Directors' Duties: Should Australia Adopt UK's Section 172 of Companies Act 2006?

Running Head: BUSINESS LAW
BUSINESS LAW
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Author Note

1BUSINESS LAW
Directors’ duties are guidelines which are imposed through law on the directors with
respect to the way in which they carry out their operations. Where most of the directors’ duties
have been derived through common law provisions they are now a part of most of the corporate
legislations around the world. These duties have the primary purpose if ensuring that the
directors do not misuse the powers provided to them and ensure honesty, integrity, diligence,
care and bona fide intentions towards working for the company. According to Talbot (2015, P
21) section 172 of the Companies Act 2006 (CA 2006) belonging to the UK is significantly
controversial provision which has been incorporated into the law for companies in the country.
Through the adoption of this section the legislation is able to incorporate within it the concepts of
shareholders value along with a number of non-exhaustive factors which have to be taken into
consideration by the directors in order to promote the success of the company. The question
which is at issue in relation to this paper is that whether Australia through its Corporation Act
2001 (Cth) (CA 2001) should also adopt the provisions of section 172 in the light of section 181
which imposes similar duties of the directors.
As stated by Gullifer and Payne (2015, p 394) s.172 of the CA 2006 is a compromise
between pluralistic stakeholders’ approach which makes the directors take into consideration
stakeholders through law while taking decisions and the shareholder primary approach which
emphasizes on concerns of the market and subjects the shareholders to self regulation. The
section is simply in relation to the duty of the directors to ensure and pursue the success of the
organization. The wording of the section provides that the actions of the directors of an
organization have to be in good faith, which would probably promote companies success for the
interest of all its members. In relation to doing so the directors are to take into consideration the
probable effects of a decision in the long run, employee’s interest who are working for the

2BUSINESS LAW
company, fostering the relationship of the organization with the customers and suppliers, the
impact which the operations of the company have on the environment, maintaining high
reputation and dealing fairly between the members of the company. It has been argued by Du
Plessis, Hargovan, and Harris (2018, p 113) that when the provisions of the section are examined
closely they simply reflect modern business practices and existing legal provisions which are
applied in general to corporations all over the world. Further the author goes on to state that that
the mere purpose of implementing such duties on the directors of a company is only to reinstate
the practical reality they are subjected to.
The examination of the wordings of the section depicts that it requires the directors to
take into consideration the interest of the stakeholders when such interest is in compliance with
the interest of the shareholders (Collison et al., 2014, p 423). It has been pointed out by Michael
that the section represents a shift from “permission to obligation” with the demonstration of old
common law provided by the case of Hutton v West Cork Railway in providing permission to the
directors to consider interest of the stakeholders albeit when they actions are primarily for the
company’s interest. The clear overriding obligation provided under the provisions of s.172 is
that of acting in the company interest and while complying with such obligations the directors
must take into consideration the other non-exhaustive factors. It has been argued by Flower that
the section does not provide any individual value to the interest of the stakeholders which is
actually present under pluralist approach. The test under this section ensures that the primacies of
the shareholders over the stakeholders strongly prevail and thus it depicts the presence of the
narrow view of CSR proposed by Friedman. Most of the cases which have interpreted the section
have a view that it is not a part of the CA 2006 which the parliament wants to address through
litigation such as the case of R (on the application of People & Planet) v HM Treasury [2009]