Role of Good Faith and Proper Purpose in Company Law

0 | P a g e
Company Law

1 | P a g e
Table of Contents
Introduction.................................................................................................2
Good faith....................................................................................................3
For a proper purpose...................................................................................4
Role of good faith and proper purpose........................................................5
Statutory mechanism to facilitate corporate governance...........................5
Conclusion...................................................................................................7
References..................................................................................................8

2 | P a g e
Introduction
There are a number of duties imposed by the
Corporations Act 2001 (Cth)
(CA) on directors while they discharge their duties in a company. The
objective of these duties is to make sure that directors did not misuse
their powers and they act on behalf of the company rather than
prioritising their personal benefits since they operate at an apex position
in the organisation (Langford and Ramsay, 2019). In this regards, a
relevant duty is given under section 181 of the CA, which is imposed on
directors when they make business decisions and discharge their duties.
As per this section, it is expected that the directors will use their powers in
“good faith” and they will only use them “for a proper purpose”. This
section ensures that directors did not use their powers for improper
purpose which could be against the interest of the company. This paper
will analyse the role of the terms “good faith” and “for a proper purpose”
which are identified in this section by analysing a range of judgements
given by the courts in this regards. This paper will also evaluate the role of
these terms as statutory mechanisms that assist in facilitating corporate
governance in the country.

3 | P a g e
Good faith
Directors are bound by the duties which are identified in CA to make sure
that they did not harm the interest of the organisation or its stakeholders.
Through section 181, the principle of “good faith” applies on directors as
well as other officers of the company and it provides that they are under
an obligation while discharging their duties to make sure that they act in
the “best interest of the company” and use their powers “for a proper
purpose” only (Bonner, Hunt and Watson-Dunne, 2014). It is important to
understand the meaning of “good faith” to understand the reason why
this duty is imposed on the directors. Since directors operate at an apex
position in the company, they have the power to take business decisions
on behalf of the organisation. A fiduciary relationship exists between the
directors and the enterprise which require them to make sure that they
avoid prioritising any personal benefits which could potentially harm the
interest of the organisation or its stakeholders (Golding, 2012). The duty
recognised under section 181 (1) (a) requires them to avoid causing
personal conflicts which could potentially benefit them while negatively
harming the interest of the company. This can be understood by the case
of “
ASIC v Adler (2002) NSWSC 171” in which the court provided its
judgement based on the guidelines identified under section 181. In this
case, the director misused his position for personal gain by acting against
the interest of the company and focusing on his personal benefits by
allowing loans which ultimately lead to insolvency of the organisation
(Golding, 2012).
It was held by the court that the interest of the company was put at a risk
by the director because he contravene with the provisions given under
section 208 of CA in relating to “related party transactions” and the
principles of “financial assistance prohibitions” which are identified under
section 206A of CA. Based on these contraventions, the court held Adler
liable for violating the principles of 181 since he did not act in the “good
faith” of the company (Langford and Ramsay, 2019). The directors face