Duty Of Good Faith And Proper Purpose In Business Corporations, Essay.

Compliance Duties of Business Corporation Directors

A primary responsibility of the directors of the business corporations can be said to be the compliance in relation to the prerequisite that one should perform that actions in good faith as well as in relation to a proper purpose. This specific duty is actually present so that it can be ensured that one performs the actions in relation to the best interests and well-being of the business corporation, and also because one can be prevented from utilizing the powers in order to secure any private advantage or gain. It should be noted that the directors of the business corporations are in a specific fiduciary relation with the particular members of the concerned business corporation, although, they actually possess an extensive notch of authority so that they are able to implement their intellect and understanding in order to fulfill the fast-pacing necessities in the connection to the functioning of the business corporation. Due to such reason, the directors are obligated to perform the actions in connection to any proper purpose and well-being of the company. Section 181 as provided in the Corporations Act (Cth) of 2001, which actually mentions that duty relating to good faith, mandates an officer or a director to perform the actions in relation to the company in good faith as well as in connection to a proper purpose and best interests of the concerned company. This particular essay shall forward a discussion regarding the remedies that could be acquired when any officer or director of any specific company has committed any improper purpose while utilizing the powers or authorities and while performing the responsibilities.

Conceivably, the most cruel and harsh arraignment concerning the doctrine relating to proper purpose is that, in actuality, the doctrine gives rise to some confusion regarding the review and assessment of exercise of authority or power by the directors. According to Farrar J (‘Abuse of Power by Directors’ [1974] CLJ 221), the doctrine relating to proper purpose actually encompasses a kind of ‘crypto value judgment’ that the courts essentially find useful and valuable but which gives rise to flexibility and suppleness at the cost of certainty. This has been understood from certain prominent cases. In this regard, it has previously been detected that most of the analysis relating to proper purpose traces its origins to 2 early 20^th century cases, which includes the cases cited as Piercy v S Mills and Co [1920] 1 Ch 77 and Punt v Symons and Co [1903] 2 Ch 506. Both the above said cases encompassed the issue relating to shares by the directors for supposedly ‘improper purposes’ and occasioned into judicial declarations to the specific effect that the objective or purpose regarding the power or authority to actually issue shares was in some way constrained to the accumulation of the capital. In either of the above said cases, the corporate constitution did not encompass any express restriction on the power or authority to issue the shares.

 In the case of Hogg v Cramphorn Ltd [1967] Ch 254, the directors of a concerned company replied to a specific takeover proposal through the issue of an adequate enough quantum of shares in order to ensure the constant majority support or aid for the unavoidable or compulsory board. In the above said case, the directors had been informed regarding the takeover bid by a specific number of theirs, Cramphorn (who previously conducted the company business along with his family). It was the view and opinion of Cramphorn that if the particular takeover had been successful then there would have been a damaging alteration in the facet of the trading activities of the company. The concerned shares had been issued in respect of the trustees in relation to a trust that was established for the corporate employees. Such issue of the shares had been challenged based upon the ground that such issue was in connection to an improper purpose. Fascinatingly enough, it had been held by Buckley J in the above said case that the directors performed the actions in the best interests and welfare of the business corporation (as per their belief). However, in spite of such finding, the judge did not allow such exercise of authority or power based upon the fact that the specific directors had performed the actions in connection to an improper purpose.

Doctrine of Proper Purpose and its Legal and Judicial Perspectives

The High Court of Australia appear to have endorsed the proper purpose test in Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11. This particular case actually involved a specific director undeniably issuing shares in order to influence power and control. It had been accepted by the Court that the concerned director had been driven by a yearning to perform what he considered to be in best interests and well-being of the business corporation. It had been held by the majority of the High Court judges that what had been given to Mr. Whitehouse was actually the power or authority to allot and assign the shares, and the instances evidently establish the fact that a purpose of controlling the voting power in relation to the shareholders is normally distant to such an authority. Regarding the assertion of Mr. Whitehouse that he performed the actions in best interests and well-being of the concerned company (as per his own belief), it had been held by the Court it did not create or establish a contending permissible purpose.

A more current case evidently reveals the manner in which the law is actually uncertain in relation to the areas of proper purpose. The case is Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260. In this particular case, distinguishing from the Whitehouse case and the Cramphorn case, the reasoning of the judge in the above said case was that the presence of the takeover offer as well as the desire of the directors to overthrow it, does not mechanically result in the deduction that the specific power had been exercised in connection to an improper purpose. In this regard, one may ask the question that if the specific reasoning in the Darvall case is correct and precise, then it shall be difficult to see the reason as to why a proper purpose mandate is added to the condition that the directors actually exercise their powers and authorities bona fide in best interests and welfare of the concerned company in section 181 of the Corporations Act of 2001.

The business judgement rule can be said to be a pertinent aspect in connection to the rule of ‘proper purpose’. The business judgement rule pursues to evade any unnecessary limitation upon proper entrepreneurial activity. Section 180(2), as provided in the Corporations Act, states that any particular director who actually makes any ‘business judgment’ (which can be said to be any specific decision for taking or not taking any action in relation to the matters that are pertinent to the functioning of the business of the concerned company), shall be considered to have fulfilled the requirements relating to due diligence and care in relation to the judgment, if such director has actually made the judgment in connection to a proper purpose and in good faith. In this regard, the case of Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 can be regarded as a relevant case. It should be noted that the decision provided in the above said case, has revived the ‘business judgment rule’ in the Australian company law, and gained the capability of delivering a defense in few cases that would or else result in a violation of any director’s duty.

Remedies for Improper Exercise of Power by Directors

Regarding the above said matter, one should also consider another provision of Corporations Act (Cth), which is section 249Q. Section 249Q deliberates that any meeting of the members of any concerned company should be held in connection to a proper purpose. Section 249Q had been considered by Court of Appeal of New South Wales in the case of NRMA Ltd v Snodgrass [2001] NSWCA 312. In the case, the respondents had requested a particular meeting of the NRMA members in accordance to section 249D for the objective or purpose of letting the members to take int consideration a specific resolution that would amend and modify NRMA’s constitution. The projected amendment shall mandate the directors (who have been elected as a board member of the NRMA in the year of 1999, as well as in every succeeding election of the directors) to publish and distribute in respect of the members the entire details regarding the funding of their election campaign. Any specific director might fail to comply, shall be disqualified from being a director. In the first 2 instances (the initial decision as well as the decision on appeal), it had been held that the requested meeting had been in relation to a proper purpose as per section 249Q. In the first instance, it had been stated by Windeyer J that the members shall not be able to call meetings for making decisions regarding the management matters that are entirely vested in the directors. Such meeting shall be summoned for any improper purpose. However, it had been provided by NRMA’s constitution that subject to law as well as other provisions in the constitution, the management control in relation to its affairs and business is conferred upon the directors in order to amend and modify the constitution for achieving the status that certain specific matters in relation to the management should be handled as per the guidance of the constitution.

In the case of NRMA Ltd v Parker (1986) 4 ACLC 609 the judgement that had been forwarded by McLelland J in the Court of Appeal of New South Wales, had been distinguished based upon the fact that the projected resolution in the above said case never sought to amend and modify the constitution of the business corporation, as well as due to the fact that the projected resolution wanted to exercise an authority or a power that is conferred entirely upon the board by company’s constitution. However, the decision forwarded in the case of Re Molopo Energy Ltd; Molopo Energy Ltd v Keybridge Capital Ltd (2014) 104 ACSR 46, states something else. It had been stated in the above said case that even when a specific resolution that have been proposed by the members, is in relation to the amendment of the constitution in to permitting the members to make a decision regarding any a matter (which would otherwise be actually decided and settled by the directors), the specific resolution shall not be effective or valid if Corporations Act confers the decision-making authority or power (regarding the matter) upon the board of directors.

When a contravention of section 181(1) of Corporations Act is caused by any officer or director, then, a civil penalty could be imposed upon such individual as per section 1317E of the above said Act. In accordance to section 1317E, if any specific court is contented that an individual has actually caused a contravention or infringement of any civil penalty provision (which includes section 181(1)), then Court shall make a declaration in regard to such contravention, specifying the individual causing the contravention, the exact provision that has been contravened, the conduct that resulted in the contravention, as well as the court that actually made the particular declaration. In this regard, the provisions of section 1317H, section 1317G and section 206C (as provided in the Corporations Act of 2001) can also be regarded as pertinent provisions. Section 1317H of the above said Act specifies that a particular Court might order an individual in order to compensate any specific corporation, any ‘notified foreign passport fund’ or any registered scheme, for the damage or harm that may have been suffered by the corporation, fund or scheme, provided that the individual has actually caused a contravention of any scheme/corporation civil penalty provision regarding the corporation, fund or scheme, and also provided that the damage actually resulted from such contravention. The above said provision also specifies that the order should stipulate the amount in relation to the compensation. It should be noted that any order could be made in accordance to section 1317H irrespective of whether a declaration relating to contravention has been made as per section 1317E.

Section 1317G, as provided in the Corporations Act (Cth) of 2001, any Court shall be able to order an individual to make payment in respect of the Commonwealth a pecuniary (monetary) penalty of an amount up to 200000 dollars if (i) a declaration relating to contravention by the concerned individual has actually been made as per section 1317E, and (ii) the contravention substantially prejudices or biases the interests of the scheme or corporation or the members, or substantially prejudices the ability of the corporation to make payment in respect of its creditors, or is serious. In accordance to the above said section, the penalty can be said to be a civil debt, which is payable in respect of ASIC on behalf of the Commonwealth. The Commonwealth or the ASIC might enforce or implement the order in a manner, which might be in the form of an order that is made in the civil proceedings against the individual in order to recuperate a debt that would be due by the individual. The debt that may arise from the order is actually regarded as a judgment debt.

Another important section in this regard is section 206C. Section 206C, as provided in the Corporations Act of 2001, mentions that upon application by the ASIC, the Court might disqualify an individual from the management and regulation of the business corporations for any time period that the specific Court may consider to be fitting, provided that a declaration has been made as per section 1317E (a civil penalty provision) that the particular individual has actually caused a contravention of any scheme/corporation civil penalty provision [or the subsections 670A(4), 728(4), 1309(12) or 727(6)], and as per section 386-1 (a civil penalty provision) of Corporations (Aboriginal and Torres Strait Islander) Act of 2006 that the individual has caused a contravention of a specific civil penalty provision (as per the meaning of the above said Act); and also that the Court has been satisfied that such disqualification is actually justified. This particular provision further specifies that in determining or deciding as to whether the specific disqualification is acceptable and justified, the particular Court might take into consideration (i) the conduct of the individual in connection to the business, property or management of any business corporation, and (ii) any other matter, which the Court might believe to be appropriate.

Conclusion

In the conclusion, it can be said that the directors are obligated to perform the actions in connection to any proper purpose and well-being of the company. Section 181 as provided in the Corporations Act (Cth) of 2001, which actually mentions that duty relating to good faith, mandates an officer or a director to perform the actions in relation to the company in good faith as well as in connection to a proper purpose and best interests of the concerned company. This particular essay has discussed that remedies could be acquired when any officer or director of any specific company has committed any improper purpose while utilizing the powers or authorities and while performing the responsibilities. 

Abuse of Power by Directors’ [1974] CLJ 221.

Australian Securities and Investments Commission v Rich (2009) 236 FLR 1.

Bidie, Simphiwe, “Director’s Duty to Act for a Proper Purpose in the Context of Distribution under the Companies Act 71 of 2008” (2019) 22 Potchefstroom Electronic Law Journal 1 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3462274>

Corporations Act, 2001 (Cth).

Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260.

Federal Register of Legislation, “Corporations Act 2001,” Legislation.gov.au (2012)

https://www.legislation.gov.au/Details/C2019C00216

Gov.au, “General Duties of Directors - Corporations Act 2001 (Cth),” www.lawhandbook.sa.gov.au (2021)

<https://lawhandbook.sa.gov.au/ch05s04s03.php>

Hogg v Cramphorn Ltd [1967] Ch 254.

Keay, Andrew, et al. "Business judgment and director accountability: a study of case-law over time." Journal of Corporate Law Studies 20.2 (2020): 359-387. https://www.tandfonline.com/doi/abs/10.1080/14735970.2019.1695516

Legislation.gov.au, “Corporations Act 2001,” Legislation.gov.au (2012) & lt;

https://www.legislation.gov.au/Details/C2019C00216&gt

NRMA Ltd v Parker (1986) 4 ACLC 609.

NRMA Ltd v Snodgrass [2001] NSWCA 312.

Piercy v S Mills and Co [1920] 1 Ch 77.

Punt v Symons and Co [1903] 2 Ch 506.

RCA Higgins, Regulatory Enforcement of Directors’ Obligations Aspects of Proceeding Against, and Defending, Directors in Regulatory Proceedings RCA Higgins SC* (2019)

<https://academyoflaw.org.au/resources/RCA%20Higgins%20Paper%20Australian%20Academy%20of%20Law%2022.2.21.pdf>

Re Molopo Energy Ltd; Molopo Energy Ltd v Keybridge Capital Ltd (2014) 104 ACSR 46.

Van der Waal, Johannes WH, and Thomas Thijssens. "Corporate involvement in sustainable development goals: Exploring the territory." Journal of Cleaner Production 252 (2020): 119625.

https://www.sciencedirect.com/science/article/abs/pii/S0959652619344956

Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11.