Analysis of Section 181 of Corporations Act 2001

Running head: CORPORATIONS LAW
CORPORATIONS LAW
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CORPORATIONS LAW1
Introduction:
The Corporations Act 2001 (Cth) regulates and controls matters like creation and
functioning of a company as well as provides the duties of the directors, officers and other
members belonging to a company plus takeovers, fundraising and other company affairs. It
controls the operation of the commercial bodies in both national as well as state level. Section
181 of the Act is a very important section that provides civil liabilities of the directors, officers
and other members of a company (Fallon and Cooper 2015). Section 181 of the Act states that
the director of a company has an obligation to use their power and perform their duty towards the
company in good faith so as to incur best possible interest of the company. Further, such act
must be done for a proper reason (Langford and Ramsay 2015). In this assignment the provisions
of section 181 of the Act will be discussed in the light of the ‘good faith’ and ‘for proper purse’.
Relevant analysis of corporate governance is also done. The assignment further focuses on an
argument in relation to the identification of the factors controlling the duty of good faith towards
proper purpose.
Discussion:
As per the provisions of the Act, the directors of a company have certain duties under
both general law and statute. In equity, the directors of a company share a fiduciary relation with
the company and there lies a high loyalty standard between them (Barker et al. 2016). Such
loyalty between them is shown in various positive duties of the directors as well as in negative
degrees too. One of the positive degree is enshrined in the section 181 of the Act (Fallon and

CORPORATIONS LAW2
Cooper 2015). Under the duties of common law, the directors have a duty of care towards the
company. This is seen in the section 180(1) of the Act.
The original wording of the section 181 probably has its origin in the judgment given in
the case of Re Smith and Fawcett Ltd [1942] Ch 304 at 306 where the judge held that the
directors are required to act ‘bona fide’ in the company’s interest (Langford and Ramsay 2015).
But it was clear after perusing many cases that the director’s duty of acting in the company’s
interest is never intended to refer to the duty of subjective ‘good faith’ only. This is because in
many cases it is observed that the directors can breach their duties in order to act in the
company’s interest even if they were already working in an honest manner. This is due to the fact
that such directors could not give proper consideration to what was stated by the court to be done
in the company’s interest (Langford and Ramsay 2015).
The Advisory Committee regarded the language used in section 181(1)(a) was in
consistent with the common law method of testing to act in the company’s best possible interest.
This includes an objective aspect (Fallon and Cooper 2015). Later on, the Advisory Committee
compared the duty of care along with diligence with duty of good faith contained in section 181.
The directors who are able to fulfill the business judgment rule given in section 180(2) are said
to comply with the provisions of duty of care as well as diligence. But this does not indicate that
the directors have complied with the separate provision of acting in ‘good faith’ given under
section 181.
The duty of ‘good faith’ provides that the directors must also act to incur the best possible
interest of the company (Du Plessis and Rühmkorf 2015). ‘Good faith’ represents a non-
representing and inclusive term that includes a true and genuine trust or confidence with no place

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of malafide and deceptive intention. The term ‘good faith’ has originated from the term ‘bona
fide’ which is a Latin term and such terms are used conveniently by the court using their
discretionary power while adjudicating any case (Du Plessis and Rühmkorf 2015). The term
‘good faith’ has been used incessantly in various cases and decisions by the judges. This
particular term has huge impact in field of civil as well as commercial law. For example, in a
case where a property is brought by an individual person from a seller who is without any proper
title and acting fraudulent, then if the individual in ‘good faith’ makes the required payment to
the seller, then the individual will be protected against any other person who later on claims
ownership of such property. This term of good faith can act as a good and sound defence if it has
been established by the buyer to the court, then the third party claiming ownership of such
property will be deprived of such title considering the fact that the buyer has bought the property
in good faith (Du Plessis and Rühmkorf 2015). However, the third party claiming ownership can
bring action against the fraudulent seller. The innocent buyer will be shielded as he acted in
‘good faith’. Similarly if a director can work in good faith for the company, then his acts will be
protected and he will not be held liable for such acts done in good faith. This duty to act in good
faith is actually based on fidelity as well as trust and is called the fiduciary duty provided not
only under Corporations Act 2001 but also under common law (Barker et al. 2016). Under the
said Act, when a director contravenes the duty of ‘good faith’ and act otherwise, they can be
penalized by sentencing him imprisonment for a period of 5 years as per section 184 of the Act.
Though section 180(2) of the Act also provides that the directors while making business
judgment is considered to take due care and diligence regarding the judgment provided they
make such judgment in ‘good faith for a proper purpose’ (Du Plessis and Rühmkorf 2015).