Notes on Australian Directors’ Duties: Good Faith, Proper Purpose, and Care

Directors’ Duties in Australian Corporate Law: Good Faith, Proper Purpose, and Care

This set of notes consolidates the key ideas from the lecture on directors’ duties under the Corporations Act, with emphasis on fiduciary duties (good faith and proper purpose) and the duty of care, skill, and diligence. It covers the structure of the directorate, roles of officers, governance mechanics, and representative cases used to illustrate how the law is applied in practice.

Overview: fiduciary duties, good faith, proper purpose, and care

Fiduciary duties arise from the relationship between directors (and certain officers) and the company. They are owed because of the relationship, not simply because of a contract.
In corporate practice, there is an explicit ambition to align fiduciary duties with best interests of the company as a whole, rather than any single stakeholder.
The two main facets discussed are:
- Good faith and proper purpose: directors must act bona fide, in the best interests of the company as a going concern, and for proper purposes; avoid using office for improper ends.
- Care, skill, and diligence: directors must exercise reasonable care and diligence, with higher expectations if they possess special skills.
The framework spans statutory duties (Sections 180–183; other related provisions) and common-law fiduciary principles. See the sections referenced below for the formal wording.

Who is a director? Structure and relationships

A director is typically appointed by the shareholders and forms the board that governs the company.
The board may include both non-executive directors and executive directors (the latter have day-to-day jobs in the company, such as CEO or chairman).
Directors may be independent (external) or internal (within the company), and there is a preference for independent non-executive directors to improve objectivity, though concerns about absenteeism exist.
The corporate governance structure is pyramid-like: directors oversee the company, delegate to executives, who then manage the day-to-day operations.
In a corporate group, directors owe duties to each company separately; a director’s actions in one company do not automatically satisfy duties in another, unless the constitution or arrangements say otherwise.

Officers, de facto and shadow directors, and other officers

The Corporations Act recognizes a broad notion of who counts as an officer. This includes directors and company secretaries, as well as others who materially influence decisions affecting the whole or a substantial part of the business, or who control financial standing.
De facto director: a person who acts as a director without being formally appointed. Examples include a person who exercises top-level management control or who effectively governs the board’s decisions.
Shadow director: a person who acts as a director in practice, even if not formally recognised as such, often through advising or influencing the board, such that the board acts on instructions from that person.
Officers include: directors, the company secretary, and other individuals who participate in directing or controlling the company (including receivers, administrators, and liquidators in certain roles).
Company secretary duties (Section 204A): mandatory for public companies; secretary must ensure records are kept up to date with ASIC, and lodge changes when directors resign or appointments are made.

Types of companies and director requirements

Private companies: typically require at least 1 director.
Public companies: require at least 3 directors, with at least 1 director residing in Australia and a company secretary.
The Australian government regime allows for internal or external governance, with the notion that a smaller company may have fewer formal requirements (e.g., some audits may be internal rather than external depending on size).
Residency and eligibility: directors must be over 18; a director cannot be a body corporate (i.e., a corporation cannot appoint itself as a director).
Replaceable rules (Section 248A) can govern meetings and resolutions unless the company has adopted its own constitution and specific rules.
The board can delegate certain powers to a non-director (Section 198C); the CEO or similar role may be appointed with a broad mandate, while the board remains ultimately responsible for governance.

Meetings: directors vs members, notices, and resolutions

Directors’ meetings are separate from members’ (shareholders’) meetings.
Notice requirements apply to both types of meetings; members must be notified, and if shares are held by multiple people, notice should be given to at least one holder.
Replacement rules allow directors to proceed with meetings even if some directors are not present, provided there is a valid mechanism (e.g., consent by all directors listed in the constitution or statutory rules).
Dismissal and appointment matters link to the annual general meeting (AGM) or general meetings, depending on whether the company is private or public.

Appointment, removal, and disqualification of directors

Appointment: Directors are appointed at a general meeting (GM) via a resolution; up to more than one director can be appointed by a single resolution if the GM unanimously agrees.
Appointments must be confirmed in some cases: if a director dies, resigns, or becomes unable to act, the appointment by other directors must be confirmed by shareholders within a set period (e.g., two months for private companies; at the next AGM for public companies).
Removal: Public company directors must be removed by ordinary resolution (generally a simple majority) with proper notice to the company; private companies have similar mechanisms, often governed by replaceable rules or their constitution.
Oppressed minority remedy: under Section 233 (the oppression remedy), courts may remove or restrain actions that oppress minority shareholders.
Disqualification: Directors can be disqualified by court orders or by ASIC for various reasons, including bankruptcy, criminal convictions, or repeated contraventions of the Act; disqualification can be mandatory for certain offenses or behaviors, including involvement in multiple failed companies.
The Act also provides a pathway for directors to apply for re-entry after disqualification, subject to meeting conditions.

Remuneration and the board’s role

Directors’ remuneration is typically fixed by the general meeting; a board or committee may propose remuneration, but authority to approve remuneration often rests with the general meeting or as specified by the constitution, sometimes via a remuneration committee.
Notable cases illustrate that only certain bodies (e.g., the board or a properly constituted committee) may authorize special remuneration; a committee alone may not authorize remuneration unless empowered by the board or constitution (Guinness v Saunders).

Company secretary: duties and legal significance

The company secretary is a key officer, especially for public companies, with specific statutory duties under the Corporations Act and the ASX obligations.
The secretary’s primary fiduciary duties relate to keeping records up to date with ASIC and notifying the regulator of changes to directors and other key appointments.
The secretary is not necessarily a director, but may hold the same title and responsibilities under the Act.

Duties: core framework under sections 180–183 and related provisions

Core fiduciary duties include:
- Good faith and best interests: directors must act in good faith and in the best interests of the company as a going concern.
- Proper purpose: powers must be exercised for proper purposes, not for personal gain or improper ends.
- Avoid fettering discretion: directors should not bind themselves by previous commitments in a way that prevents proper exercise of discretion.
- Not to compete with the company or use information improperly: avoid conflicts of interest or opportunities that belong to the company.
- Information and confidentiality: use information obtained in the course of office appropriately; avoid improper use of information to benefit others.
Section 180: duty of care, skill, and diligence; the standard is objective but heightens when a director has special knowledge or expertise.
Section 181: fiduciary duty of good faith; directors must act in the best interests of the company as a whole and not in their personal interests.
Section 182: not to improperly use company information or position to gain advantage for oneself or others.
Section 183: additional duties to avoid improper use of information and to avoid conflicts between personal and company interests.
Section 185 onward (and related): common-law duties still apply, including business judgment and other tort-like expectations.
The “business judgment rule” is a defense that can shield directors from liability if they acted in good faith, informed themselves, and had no conflict of interest, among other criteria; see Section 180(2) for the rule and its limitations.

Care, skill, and diligence in practice

Directors’ care needs to reflect the circumstances: the standard codifies tort-like expectations—if a breach causes loss that is reasonably foreseeable, there may be civil penalties.
The care standard is not purely clerical; it requires active, informed decision-making, and the exercise of reasonable judgment given the director’s knowledge and the company’s circumstances.
If a board decision is negligent, civil penalties may be imposed; the business judgment rule may provide a defense if the decision was made in good faith and with reasonable care.

Practical and notable case law (illustrative cases discussed in the lecture)

ASIC v Adler (Asick and Adler): Adler breached duties as an officer of HIH and HIHC by engaging in improper transactions through a trust and related entities, including unsecured loans to himself; the court held that he acted in a way that benefited his interests and not the company’s and that consciousness of impropriety could be inferred from the structure and lack of oversight.
Bailey v Mandela Private Hospital: a director/shareholder issued shares to his spouse to maintain control; this was not for the company’s benefit and was deemed not in the company’s best interest.
Guinness plc v Saunders: remuneration may only be authorized by the board (or via constitution) and not by a committee of the board; underscores the governance architecture for remuneration decisions.
Re George Newman & Co.: directors’ duties arise from fiduciary principle; the case reinforces the English-origin principles that continued to inform Australian practice.
Walker Wimborne (and related) line of authorities: director duties in the context of group companies; directors owe duties to each company separately, even when actions affect the group as a whole; misaligned actions between subsidiaries and holding companies can breach duties.
Gambotto v. Woodhouse: oppression remedy in the context of minority shareholder rights; highlights the court’s role in protecting minority interests when governance actions threaten their rights.
Scottish Cooperative Society v. Leach, etc. (subsidiary cases): directors appointed by the holding company can breach duties if they act to protect the holding company’s interests at the expense of minority subsidiary shareholders.
5xx series and creditor considerations: in certain insolvency contexts, creditors’ interests may become relevant, and directors may owe duties to preserve going-concern value and minimize losses to creditors.
The Basel line of authority clarified that reliance on information or actions by others does not automatically shield a director from liability; however, certain relationships (e.g., banks lending money) can create officer status depending on the context.

Going concern, creditors, and group dynamics

Directors must consider the going-concern status of the company and balance the interests of creditors and shareholders where insolvency is imminent.
In some group contexts, the holding company’s decisions can affect the subsidiary. Where this occurs, directors must be mindful of the interests of the subsidiary’s creditors and shareholders, not just those of the holding company.
Equicorp Finance and related cases illustrate that cross-company loans or inter-company transfers can be legitimate if carried out to sustain the group’s viability, but they can be problematic if used to shift value to the detriment of another company in the group.

Practical governance implications and exam-ready takeaways

Always identify whether you are dealing with a private or public company, because the director counts, residency requirements, and secretary obligations differ.
Distinguish between:
- Directors’ fiduciary duties (good faith, proper purpose), and
- The duty of care, skill, and diligence (tort-like due care expectations; existence of business judgment rule).
Remember the concept of officers: not only directors but also shadow/de facto directors and the company secretary; understanding who counts as an officer matters for liability exposure.
Be familiar with the key statutory sections: ext{Section } 180- ext{183} (fiduciary and care-related duties), ext{Section } 188- ext{189} (reliance and related matters), ext{Section } 201 ext{A–J} (board composition and appointment), ext{Section } 248A (replaceable rules), ext{Section } 233 (oppression remedy), ext{Section } 204A (company secretary duties), and ext{Section } 206 (disqualification and related powers).
Understand practical governance: board delegation powers (to CEO) but with ultimate accountability to shareholders; the board ratifies major strategic decisions and oversees risk management and capital allocations.
Real-world relevance: directors must align short-term actions with long-term going-concern viability, balancing the interests of creditors, shareholders, and employees; ethical and professional responsibilities matter just as much as legal duties.

Quick reference: key section and case anchors (for exam navigation)

Governance and duties: ext{Section } 180, 181, 182, 183; common-law influence persists via ext{Section } 185 and related provisions.
Business judgment rule defense: ext{Section } 180( ext{2}).
Directors and officers: ext{Section } 9 (definitions of officer, de facto, shadow director).
Appointments and removal:
- Initial appointment and director eligibility: ext{Section } 201A (and related subsections).
- Removal by ordinary resolution (public company): ext{Section } 203; oppression remedy: ext{Section } 233.
- Two-month notification and AGM confirmation for director appointments/resignations: ext{Section } 203 ext{(D/H)}.
Replaceable rules: ext{Section } 248A; resolutions and director voting mechanics defined therein.
Company secretary duties: ext{Section } 204A.
Insolvency and creditor considerations: ext{Section } 588G (creditor protections in insolvency contexts); other relevant provisions in the 500s and 600s ranges for corporate failure scenarios.

Study tips and exam strategy

Treat each director as a fiduciary who must act in the company’s best interests in good faith and for proper purposes, while also meeting the objective standard of care and diligence.
When answering questions, separate the issues: (1) fiduciary duties (good faith, proper purpose, conflicts of interest) and (2) care/diligence (business judgment rule and reasonable care).
Use a matrix approach: identify whether the subject is a director, de facto/shadow director, or officer; outline the applicable duty, the standard, and the potential liability.
Cite the correct statutory sections, and for cases, provide the core principle (e.g., Adler/Bailey/Guinness) rather than reproducing the entire case history. Include case names and year if known, and briefly state the holding and its significance.
In hypotheticals involving group企業, emphasize the separate duties to each company and the potential for conflicts when the holding company’s interests diverge from a subsidiary’s interests.
Remember the practical governance aspects: director appointments, tenure confirmations, and the possibility of replacing directors by ordinary resolutions; the independence/agenda considerations of the board.

Note: For assignments, focus on how the Corporations Act, together with the common-law fiduciary framework, governs directors’ duties, including how the business judgment rule can operate as a defense and how breaches may lead to civil penalties or other remedies. Look up the exact wording in the Corporations Act for precise phrasing and section cross-references, and supplement with case names as needed to illustrate the principles.