Director’s duty: Loyalty and good faith
As the actual controller of
the company, the directors are obliged with many responsibilities. One of the
basic measurements of directors’ compliance with there is the loyalty and good
faith. Generally, it can be divided into four different perspective, including:
retain discretion, avoid conflicts of interest, act in good faith in the
company’s interest and use directors’ power for proper purpose.
First of all, the director
must retain discretion, which means the director must agree not to exercise
power given to him/her is inconsistent with acting in best interests of the
company. Therefore, director must always act in best interests of company.
In addition, the director
has the duty to act in good faith in the best interest of the company. This
requirement is clearly stated in S.181(1)(a) of Corporations Act(2001) (cth).
The term good faith means the director must act honestly. Normally, the
interest is represented as the shareholders interest. In fact, the director
must treat the interest of shareholders as a whole, which needs the director to
balance the interest of majority and minority. However, when the company is
experiencing financial difficulties, the creditors’ interests are supposed to
be considered by the director beyond shareholders''' interest.
Moreover, the director of a
corporation must exercise their powers and discharge their duties for a proper
purpose.(S.181(1)(b)). The power of directors are interpreted in the S 198A(s)
CA(2001) general management power. When justifying where the action was done
with a proper purpose, a specific test is introduced. Where the lawful purpose
and actual purpose of the activity were compared. If there is a conflict, the
director has breached the duty to act for proper purpose.
At last, the director must
disclose any material personal interest to the board unless exemptions
apply.(S.191(1) &(2)). Under S.195, the public company directors are prohibited from
participating and voting at boarding meetings that consider matters in which
they have a material personal interest, exceptions apply. Furthermore, the
improper use of position(s.182) and information(S.183) are also prohibited by
the statutory provisions.
The consequence of breaching the loyalty and
good faith duties will commonly face civil penalties enforced by ASIC. For
instance, the director may be disqualified from the position or be ordered to
compensate company’s loss. ASIC may also seek criminal penalties for serious
contraventions of the Corporations Act.
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