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The good faith duty of a director

Updated: 7 December 2019

Directors have a duty of good faith.

Also, civil and criminal penalties may apply for a breach of good faith.

Below is a break down of the good faith duty to help you better understand this director duty and avoid legal trouble. 

Now, when you see the word director, you can also think of any agent acting on behalf of the director, because they also have a good faith duty. 

Next I will be walking you through section 181 and section 184 of the Corporations Act 2001 (Cth) to learn more about the good faith duty.

Let's start with the civil duty. 

The civil duty of good faith

Now, there are positive actions a director needs to take under section 181.

For instance, a director must exercise their powers and carry out their duties in good faith in the best interests of the company and for a proper purpose.

Importantly, the section 181 duty is a civil one. This means if a director breaches section 181 a court may order civil penalties.

However, ASIC may also consider criminal action for dishonest, intentional or highly reckless actions as well.

So what are the civil penalties?

Civil penalties

Well, civil penalties may include disqualification, compensation or financial penalties. Financial penalties may be up to $200,000 for individuals.

The meaning of not acting in good faith

In addition, section 184 goes further to explain how the section 181 good faith duty can be breached. 

For instance, a breach if the director is reckless or intentionally dishonest and also fails to exercise the powers and carry out their duties in good faith in the best interests of the company or for a proper purpose.

So why are there criminal penalties under section 184?

Intent.

Because a criminal offence has to do with the intent to do something wrong.

Accordingly, if intent is proven, a criminal remedy may apply.

Now, what exactly are the criminal penalties?

Criminal penalties

Criminal penalties may include fines, the lowest being $850. A dishonest breach of good faith may attract a penalty up to $340,000. 

Also, market manipulation or insider trading can be fined up to $765,000 or up to 3 times the value of the benefit obtained from the conduct.

In a nutshell

Directors have a good faith duty under corporations legislation. ASIC may choose civil and criminal remedies for a breach of good faith. 

Do you have any questions about the good faith duty of a director? Leave them below.





Vivian Michael
 

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to deliver the best quality business legal services to entrepreneurs launching an Australian business, wherever they are in the globe.

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