LAW00004 Company Law: Good Faith, Proper Purpose, and Corporations Act

This report analyzes the concepts of "good faith" and "for a proper purpose" as defined in section 181 of the Corporations Act 2001 (Cth), focusing on their significance in corporate governance. The report begins by defining good faith and proper purpose, highlighting their importance in guiding the actions of company directors and officers. It examines the duties of directors, including fiduciary responsibilities, and the consequences of breaching these duties. The report then delves into the role of these terms as statutory mechanisms to facilitate corporate governance, discussing how they influence the exercise of power by company officials and the regulatory strategies employed by bodies like ASIC. The analysis considers relevant case law and scholarly opinions to provide a comprehensive understanding of these crucial aspects of company law, emphasizing the objective assessment of a director's purpose when exercising powers and discharging duties. The report concludes by summarizing the key findings and reinforcing the significance of good faith and proper purpose in ensuring responsible corporate behavior and effective governance.

RUNNING HEAD: COMPANY LAW
Company Law
Name of the student
Name of the university
Author Note

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Table of Contents
Introduction:....................................................................................................................................2
Thesis statement:.............................................................................................................................3
Defining the Good faith:.................................................................................................................3
Definition of “for a proper purpose”:..............................................................................................4
Facilitation of Corporate Governance:............................................................................................5
Discussing the Good Faith:..............................................................................................................6
“for a proper purpose”- discussion..................................................................................................6
Conclusion.......................................................................................................................................8
Reference List..................................................................................................................................9

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Introduction:
Under section 181 of the Corporations Act, 2001 (Cth) illustrates the civil responsibilities of the
officers and the directors of an organisation or a company. Practically this specific statute
permits few conditions for discharging and exercising the powers provided to the officers and the
directors. Numerous discussions those are scholarly regarding the specific statute that have
recommended these particular conditions as observing the function as the powers of “ good faith
in the corporation’s best interest” and “ for a purpose that is proper”. Regarding this, the current
account has the intention for proving the reason for discharging or exercising the powers depends
solely on the purpose that drives the person either the directors or the officers for doing so.
However, according to the scholars like Kraakman (2017) suggests, in spite of having the clear
concept about the meaning of the good faith, it is very clear that there is a specific uncertainty in
respect of the term ‘for a purpose that is proper’. Therefore the study has justified the
accountability of discharging or exercising the power of an officer/director depends solely on
purpose, then it will serve the transparent idea to the regarding the notion of the purpose that is
proper. In order of this study discusses and defines the proper purpose and the good faith during
elaboration the impact on corporate governance. Apart from this, the particular study has the
intention for including the opinion of the individuals in the statement for leading the discussions
for discussing the domain of open-ended discursive.

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Thesis statement:
The thesis statement is as follows:
The particular study proves the purpose that the rule in section 181 of the Corporation Act 2001
(Cth) determines the identification of appropriateness of exercising power by the sources of
purpose.
Defining the Good faith:
As the corporate directors have any other duties, the concept of good faith is framed on the
certain principles where the directors abide by the order to retain the good name of the particular
entity. The duty of good faith (or being coordinated with the most profitable interests of the
corporation) the directors are provided with the principles for exercising power in keeping it
according to the fiduciary capabilities of the corporation. Furthermore, the principles that are
associated show the liability of the directors performing their responsibility with fiduciary acts.
For gaining the idea of good faith from an perspective that is inverted, it is imperious for
mentioning the violence of the principles considering the expected duties that are deliberately
derelict. For offering an experiential reference the judgments Cowan V Scargill [1985] Ch 270
relates to this particular case as it is wholly framed upon the breach of fiduciary duties
deliberately. The typical form to violate the duty that is fiduciary is of trading that is insolvent, in
spite of being aware of incapability of the corporate sector to trading, it has been observed that
different directors made the promise to trade along with some entity. The several other case
studies categorise the desecration of the corporate loyalty which states the breach of duty
concerning the good faith.

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Definition of “for a proper purpose”:
According to Saul Fridman (2016) who wrote in the matter of public law and corporate law, it is
apparent that the difference between the improper purpose and the proper purpose shows some
shadow across several appreciation and the discourses of the Corporation Act 2001 (Cth). The
discharging and exercising the powers by the directors determine a purpose which addresses the
benefit of the company. Therefore the conditions associated with defines to direct the powers
regarding the permissible and appropriate causes. Apart from the Corporation Act 2001, it has
been observed that the encouragement of the enforcement of the practice of Investment
Commission and Australian Securities has implied the primary purpose that is the impetus that is
derived from the fiduciary duties. The proper purpose provides instruction to the directors for
acting in a specific way that addresses the corporate interest of the organisation. In this case the
public policymakers included this in the Corporation Act 2001 based on the penalty difference
associating the breaching type.
For appreciating the component of the main statute, the main rules imposed for judging the
power exercised by the official/director. Following the rudimentary principles of the rule of
proper purpose that exercises power by the official or the director. For instance, according to the
rudimentary principles of the proper purpose rule, exercising power is supposed to be considered
improper if the consequences do not serve a broader benefit of the company (Boutilier, 2017).
One of the common instances of improper actions is the inability to fulfil the fiduciary duties of
the respective organisation. In this regard, FoxDecent (2017) stated that violation of the
obligation to act within the tenets of good faith could also be considered as exercising power for
improper causes. Apart from that, typical example of improper cause can also be exercising the

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powers for personal gain or other didactic advantages. These purposes have been elaborated
(with legal examples) in later sections of the study.
Facilitation of Corporate Governance:
The truth among the three agencies that can be considered to regulate the policies of corporate
governance, ASIC considers the conjugal of the Corporation Act 2001 (Cth). For addresser of the
current inquiry that is currently the main target is to analysing comparatively between the
policies of the regulation of corporate governance. And it acquires the influence of the
Corporation Act 2001 (Cth). According to Jeffrey Lucy, the recent chairman of the ASIC has
given the suggestion that the strategy of regulation by ASIC is distributed into three layers of
pyramid. In a nutshell, the essence of the regulatory strategy is to provide assistance to the
directors while complying with the principles of their fiduciary duties (Masum et al. 2018).
However, strategic priorities are also intended to prevent them from violating the principles of
their duties. It is evident from the first two layers of the strategic preoccupations of ASIC that it
is meant to execute their instruments of corporate governance simply through influencing the
perspectives and conducts of the directors who are endowed with the responsibility of exercising
the power.
The prosecuting and the consideration strategies concerning the involvement of the directors that
is illegal has occupied the topmost but the smallest place in the pyramid. Furthermore, in cases of
prosecution regarding the cases of misconduct or financial fraud, unlike other acts, ASIC do not
consider the fiduciary duties or financial liabilities of the institutions which are subject to
regulation. Furthermore, the charges of criminality associated with involvement in the improper
purpose of exercising power is chiefly governed the consequences of the consultation with

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Director of Public Prosecutions. This particular aspect, apart from addressing the parallels
between Corporations act and public law, is supposed to highlight the way the referred act
influences the corporate governance as ASIC seems to encourage the enforceability of the
sections of the concerned act.
Discussing the Good Faith:
Violation of the good faith for regarding the in terms of breaching the core duties (including
fiduciary duties) of a director/official has been considered analogous to the contravention of the
requirements (or vindicated acts) that the concerned personnel is supposed to perform to restore
the best interests of the company. This emphasizes the proclamation that shows the subjective
intention and beliefs in the duration of executing the director according to the decided acts. It is
not possible understanding the assessment of the proper purpose and good faith for exercising the
duty and power for acting in a good faith that frames the different foundations. The power of
consideration is not the question of paramount but the question asscociated the power to share
the issue (Wheeler, 2017).
“for a proper purpose”- discussion:
The suggestions for the rule of ‘proper purpose’ can be seen as appearing to be as too
important for the definitions of the acts that are considered as improper in a susceptible manner.
As stated previously, the major instance for the involvement with the improper practices can be
seen as to be associated with the violations of the fiduciary duties of the directors. Further, if the
directors can be seen as appearing as to be exercising their powers for their personal gains and
advantages., it would also be considered to be an improper purpose. The question whether there

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was involvement of the director in the breach or not has been focused by the scholars like
Boutilier (2017) by way of the process of prosecution that can be seen as being adopted by the
public prosecution Director in order for the identification of the inspection process.
A two tier process is now to be followed, which is a process that entails two important
components – ultimate purpose and motivation. As a part of the first process, the court
undertakes an investigation to determine what exactly the ultimate purpose of the power that is
exercised by the director is. It is important to remember that such a process is one that is both
approved of as well as validated by legal scholars such as Schwartz et al. 2018 who believe that
such an approach has a crucial role to play in confronting not only the existence of the power of
the director in its many different forms but also the constitutional domains that are seen to
employ the use or the exercise of such power. Another important feature of this process is the
fact that the basic parameters of this power are to be identified. It is against the validation of the
domains of application of such power and the origins of the power that the appropriateness of
making use of such power is judged. If power happens to be exercised beyond such vindicated
domains then it is to be regarded as the improper use of power on the part of officials and
directors.
The second important aspect of the two tier process is the process of motivation. Over
and above determining what the ultimate purpose of the exercise of power by directors and
officials is, prosecutions also have to be examined as dictated by the court against the motivation
behind the use of this power by directors and officials. Specifically, the intention of a director or
an official to exercise power is something that the court seeks to go ahead and judge beyond
what may be termed as the mere tenets of the notion of improper motivation. In this particular
context, a clear account needs to be provided of the most important responsibilities and duties of

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directors and officials. Wheeler and Ombudsman (2017) argue that such core duties and
responsibilities of directors and officials are those that are rooted in many important legal
sources such as common law sources, a good example of this being the tort law on the subject of
negligence, sources of equity law and the Corporations Act of 2001 among other important legal
instruments. As argued by Webb (2018), what also must be added in this context are the
consequences of breaches as also differences in penalties even though it has been prescribed by
the ASIC, that it is primarily the principles of the Corporations Act of 2001 that must be taken
into consideration in this context. For example some of the common consequences that are
prescribed by the Corporations Act of 2001 are equitable compensation, contract recission,
whereas some of the common consequences of breach happen to be pecuniary penalty and
disqualification among others. Additionally it needs to be remembered that the penalties which
are prescribed on the part of the ASIC are those that are mediated through the medium of the
Commonwealth and this is something that is done by maintaining adherence to the provisions of
the act at the same given time.
Conclusion
In conclusion, it can be stated once again, as mentioned previously that the origin of
proper purpose rule is one that is largely dependent on Chancery Courts assumption, with the
court having proposed what may be termed as corporate jurisdiction in order to check the power
that is exercised by directors of companies. It has also been mentioned before that such power
needs to be exercised by adhering to equitable norms and can be punished if power is exercised
by directors without them being compliant to this origin of proper purpose rule. I consider this
statement to be rather true. The chief purpose of the rule is to act in good faith and this is

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something that has been validated by courts of law. The inappropriateness of purpose is
something that needs to be determined on the basis of whether or not the act serves the proper
purpose of the company. If powers are to be executed therefore, the limitations of all available
power is necessary. This is something that has been enumerated well enough in cases such as
Cowan v Scargill (1985) where it has been established that proper purpose rule as well as the
validity of this rule is something that depends on purpose alone, while giving courts access at the
same given time to what may be termed as intractable affairs

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Reference List
Boutilier, R., 2017. Stakeholder politics: Social capital, sustainable development, and the
corporation. Routledge.
Cowan v Scargill (1985)
Fox-Decent, E., 2017. Challenges to public fiduciary theory: An assessment. Research
Handbook on Fiduciary Law (Andrew S. Gold & Gordon Smith, eds., Forthcoming).
Kraakman, R., 2017. The anatomy of corporate law: A comparative and functional approach.
Oxford University Press
Masum, A., Salahudin, S.N. and Aziz, H.H.H.A., 2018. Corporate Governance and Directors
Duty to Act in Good Faith and in the Best Interest of the Company: The Malaysian Experience.
International Journal of Engineering & Technology, 7(4.38), pp.795-799. Beyer, V.L. and
Corkery, J.J., 2019. Opening Our Eyes to the Blind Pursuit of Profit– Adjusting Attitudes on
Corporate Governance. Enterprise Governance eJournal, pp.1-10. Schwarcz, S.L., Jones, A. and
Yan, J., 2018. Responsibility of Directors of Financial Institutions.
Valsan, R., 2016. Directors' Powers and the Proper Purposes Rule. King's Law Journal, 27(2),
pp.157-164.
Webb, T.E., 2018. Uninformed Reform: The Attempt to Abolish the Hospital Managers’ Section
23 Discharge Power Under the Mental Health Act 1983. Medical law review, 27(1), pp.79-107.
Wheeler, C. and Ombudsman, D.N., 2017. Judicial review of administrative decisions: 37 shades
of grey in administrative decision-making.