Duties of Directors: Good Faith and Proper Purpose

Running Head: BUSINESS LAW 0
CORPORATION LAW
AUSTRALIA
[School]
[Course title]

BUSINESS LAW 1
Table of Contents
Introduction....................................................................................................................................2
Good Faith......................................................................................................................................2
Proper purpose...............................................................................................................................3
Meaning of Fiduciary Duty...........................................................................................................4
Section 181 along with good faith and proper purpose..............................................................4
Statutory mechanism which can facilitate corporate governance............................................6
Conclusion......................................................................................................................................7
Bibliography...................................................................................................................................8

BUSINESS LAW 2
Introduction
The basic purpose behind preparing this report is to reflect the duties of the directors while
exercising of discharging his powers and duties. The good faith and proper purpose are some of
the essential component which will be included in it while discovering the role of the director.
Both the terms will defined and discussed using section 181of the Corporations Act2001. So in
short this assignment will revolve around discussing the terms good faith and things done for a
specific purpose as a statutory mechanism which facilitates corporate governance.
The directors are believed to complete their obligations with good faith and with specific or
proper purpose where both terms are defined as follows.
Good Faith
In general it is presumed that all the parties while dealing with each other are to honest, fair and
in good faith, so that they would not hamper the rights of each other’s (Carter & Courtney,
2016). This will further lead to earn or receive huge profits or benefits. The appealing court of
New York in the case of Company v. The Paul Armstrong Company et al 263 N.Y. 79: 188 N.E.
163: 1933 N.Y. determined that while being engaged in an agreement none of the party shall
have that much power that it can breach or hamper the other party’s right, for receiving any type
of gain. “In short all the agreements which are legally binding must have an indirect agreement
of good faith and fair trade” (Perrigot, et al., 2019).
Good faith and its role is not settled properly under the Australian Contract law. It is a very
confusing fact, but they are tending to move towards three preposition in a very high speed. The
3 preposition are as follows first, the implied good faith is a basic requirement in connection with
the termination of the terms of the contract: second one is the area where it is present or the

BUSINESS LAW 3
source where the implied good faith is required as an indispensable term of the agreement: and
thirdly the satisfaction of the good faith by the parties acting it (Picken & Eggers, 2017).
NSW in the case of Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26
NSWLR 234 determined that Good faith is the most important fact in a contract which
safeguards the rights of the parties.
Proper purpose
A director working in a company or a trust can never misuse its power and position in an
improper way. They are mandate to comply with their powers for a specific purpose and a
determination is said to be a proper one if it is motivated and desires to earn benefit for its
company. The proper purpose is originate from the fiduciary duties which requires the individual
to behave in a particular way which can be for the interest of someone who had kept their trust in
them. For example it is the fiduciary duty of a doctor to provide the best and reasonable care to
its patient (Hemingway , 2019).
The makers of the public policy considers this term proper purpose towards duties so important
that it got included firstly in the Corporation Act 2001 and then in the Australia Securities and
Investments Commission (ASIC). The proper purpose rule states that if certain powers are used
by the directors for the reasons other than for the benefit of the company then it will be
considered as improper (Proper, 2017).
In the case of MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990 it was seen that it
is the duty of the director to act for the interest of the company and take such decisions which are
for a proper purpose or else penalties may be imposed against him (LAWYERS, 2018).
A two tire process is used by the courts to determine whether the director has breached the duty
or not are first is identifying the basic purpose for doing so, that can provide the authority of