Director’s Duties – Duty of Good Faith

Date: Apr 30, 2014
Document Type: Article

As a director of a company, you have many duties and obligations to the company arising from common law and statute.

It is important to be aware of these duties regardless of how large the company is or the extent of your involvement in the company.

The main duties of a director include:
  • Duty to act in good faith
  • Duty of care, diligence and skill
  • Duty to avoid conflicts of interest
  • Duty not to improperly use your position or information
  • Duty not to trade whilst insolvent

Failing to be aware of the existence and extent of these duties can get you into serious trouble with, amongst others, ASIC and can cause significant personal liabilities.

This article addresses the duty of good faith. Other articles on this website will address other duties.

Duty of Good Faith

The duty of good faith has several distinct and independent elements. As a director you must perform your role in the company:

  • in good faith;
  • for the benefit of the company as a whole; and
  • for a proper purpose.

What do I have to do?

As a director you must act honestly and in what you consider to be the best interests of the company.

This means you must place the interests of the company ahead of employees, any third party, the public and especially your own interests. Of course this does not mean that you can breach your legal obligations to those other people. What it means is that you have to act within the law but in compliance with your primary duty to the company.   There are some exceptions to this rule, such as duties owed to creditors when the company is facing insolvency.

Your actions must also be for proper purposes. This means you can only exercise a power granted to you as director for the objective purpose it was granted. For example, if you are given the power to issue shares to raise capital you cannot use it to defeat the voting power of existing shareholders.

A good place to start in determining the interests of your company is by reference to the company’s constitution. If you are unsure whether an action will be for the benefit of the company or for a proper purpose you should get legal advice before acting.

What happens if I breach this duty?

If you breach your duty, you may be liable for civil penalties such as fines, be ordered to pay compensation, or you may be disqualified from directorship.

If you have been intentionally dishonest or reckless in breaching this duty, you may be criminally liable which could entail much larger fines and even imprisonment.

Breaches of director’s duties can be very serious. You cannot assume they will not affect you because you aren’t involved in the day-to-day running of the company.  

The law is complex. If you need advice please phone us.

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