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The good faith duty of a director
Updated: 11 May 2022
Directors have a duty of good faith. 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.
This means a director cannot allow personal or conflicting interests to interfere with the company’s interests. Directors must declare conflicts of interest and avoid deliberations in these matters for the best interest of the company. A director of a company board must always put the company’s interests before their own.
Civil and criminal penalties may apply if a director does not exercise their powers with due diligence
The term "director" can also mean any agent acting on behalf of the director. This is because agents also have a good faith duty.
The relevant parts of legislation for good faith duties are Sections 181 and 184 of the Corporations Act 2001 (Cth].
The civil duty of good faith
There are positive actions a director needs to take under Section 181.
For example, a director must act with proper purpose. An example of improper purpose is a director that uses their powers for personal gain.
Importantly, 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 may include disqualification, compensation or financial penalties. Financial penalties may be up to $200,000 for individuals.
Meaning of not acting in good faith
What does NOT acting in good faith mean ?
A breach can occur if a director is reckless or intentionally dishonest and also fails to exercise their powers and carry out their duties in good faith in the best interests of the company or for a proper purpose.
Why do criminal penalties apply under section 184?
In a word, intent.
A criminal offence has to do with the intent to do something wrong. So, if intent is proven, a criminal remedy may apply.
What criminal penalties can apply?
Criminal penalties may include fines from between $850 up to $340,000 for a dishonest breach.
Also, if found guilty of market manipulation or insider trading, a fine of up to $765,000 or up to three times the value of the benefit obtained from the conduct can apply.
In a nutshell
Directors have a good faith duty under corporations legislation to always put a company’s best interest before their own.
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.