Understanding Director's Duties: Essay On Good Faith And Best Interest Of The Company.

Good Faith

Discuss about the Good Faith And Best Interest Of The Company.

The subject matter of the present case is to define the term good faith and best interest of the company and the relationship between the best interest of the company and in the interest of the company as a whole. The Corporation Act of 2001 in Australia deals with the subject matter or any case related to the company or the corporation. In the present case, there are three terms used, such as good faith, best interest of the company and in the interest of a company as a whole (Anderson 2014). The terms are interconnected with each other that are based on the duty of a director of a company. Under the Corporation Act 2001, it has been stated that every directors has certain duties towards the shareholders and as well as the other stakeholders and they should be maintained good faith while performing their job (Barker, Barton and Fagan 2016). Therefore, it can be observed that, it is the primary duty of the director of a company to act in good faith for the best interest of the company as well as in the interest of the company as a whole. The objective of the act is to secure the interest of the shareholders and so that the company’s future becomes prosperous. It is true that the terms are interconnected to each other but there are certain differences can be observed regarding the best interest of the company and in the interest of the company as a whole (Bolimos, Bolimos and Choo 2017).

The term good faith means to do some job or work sincerely. Under the Corporation Act the term good faith denotes to identify the acts of the director in the course of their duties. Under the purview of Corporation Act 2001, two section 181 and section 184 deal with the term good faith. In every company directors plays an important role, grab an important position for the management of the company in a better way, and work in that way for the betterment of the company (Brown and Lawrence 2017). It is the primary duty of a director to look into the matter responsibly and to make a connection between the company and the stakeholders.

Stakeholders consist of certain kinds of persons without whom the company cannot be incorporated or cannot be continued its duties (Chia and Ramsay 2016). It can be stated that if the director of a company does not work in good faith, there can be certain contradictions happen regarding the procedure of the company and the primary objective of the Act cannot be fulfilled. The director should keep in mind that he must perform his duties on the basis of the interest of the company and shareholders. Law to secure his own interest without securing the interest of the company bars him (Dixon 2016).

Best Interest Of The Company

The principle of good faith is based on the principle of equity. Under the Corporation Act 2001, there are certain fiduciary duties and certain statutory duties present and it is the duty of every director to act on the basis (Hannigan 2015). By fiduciary duties it is meant, something that is related to the trust and the term is connected and/ or must regarding the person posted in an important place.

The term good faith is used to denote the performance of the company’s director so that they can maintain honesty in the job environment. From the definition, it can be clarified that what are the importance of a director in a company. The directors of a company are represented themselves as a governing body as the executive head of the company (Hiller 2013). It has been stated under section 180 of the Corporation Act that every director of a company should act diligently and must show certain care to the shareholders of the company. It is the primary object of the director of the company to act in good faith and the relevant provisions of the same as discussed under section 181 of the Corporation Act 2001. It has been stated under the section that there are certain mandatory duties for the director of a company and one of such duty is to act in good faith. It has been stated earlier that the director of the company holds an important position in the administration of the company and therefore if the directors have failed to make them trustworthy, then the future of the company can be affected at large (Mills 2014). The primary objective of section 184 Corporation Act is to secure the interest of the company and therefore if there is any breach regarding the good faith by the director of the company has been observed and allegation brought against the director of a company, he shall be liable to face the relevant provisions of law regarding the breach. There is another provision under the Corporation Act 2001 that is mentioned under section 184. This section is quite different than the section 181 of the Corporation Act to certain extent (Nicholls, Donald and Liu 2015). The term good faith has been defined under section 181 of the Corporation Act, where section 184 of the Corporation Act deals with the criminal breaches made by the director regarding the term good faith. Certain penalties or also imposed on the directors if the allegations made against the directors of the company regarding the good faith has been proved or has been supported by the evidences.

A director can violate the position of good faith in case where they will be failed to perform their duties sincerely and certain reckless acts done by the directors during the course of their employment (Riaz, Ray and Ray 2015). In ASIC v Adler (2002), it was held that it is the duty of the director to act diligently and in good faith with the shareholders of the company. Under the scenario of the case, a non executive director of a company has both certain shares regarding the insurance company and with an intention to cheat or deceive the company and tried to proceed with the same ulterior motive. It has been observed that Adler was not disclose all the relevant facts to the shareholders and his colleagues including the other directors of the company and therefore held liable under the provision of the section 181 of the Corporation Act regarding violation of the position of good faith.

In ASIC v Macro Realty Developments Pty Ltd (2016) it has been observed that the fiduciary duties of a director has been violated by the development company and therefore help liable under section 181 of the Corporation Act 2001.

The term best interest of the company stands on the interest of the shareholders. It is no doubt that the shareholders of a company are playing an important role in the administration of the company. The economic backbone of the company is very much dependent on the sets of the shareholders on certain circumstances. Shareholders are buying the share of a company and hence they help the Company to gain liquid cash. Being holding a fiduciary position it is that the duty of a director to act for the benefit of the shareholders and to secure the interest of the shareholders. Except the investment every shareholder of a company and holding certain important places regarding the appointment of the director and regarding the participation in the Annual General Meeting of the company.

The Corporation Act 2001 was enacted to secure the interest of the company as well as the interest of the shareholders. It helps to give security to the shareholders from the arbitrary acts of the directors. Care intelligence at the most important thing for the directors of a company while communicated to the shareholders. The provision regarding the section 180 of the Corporation Act states about the care and diligence of the director of a company. In ASIC v Cassimetes, it has been held at the director of certain duty towards the shareholders and act for the interest of the shareholders as a whole. The Directors are stopped by the Corporation Act to receive the shareholders of a company of to snatch away the basic right of the shareholders. In this case the directors of the storm company have projected a business model and announced the shareholders of the investors to invest their money into the project 2 on a lump sum amount after the maturity of the period. The director of the company had failed to make the investors aware about the risk of the investment and after financial break down, all the invested money had lost. Therefore, there is a clear laxity regarding the interest of the shareholders have been observed in this case.

Director of a company should have the intention to work in such a manner so that the acts can be resulted in the prosperity of the company and should have some intentions to work positively. In a company, directors are holding such important position and therefore it can be said that the directors of a company have certain fiduciary duties to be performed during the course of their business. The law has prescribed certain provisions on the fiduciary duties and it is stated under the act that the directors should be performed their duties or the fiduciary duties honestly (Hiller 2013). From this aspect, it is their responsibility to deal with the shareholders with due diligence.

In Sharp &Ors. v Blank and Ors. (2015), it was observed by the court that every director should be loyal when acting with the shareholders of the company and have to provide relevant information regarding any kind of works.

In Starlink International Group v Coles Super market, it was a list against the supermarket that a contract have been signed in between the company and the supermarket and afterwards the contract, the Supermarket head terminated all the provisions of the contract without maintain the relevant provisions to this aspect. Therefore, a case was filed against the supermarket and the court ordered that the supermarket has failed to show any evidences regarding the diligence performed by the supermarket regarding the contract.

The second question of this paper is based on the differences between the best interest of the company and in the interest of the company as a whole and through this chapter, it has been mentioned in a detailed way. It is clear from the previous answer that the time best interest of the company is interconnected with the interest of the shareholders of the company. It is an obligation to the directors of the company to act in good faith regarding the shareholders and penalties are provided in the provision of the Corporation Act if any breach has happened by the directors to this respect. In Hutton v Wester Cork Railway Co. (1883), it was observed that the director of a company hold certain fiduciary positions and therefore it is their ability to act for the interest of the shareholders (Tills and Wills 2016).

It is of no doubt that the shareholders of the company hold certain important position in the company and there's interest should be secured by the directors as they hold certain fiduciary position in the company. In the profession of Australia, shareholders are playing an important role regarding the administration of the company. Therefore, it is there right to get certain benefits so that there interest can be secured and it is the duty of the director of the company to disclose all the relevant facts and matters to facilitate the process of securing the interest.

The term interest of the company as a whole is not limited to the shareholders of the company only, but it means the interest of the company as a whole. In every company the administration of the executive works are performed by the stakeholders that include the director also. Therefore, it can be said that the administrative over the executive duties of a company is depended all the acts of the stakeholders. In Aberdeen Ry. V Blaikie(1854), it was observed that a director of a company has to show interest for the stakeholders as a whole and should not be Limited after certain categories of the stakeholders.

It can be observed that a company is a separate legal entity through different case laws. It has also been mentioned that the stakeholders are the part of it and the company cannot make any steps or move without the directors and the other stakeholders. Sometimes, it can be seen that the directors are also included under the definition of the stakeholders. The directors are represented the company in various occasions and therefore it is the duty to act in good faith or to act diligently. Under the Corporation Act there are certain provisions dealing with the acts of the directors and regarding the breach in the director’s duties (Li 2014).

In Salomon v Salomon (1897), it can be stated that a company is a separate legal entity and therefore it is the duty of the director of a company to act for the interest of the company and not to the interests of the specific person of the company (Viven-Wilksch 2015). It is a historical case regarding the company act and the principle of lifting the corporate veil has been raised from the case. In Sharp v Blank & others, certain contradictory profession was made as against the case of Solomon. In this case, it was observed by the court that share holders at the part of the company and company is not separate from the shareholders or the stakeholders. The principle of interest of the company as a whole has been established in this case and it was held by the court that the director of a company should act by maintaining the following principles laid down under the previous case (Welsh 2014).

In Perceval v Wright (1902), an allegation against the director has been made and it was stated that he had failed to provide sufficient interest to the company while performing his duties. The presiding officer of the case was point out certain relevant provisions regarding the apps of the detector and stated that the primary object of a director is to secure the interest of the company and the interest of the shareholders at the secondary object.

From the above statement, it is to be stated that there is a difference between the two terms. By best interest of the company, it means for the interest of the shareholders and in the interest of the company as a whole means for the interest of the company only. In the later part, it is to be observed from the various decisions of the court that company is a separate legal entity and shareholders are just a part of it (Whincop 2017). It is to be stated that the director of a company should have to take personal care to the company only and not to the shareholders. Therefore, it can be stated that the two terms are contradictory in nature. However, both the terms are inter-related to each other as both the terms are connected to the interest of the company.

Conclusion

Therefore, it is cleared from the above mentioned discussion that all the three terms of this case that is the good faith, best interest of the company and in the interest of the company as a whole is interconnected to each other. There is a prolonged study about the director’s duties and responsibilities towards the company and the shareholders has been discussed in this paper. All the relevant principles of law as well as a profession of the Corporation Act 2001 have been discussed in this paper. The contradiction between the best interest of the company and in the interest of the company as a whole is still remain unsolved. There are different notions about the same has been taken place in different cases. How work the main outcome of the paper is that director is holds certain fiduciary position in the management of the company and he has to secure the interests of the company as well as the interests of the shareholders during the performance of his duty.

References:

Aberdeen Ry. V Blaikie (1854) UKHL 1

Anderson, H., 2014. Directors' Liability for Fraudulent Phoenix Activity—A Comparison of the Australian and UK Approaches. Journal of Corporate Law Studies, 14(1), pp.139-173.

ASIC v Adler (2002) NSWSC 171

ASIC v Casemates [2016] FCA 1023

ASIC v Macro Realty Developments Pty Ltd (2016) FCA 292

Barker, S., Baker-Jones, M., Barton, E. and Fagan, E., 2016. Climate change and the fiduciary duties of pension fund trustees–lessons from the Australian law. Journal of Sustainable Finance & Investment, 6(3), pp.211-244.

Bolimos, I.A., Bolimos, I.A., Choo, K.K.R. and Choo, K.K.R., 2017. Online fraud offending within an Australian jurisdiction. Journal of Financial Crime, 24(2), pp.277-308.

Brown, A.J. and Lawrence, S.A., 2017. STRENGTH OF ORGANISATIONAL WHISTLEBLOWING PROCESSES–ANALYSIS FROM AUSTRALIA & NEW ZEALAND.

Chia, H.X. and Ramsay, I., 2016. An Analysis of Shareholder Resolutions Involving Australian Listed Companies from 2004 to 2013.

de Melo Bandeira, G.C.S., 2013. “Corruption” and social and economic criminal law: Criminology, criminal policy, political science and law & economics–A new idea about criminal liability of legal entities. Tékhne, 11(2), pp.105-113.

Dixon, O., 2016. Honesty without Fear-Whistleblower Anti-Retaliation Protections in Corporate Codes of Conduct. Melb. UL Rev., 40, p.168.

Hannigan, B., 2015. Company law. Oxford University Press, USA.

Hiller, J.S., 2013. The benefit corporation and corporate social responsibility. Journal of Business Ethics, 118(2), pp.287-301. Hiller, J.S., 2013. The benefit corporation and corporate social responsibility. Journal of Business Ethics, 118(2), pp.287-301.

Huggins, A., Simnett, R. and Hargovan, A., 2015. Integrated reporting and directors’ concerns about personal liability exposure: Law reform options. Company and Securities Law Journal, 33, pp.176-195.

 Hutton v Wester Cork Railway Co. (1883)23 Ch D 654

Li, Y., 2014. The impact of corporate governance on the corporate social responsibility of small corporation in australia: a structural equation modeling approach. In WEI International Academic Conference Proceeding, New Orleans, USA.

Mills, C.W., 2014. The racial contract. Cornell University Press.

Nicholls, R., Donald, M.S. and Liu, K., 2015. It's a Small World after All: Using Social Network Analysis to Investigate Systemic Risk in the Australian Superannuation Sector.

Percival v Wright [1902] 2 Ch. 401

Riaz, Z., Ray, S. and Ray, P.K., 2015. Collibration as an alternative regulatory mechanism to govern the disclosure of director and executive remuneration in Australia. International Journal of Corporate Governance, 6(2-4), pp.241-274.

Salomon v Salomon Co. Ltd (1897) AC 22

Sharp & Ors. V Blank and Ors. (2015) EWHC 3220 (Ch)

 Starlink International Group Pty Ltd v Coles Supermarkets Australia Pty Ltd & Anor [2011] NSWSC 1154

Tills, M. and Wills, C., 2016. Corporate law: Directors found guilty of breaching duties following corporation's breaches. Governance Directions, 68(10), p.624.

Viven-Wilksch, J., 2015. The adventures of good faith: can legal history and international developments provide guidelines for Australia?. Alternative Law Journal, 40(2), pp.89-92.

Welsh, M., 2014. Realising the public potential of corporate law: Twenty years of civil penalty enforcement in Australia. Fed. L. Rev., 42, p.217.

Whincop, M.J., 2017. Corporate governance in government corporations. Routledge.