Duty of Good Faith in Company Law

Running Head: COMPANY LAW
Running Head: COMPANY LAW
COMPANY LAW
Name Of the Student
Name Of the University
Author’s Note

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COMPANY LAW
INTRODUCTION:
Corporation Act 2001 (Cth) lays down provision for general duties of the directors. The
provision lays down that the company director or any other officer of the company shall be
bound to exercise their power and discharge their duties with care and good faith and strict
diligence. The diligence and care should be rational and reasonable enough to believe that the
such decision shall be in the best interest of the company. Therefore, the Act provides that the
Directors and Officers of the company are bound to comply with three fundamental duties
towards their legal and fiduciary responsibilities namely; duty of good faith, duty of loyalty and
duty of obedience.
Fiduciary duty is the responsibility of the directors and the officers to act in the best
interest of the company. Such best interest of the company shall be derived from honesty and full
disclosure of information (section 191 of the Act) related to any client of the company and lastly,
not to derive any personal interests from the businesses of the company.
DUTY OF GOOD FAITH AND PROPER PURPOSE:
The common law rules provides for the directors to owe duty of good faith towards the
interests of the company and the same has been enforced in Australia Commonwealth and the
states by the enactment of provision Section 181 of the Corporation Act 2001 (Cth), which lays
down the provision for the duty of the directors and the officers to maintain duty of good faith
and good faith as a part of their civil obligations. It has been explained in the provision that a
director or any officer of the company must exercise their powers and discharge their duties in
good faith to fulfil the best interests of the corporation and such faith and interest should for a

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COMPANY LAW
proper purpose. Breach of the provision would amount in civil liability under section 1317E of
the Act. Section 184 of the Act also states the implication of criminal liability if a director or the
officer of the company are found to act recklessly or has the intention to act dishonestly resulting
in the failure of their fundamental duties towards the corporation.
STATUTORY DUTY OF THE DIRECTORS TOWARDS GOOD FAITH
AND PROPER PURPOSE:
The directors are subject to such statutory duties towards the interests of the company due
to the exclusive powers they are entitled to for controlling the management of the company.
Control of management also involves the strict implication of the doctrine of lifting up of the
corporate veil when the directors are found to be camouflaged behind the face of the company to
fulfil their personal interests by using company’s position. The same was confirmed in Salomon
vs. Salomon [1897]. In Re Smith & Fawcett Ltd [1942], it has been held by the Court that
implication of good faith for the directors is a subjective test. However, in ASIC vs. Adler[2002]
41 ACSR 72, it has been held by the court that the test for the assessment of good faith is an
objective one and the directors found to be breaching such test shall be liable for the same. In
Ngurli vs. McCann [1953] HCA 39-90 CLR 425, it has been laid down that issuing of shares by
the directors for continuing their position as directors in the Board management of the company
shall amount to the breach of Section 181 of the Company amounting to civil liabilities. The
Court has further recognized the duty of the shareholders to act fairly and in accordance with the
class of shares held by them and the subsequent rights and duties associated with the same (Mills
vs. Mills [2018]).