Directors' Duties under Section 181 of the Corporations Act

Running head: CORPORATIONS LAW
CORPORATIONS LAW
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CORPORATIONS LAW1
Introduction:
The directors of a company are liable for managing the affairs of the company, its
business activities and after they are appointed they owe various duties towards their company.
The directors have an obligation of following the duties provided under the various provisions of
the Corporations Act 2001 (Cth), hereinafter referred to as the Act along with other duties
imposed under general law (Yogaratnam & Xynas 2016). The Act provides provisions that
controls and governs the running of the companies in both federal and interstate level. The Act
provides the main legislation regulating the companies running in Australia. In case the directors
failed to fulfill such duties or found to act dishonestly while discharging the duties, then they are
subjected to personal liability (Ciro and Symes 2013). In this essay, the directors’ duties are
discussed by referring the provision under section 181 of the Act. In this essay, the critical
analysis of the directors’ duty will be done focusing on the terms ‘good faith’ and ‘for a proper
purpose’ particularly. Moreover whether this section is relevant in the current time will be
analyzed too.
Discussion:
Good faith under common law:
The directors of a company are under an obligation to the company for exercising their
powers in accordance with some standards. As per the judgment held by Justice Dixon in the
case of Mills v Mills (1938) 60 CLR 150 at 180, the company directors can be regarded as the
fiduciary agents and the power given to them cannot be misused for incurring any personal

CORPORATIONS LAW2
benefits or for any reason which is foreign to the interest of the company (Yogaratnam & Xynas
2016).
The duties of the directors have their sources in the fiduciary law which is specie of the
general law (Ciro and Symes 2013). The duty of good faith in business law is acknowledged as a
response to the common law fiduciary duty. Under the common law, the directors have a duty of
good faith towards a company together with the traditional fiduciary duties like the duty of
loyalty and duty of good care. Before the codification of the statute, the duties of directors are
recognized under common law and such duties include duty to act in ‘good faith’ which will be
accomplished when the director considers such act as the best interest for the company. In this
regard, the case of Re Smith and Fawcett Ltd. [1942] Ch 304 must be referred which is a leading
company law case that discussed the duty of good faith of the company. It further stated that the
directors in this regard must exercise their duties in a way that they consider bona fide for the
interest of the company. In another case of Scottish Co-operative Wholesale Society Ltd v Meyer
[1959] AC 324, it was held by Lord Denning that the criteria to prove that the directors had acted
in good faith, it is to be identified that whether such act promotes business of the company.
Under common law, this duty is considered to be a subjective duty because in order to decide
whether the director has acted in good faith or not, the state of mind of such director will be
considered at the instance when such decision was taken (Ciro and Symes 2013). Another case
that can be referred here is the case of Regentcrest plc v Cohen [2001] BCC 494 (Ch) where the
director’s duty to acct in good faith is recognized.
Duty to act for proper purpose under common law:
The duty to act for proper purpose had its origin in the equitable law and its early usages
were seen in the cases involving trust and trustees (Yogaratnam & Xynas 2016). Prior to the