vanessa, the managing director, could not take refuge under the section 190 stated above as she had not cross-checked the statements with the actual amounts. TACH Ltd. faced insolvency but still there was a fair chance for the director to get defended by the section 588 (H). Thus, there was a breach of duty and responsibilities on the part of every director be it Vanessa, Kurt or Erol. They must have considered the importance of providing the fair and correct position of a Company. Part B An audit is an opinion expressed in the financial report prepared by applying the required auditing standards and framework. The auditors judgment is helpful in increasing the reliability of the report drawn up, but they cannot assure the users about its effectiveness and efficiency of the affairs conducted by the management. CPA Australia and the Institute of Chartered Accountants in Australia require an auditor to comply with the following responsibilities: Keeping an independent viewpoint Maintaining confidentiality, integrity, and objectivity Maintaining professional proficiency and competency i.e. professional skepticism Taking due care and diligence Maintaining methodological standards An auditor has to be accountable and liable to all users of the financial statements be it externally such as the stakeholders and third parties who place their reliance on such statements. The users are mostly provided with the independent opinions and interested parties such as shareholders rely upon taking important investment decisions such as the acquisition of shares or other assets. Even the financial institution relies upon so as to gain knowledge for approval of loans and other credit rating facilities. The client will have to prove the negligence and that actual loss has been incurred by the auditors incompetency to perform the desired work. The auditor can be held responsible for the client, and they are judged by standards which mention the duties and skills required by the auditor to achieve its objectives. An auditor is held liable on the occurrence of the following: A recognized contractual relationship takes place The negligence of an auditor is recognized and proved There is an establishment of loss by a third party The cases where there is no formal relation and contract but still due care is to be exercised in the following cases: When the trade creditors become unsuccessful in recovering their debts outstanding on the occasion of the debtor company facing liquidation When the Bankers have provided the same with loans or facilities of overdraft When the debenture or shareholders hold stocks or debentures in the company The Investors who purchase share or company can get their investment washed off on the discovery of material incorrectness in the accounts of the company. A third party must prove the following to be successful in negligence against an auditor: There is an existence of a duty of care and responsibility. The auditor must have known that the financial statements would be followed and relied upon by the third party. The third party falls under a category of material concern and such criterion is termed as proximity. The damage faced by the third party is due to the preparation of the negligent financial statements, and the third party has proved that the same would have reduced if there was no reliance on such statements. The Third party must have the proof that there would be an entirely different action undertaken by him on the occasion of non-reliance of such false account statements. He should prove that he forcibly believed in the declarations and accounts to be an accurate and fair one. There are two major theories faced by the Third Parties in Australia which are explained below: Theory of Expectation Gap: In cases of corporate failures, the third parties have a tendency of blaming the auditors for the failures which resulted from the ignorance of management and directors. The major responsibility lies with the management and not auditors. Auditors are not bloodhounds, they are watch dogs. The auditors are not at fault in cases where the management has not considered responsibility to provide the auditors with the accurate and real data and other business details which prove to be material. Theory of Deep Pockets: When the third parties search for a solvent party to recover their losses, they target the auditors. Even if the auditors are not capable of provided the desired recovery, the third parties tend to blame and go against the auditors for the failures to recover the amount. They target the auditors because the company cannot guarantee anything except a very minute benefit.