Duties of Directors under Corporations Act 2001

LAW00004 0
Southern Cross University
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Student Name: MISRAT JAHAN
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Contents
Introduction........................................................................................................................ 2
Duty to act in good faith................................................................................................. 2
Duty to exercise powers for a proper purpose............................................................................... 6
Conclusion......................................................................................................................... 9
References....................................................................................................................... 10
Books/Journals 10
Case Laws 10

LAW00004 2
Introduction
Directors position of the company have vast significance role as they are the people who are
responsible for managing business affairs and making for business decisions. Although a company
has some separate legal status and directors are not liable for the acts of the entity, yet they have
possessed some responsibilities. The reasoning behind the same is that the directors are a natural
person and ultimately responsible for using their business judgment for the company. These
responsibilities are well known as the duties of directors and mentioned under the Corporations
Act1. The Corporation Act is applicable throughout Australia and contains corporate law of the
nation. In besides, to provide the provisions related to the incorporation, meetings, liquidation of a
company and other matters, CA 2001 prescribes general as well as special duties of directors. These
duties have been interpreted in different manners while deciding different cases. In the presented
report, one of the responsibilities, for example, commitment mentioned under section 181 will be
discussed. The responsibility includes two factors, namely good faith and proper purpose. Thus, the
duty of states that directors must perform their duties in good faith and for the best interest and
adequate purposes of the company2. The following report is aiming at researching on the
significance of these terms with the help of various case laws related to the said concepts. Lastly, a
conclusion summarizing the key findings of the report will present.
Duty to act in good faith
Duty to act in good faith is not only a statutory duty but also it is a fiduciary duty under common
law. As per this duty, a director is required to perform the functions in good faith. Here the question
1 Corporations Act 2001 (Cth).
2 Australia, Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related
regulations (CCH Australia Limited 2011) 221.

arises that in whose favor directors are required to act or perform the business obligations. If two
competing companies are there, then in whose good faith the director will take the steps ahead,
which is also a question. In the case of Bell v Lever Bros Ltd3, it has decided that directors may hold
directorship positions in the board of the two rival companies. However, in reality, the situation is
different. Directors cannot disclose the information, which is related to one company to another
company, and therefore, at last, they have to resign from one of the companies. The duty to act in
good faith has been developed to create a scenario of corporate governance. It ensures those
directors who are responsible for running and managing a company, must deal with a favorable
opinion. Duty to act in good faith also demands a director works sincerely or honestly without any
intention to cheat. The responsibilities even be known as a duty to act bona fide4. If to discuss the
duty to act in good faith in details it must be noted that, the directors are required to taking decision
that will be leads to the good of the company. It is not mandatory that decisions taken by directors
will bring actual profits for the company each time because nobody cannot control the business
environment. Duty only emphasizes on the intention of directors at the time of decision-making and
states that at the time of making a decision, a director must have believed that the same is in the best
interest of the company. In the case of Darvall v North Sydney Brick & Tile Co Ltd5 it has been
decided that while considering good faith of the company, directors must consider short term as well
long term interest. Duty to act in good faith is closely connected to another task mentioned under the
same section 181 that is known as the duty to work in the best interest.
Some problems are there with the duty of working in good faith when it comes to the discussion of
the nominee director. Nominee directors are those directors who are appointed to the company's
3 Bell v Lever Brothers Ltd [1931] UKHL 2
4 Youlegal.com.au, Directors’ Duties In Focus – Duty To Act Bona Fide (In Good Faith) (You Legal) <
https://youlegal.com.au/directors-duties-focus-duty-act-bona-fide-good-faith/#targetText=The%20duty%20to%20act
%20bona,requirements%20expected%20of%20company%20directors.&targetText=The%20'common
%20law'%20requires%20that,business%20affairs%20of%20the%20company.>.
5 Darvall v North Sydney Brick & Tile Co Ltd (1988) 6 ACLC 154