Directors’ Duty To Act In Good Faith And For Proper Purposes Notes

Class 12 Directors’ duty to act in good faith and for proper purposes

Corporations Act ss 181, 184.

CORPORATIONS ACT 2001 - SECT 181

Good faith--civil obligations

Good faith--directors and other officers

(1) A director or other officer of a corporation must exercise their powers and discharge their duties:

(a) in good faith in the best interests of the corporation; and

(b) for a proper purpose.

Note 1: This subsection is a civil penalty provision (see section1317E).

Note 2: Section187 deals with the situation of directors of wholly‑owned subsidiaries.

(2) A person who is involved in a contravention of subsection(1) contravenes this subsection.

Note 1: Section79 defines involved .

Note 2: This subsection is a civil penalty provision (see section1317E).

CORPORATIONS ACT 2001 - SECT 184

Good faith, use of position and use of information--criminal offences

Good faith--directors and other officers

(1) A director or other officer of a corporation commits an offence if they:

(a) are reckless; or

(b) are intentionally dishonest;

and fail to exercise their powers and discharge their duties:

(c) in good faith in the best interests of the corporation; or

(d) for a proper purpose.

Note: Section187 deals with the situation of directors of wholly‑owned subsidiaries.

Use of position--directors, other officers and employees

(2) A director, other officer or employee of a corporation commits an offence if they use their position dishonestly:

(a) with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or

(b) recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.

Use of information--directors, other officers and employees

(3) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation commits an offence if they use the information dishonestly:

(a) with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or

(b) recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.

Redmond [7.215]-[7.305].

An overview of remedies and their outcomes

Fiduciary obligations:

• Duty of good faith – requires directors to exercise their powers not only in that manner required by law but also bona fide for the benefit of the company as a whole

• Duty to avoid situations involving a conflict of interest without the company’s consent

• The duty of good faith may be distinguished from other general law duties in two principal respects:

  • It applies to directors when they make decisions or exercise powers FOR the corporation

  • It permits a challenge to be made to a particular decision take of transaction entered into by directors, the remedies include orders to set aside the decision or transaction. This requires proof that the other party had knowledge of breach of duty. The assumption that directors properly perform duties s129, must be displaced by knowledge or suspicion that it is incorrect.

Judicial reluctance to intervene in directors’ decisions

Courts have been reluctant to be drawn into disputes with respect to matters of corporate policy, the merits of particular corporate decisions or grievances as to the conduct of company affairs generally.

This is an ‘elementary principle’ that the court will not interfere with the internal management of companies acting within their powers, and has no jurisdiction to do so.

The elements of the duty to act in good faith

• This requires directors to act bona fide for the benefit of the company as a whole. Directors abuse their discretionary powers if they use them to achieve an advantage for themselves, a third party, a SH or class of SH’s, a stranger to the company, or to damages the company itself.

The duty of subjective good faith

• The first obligation is a duty to act honestly in the company’s interests as the directors perceive those interests. Judicial review is confined to inquiry as to each director’s subjective intent.

The duty to exercise powers for proper purpose

• The second element is a duty upon directors to exercise corporate powers only for the purpose for which they were granted to directors. The court can invalidate decisions which go beyond the purpose or do not benefit the company generally. This is also taken to be ‘for the purpose for which it was conferred, not arbitrarily or at the absolute will of the directors, but honestly in the interest of the SH as a whole’.

The duty to consult and act by reference to company interests

• The third element is a duty to consult, and act by reference to, those interests which the law identifies as interests of the company, and to have regard to outside interests only derivatively. This is an objective test and creates a wider role for judicial intervention through review of directors’ decisions than under the subjective duty of good faith.

The individual subjects of the duty

• While the duty of good faith in each of its elements attaches to the exercise of powers vested collectively in directors as a board, the duty is owed by directors individually. Whether the duty has been breached and the consequent validity of the D’s decision is tested by inquiry as to each individual D’s intention and purpose.

p423: Hutton v West Corp Railways (1883) ??

• Should directors money be paid to people like employees? 8 lines down: Justice Bowen says ‘that is the general doctrine, bone fides cannot be the sole test. Just because you honestly believe something is not good enough. Otherwise you may have a lunatic perfectly bona fide yet perfectly irrational. The test must be what is reasonably incidental to and in the reasonable scope of carrying on the business of the company. Does it help the...

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