LAW00004: Corporations Act Section 181 Analysis Report

This report provides an in-depth analysis of Section 181 of the Corporations Act 2001, focusing on the interpretation of 'good faith' and 'proper purpose' in the context of directors' duties and corporate governance. The report examines the legal framework governing the conduct of company directors, exploring the meaning of these terms as statutory mechanisms. It discusses the fiduciary responsibilities of directors, referencing relevant case law, including the landmark case of Re Smith and Fawcett Ltd, to illustrate the application of these principles. The report highlights the evolution of these concepts, contrasting statutory provisions with common law principles. It also addresses the interplay between the directors' duties to the company and the interests of shareholders, providing a critical examination of the duties laid down in statutory provisions and the powers given to the directors. The analysis includes discussion of the role of good faith and proper purpose in corporate governance, and the impact of non-compliance with these duties. The report concludes by summarizing the key points discussed and their implications for corporate law.

Running head: CORPORATIONS LAW
CORPORATIONS LAW
Name of the Student
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Author Note

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Introduction
The creation and the operations of a company or an organization are to be regulated and
governed by the Corporations Act, 2001. It also provides certain kinds of duties to the directors
and the officers along with the other members who work in the organization and who are
considered to be a part of the organization. It looks over the different kinds of takeovers and
other affairs of the companies such as fundraising and others. The companies are governed by at
both the state level as well as the national level. The civil liabilities of the directors are a
significant part of the Act which are mentioned or laid down under Section 181. This particular
section mentions that the directors who are a part of the company or the organization has a
responsibility to perform their duty in good faith which would help them achieve the best interest
for the organization or the company. The act of the directors should be done with a reason which
is proper and reasonable.
This paper mainly discusses the provisions which are laid down or mentioned under
section 181 of the above-mentioned Act and it will mainly focus on the area of good faith and
proper purpose. An analysis of the corporate governance principles have also been made. This
paper further tries to concentrate on a dispute which is in connection to identification of the
determining issues which are regulating the principles of good faith to proper purpose. In
conclusion, it summarizes the points that have been discussed in this paper.
Discussion
The provisions which have been laid down in the Act discusses the duties which are to be
performed by the directors while working in a company or an organization as they have certain
duties which needs to be performed which form a part of both the statutory provisions as well as

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the common law. In all fairness the directors of a company or an organization shares a certain
kind of fiduciary relation due to which the directors are considered to be loyal towards the
company or the organization (Fienman 2014) . These loyalty are showcased by the directors both
positively and negatively. The positive thing for the directors of the company or an organization
are mentioned in section 181 of the above-mentioned Act. The directors have certain duty of care
towards the company or the organization which the directors work for. These are considered to
be common law duties. These are also seen in the section 180(1) of the Above-mentioned Act.
The innovative statement in section 181 has its development and origin in the decision which
was provided in the important case of Re Smith and Fawcett Ltd [1942] Ch 304 at 306. In this
case the judgment given by the judge stated that the company’s interest is of utmost importance
and it is essential for the directors to act “bona fide” in the interests of the company or the
organization. Later it was clear after scrutinizing several cases that the duty that the director has
towards the interests of the company is not considered to be referred to the good faith always.
The reason for such an assumption is to understand that the directors have several duties to
perform and the directors can at times try to violate their duties by acting on behalf of the
company’s interest whether or not the directors were performing their duties in an honest way.
The reason for such was due to the fact that those directors were not able to comprehend
properly as to what was stated or mentioned in the court on behalf of the company’s interest.
Section 181 (1) (a) was considered to be inconsistent with the common law principle and
method which mentioned the best interests of the company according to the Advisory
Committee. It is considered to have an objective facet. There was a comparison which was being
made by the Advisory Committee far along where the comparison was on the basis of diligence
and due care of duty along with the duty of good faith which was mentioned in section 181. The

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fulfillment of the business judgment rule by the directors under the section 180 (2) are
considered to be observed with the regulations of the duty of care along with diligence. Even
after this it does not state or point out whether the directors have agreed with the different
provision or the regulation which states good faith which has been mentioned under section 181.
The directors should also be able to incur or achieve the best interest of the organization
or the company which have been provided or mentioned under the duty of good faith. The term
good faith is considered to include non-representing and comprehensive term that is considered
to be understood as honest and genuine confidence or trust where there is no mala fide or
dishonest intention. Good faith as a term has been derived from the Latin term bona fide and
these are the terms that are considered to be used by the different courts on their convenience by
using their discretionary authority while trying to adjudicate any case (Baude 2014). Good faith
as a term has been persistently used by various courts in various other cases and the decisions
have also been given by the judges under this term. This specific term has a very significant
impact or effect in the arena of any civil or commercial law. For instance, if there is a case where
an individual has brought any kind of property from a person who has sold the property to that
individual without any kind of proper title and that individual who sold the property is acting in a
certain way which makes the individual seem fraudulent and even after this the individual who is
buying such a property in good faith pays the individual, the person or the individual who bought
the property would be protected from any individual who tries to claim possession and
ownership of such property later. Therefore, the term of good faith at times can act as a
reasonable and logical defense provided that it has been established by the individual who
bought the property to the court. The party who has been claiming for the possession and
ownership of the property would not be given the possession and ownership of such property

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since the property had been bought by the buyer in good faith. Although the third party has the
right of bringing an action on the seller who was fraudulent. The buyer of the property had acted
in good faith and therefore, would be protected by the court and the liability would not be under
the buyer since the buyer was acting in good faith. In the similar way if a director acts in good
faith and performs certain acts in the interests of the company then the directors are not going to
be held liable for acting in good faith (Trakman and Sharma 2014). This act and duty of good
faith is mainly based on trust and fidelity. It is also known as the fiduciary duty which has been
laid down or mentioned in the Corporations Act, 2001. It has also been mentioned under the
common law principle. In this above-mentioned Act if there is a contravention of the duties of
good faith by the director then the director can be indicted and penalized. There can also be
imprisonment by sentencing him for the time period of five years which has been laid down or
mentioned under section 184 of the Act. It has been stated in section 180 (2) of the above-
mentioned Act that the directors while performing their duties and while making any kind of
judgment in relation to business need to take proper care and diligence under the judgment which
has been provided which is in good faith and bit is also in proper purpose.
It has been somewhat observed and understood that there are a very few elements which
are considered to be common in the several duties which are performed by the directors which
are to act in good faith and proper purpose. There is an additional duty which are imposed on the
directors for the duty of good faith which is to act in a certain way which would help in obtaining
the best interests in the organization or the company.
This particular paper discusses section 181 mainly where the section which is contained
in the act has been scrutinized and evaluated in a critical manner. Under section 181 the directors
are imposed with duties of acting in good faith and the duties are to be performed by the

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directors and with proper purpose which would help them achieve best interest in the company.
The individual concerns or interests of the shareowners are not to be taken into consideration.
The terms good faith along with the term proper purpose are considered to be the most crucial
terms mentioned in the section. This means that the directors will only perform the duties for the
best interests of the company and not for the interests of the shareowners.
There are several views and perceptions which have been given by various people and
these are to be discussed. The government made a review which was in the year 1989 where the
SSC had made a remarkable observation which was the directors duties were to amended which
would help them to look beyond this particular section. The discussion was that the directors
could look beyond this section only if the interests of the shareholders were not coming in the
way of the company’s best interest.
It was also stated further that by the report which was given by CAMAC and PJC which
was also known as the Parliamentary Joint Committee that the directors duties which were
mentioned in section 181 were not only restricted to the best interests of the company but also to
the interests of the shareholders as well.
It was further state in order to critically examine the duties which were laid down in the
statutory provisions along with the common law were that the powers which were given to the
directors of a company were very vast. As it can be seen in the case of Howard Smith Ltd v
Ampol Petroleum Ltd [1974] AC 821, The duties of the directors were vast which could also go
against the wishes of the shareholders majority.
It was also seen in the discussion by (ABA) which was also known as Australian
Banker’s Association it could be understood that the directors of a company were supposed to

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make any kind of decisions in good faith and also along with proper purpose which would be
considered to be a beneficial part for the company. The shareholders interests were not of utmost
importance. This could have also been considered to be a violation towards the board of the
company. If the interests of the shareholders were found to be defective it would not be
considered to be good faith or proper purpose since it would result in exposing the company to
certain risks.
There are certain lacuna in the statutory duty when it is considered to be compared to the
common law duties. There is a certain amount of uncertainty which is present in the subjective
nature along with the objective nature. It also cannot be specified whether the duties which have
been laid down under the Act can be deviated due to the public interest of the Act. Lastly, there
can be a possibility of the section to act in a more positive way than that of the common law
principle which relates to fiduciary duty.
As it can be seen in the case of ASIC v Adler (2002) 41 ACSR 72, this was seen that there
was something wrong with a transaction which was not done in the right manner. The Supreme
Court in this case considered that the imbursement which was involved was considered to be
defective and it was not discrete which had allowed self-acquisition by HIH according to the
securities which are concerned. This was discussed in a manner which was broad that the good
faith principle provided with a certain kind of standard which could have been followed by
parties who were creating different kinds of agreement which could often be found or identified
as a concept which was rational.
From the discussions which are made above it can be understood that under section 181
of the above mentioned act the directors had only limited duties and the shareholders interests
were not considered to be of utmost importance. It can only be seen in Australia and other

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countries are focused on the interests of the shareholders or the stake holders of a company.
There have been two perceptions either Australia can adopt the interest of the shareholders and
stake holders like the several other countries who implement it and in both of these views it was
a debate on whether it should be amended or kept the way it is. This view has been concentrating
on the interests of the shareowners and stake holders the other broader aspects would be taken
care of by the directors.
Conclusion
Therefore, from the above discussion, it can be understood, that the section 181 which
provides the duties of the directors for the best interests of the company to be kept and not
changed or amended. It also shows that the interests of the company are of utmost importance for
the directors and the interests of the shareholders and the stake holders are to be taken care of
indirectly by the directors after looking after the best interests of the company. Therefore, in
conclusion, it can be understood that the directors have certain duties which needs to be
performed in order to keep the company’s best interests. The directors are liable to act in good
faith and proper purpose which would help them make the company or the organization better.

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References
ASIC v Adler (2002) 41 ACSR 72
Baude, W., 2014. State Regulation and the Necessary and Proper Clause. Case W. Res. L.
Rev., 65, p.513.
Corporations Act, 2001.
Fienman, J.M., 2014. The Duty of Good Faith: A Perspective on Contemporary Contract
Law. Hastings LJ, 66, p.937.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Re Smith and Fawcett Ltd [1942] Ch 304 at 306.
Trakman, L.E. and Sharma, K., 2014. The binding force of agreements to negotiate in good
faith. The Cambridge Law Journal, 73(3), pp.598-628.