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Module 5 · Good faith in the best interests and proper purpose

Section 181(1) contains two distinct duties, good faith in the best interests, and proper purpose, and the exam plants them separately. Everything turns on two identifications made early: whose interests count on the good faith limb, and which power or discretion was actually exercised on the proper purpose limb.

Cases at a glance

Case	In a line
Bell	Good faith means honesty, with a subjective core and a reasonable director check. Creditors' interests are subsumed, not overriding
Greenhalgh	The company as a whole means the shareholders, not the corporate entity
Pilmer	Existing members' interests matter most because they have risked their capital
Ngurli Ltd	The interests are the members', and voting and share powers are limited by purpose
Darvall	Directors in a takeover may balance sellers against holders. Getting the best price for uncommitted shareholders can justify an apparently improper use
Parke	A loss making newspaper company proposed distributing sale profits to employees. Employees cannot come before shareholders
Re Broadcasting Station 2GB	A nominee may serve the appointor only where those interests align with the company's
Kinsela	Once insolvency is a real and not remote chance, creditors' interests grow increasingly relevant. Shareholders cannot ratify
Kalls Enterprises	Directors must not prefer some creditors over others
Spies	No creditor enforceable duty exists. Only the company or a liquidator can act
Re New World Alliance	The duty regarding creditors is owed to the company alone
Walker	Each group company is a separate entity whose interests must be considered alone
Maronis Holdings	Money cannot simply be moved between group companies to cover group debts
Charterbridge Corp	No breach where an intelligent and honest person in the director's position could have seen benefit
Doran Constructions	Weigh each company's own benefit and detriment on intercompany loans. Value flowing back can suffice
Wheeler	Where the substantial purpose is improper or collateral, honesty is no answer
Howard Smith	Shares were issued to defeat the majority's power to remove the directors. Purposes derive from the power's text and function
Eclairs Group	A disclosure power was used to knock out AGM votes. The power existed to obtain information
Kirwan	Share issues can validly serve multiple purposes
Teck Corp	A legitimate commercial objective stands though control is incidentally entrenched
Harlowe's Nominees	The purpose of the majority of directors counts
Mills	Mixed purposes breach only where the improper purpose is substantial
Winthrop Investments	Substantiality rather than mere incidence marks the breach line
Whitehouse	But for the improper purpose, would the power have been exercised
Re Southern Resources	Perception and circumstance evidence the directors' purpose
Hindle	State of mind may be ascertained from the circumstances
BCI Finances	Avoiding income tax is an improper purpose
Hurd	Using IP and company connections to start a rival is improper
Kijurina	Transferring assets to defeat creditors and tax is improper
Resource Equities Ltd	Shares issued before an EGM, the capital never deposited. Improper
Bell IXL Investments	A pre EGM issue stood where the money was genuinely needed and sought
Netbush	Rebalancing minority shareholders is improper
Kokotovich Constructions	Removing value from a shareholder with no benefit to the company is improper
Meinhard	Cited alongside Bell for the duty to act honestly, not mislead and provide information
Hogg v Cramphorn	A director's improper purpose share issue, though a fully informed general meeting may ratify it absent a fraud on the minority

Attack plan. Section 181(1) contains two distinct duties and the exam plants them separately. 1. Who is bound? Directors and officers (Module 4 characterisation first). If a wholly-owned subsidiary is involved, check s 187. 2. Identify the power. Fix the power or discretion actually exercised. Every discretion has its own purposes. 3. Good faith limb (s 181(1)(a)). Did the director consider the best interests, did they honestly believe their conduct served them, and could a reasonable director think so? 4. Whose interests count. Shareholders as a whole (present and future), creditors on approaching insolvency, never the group or an appointor as such. 5. Proper purpose limb (s 181(1)(b)). Fix the power's legal purposes (constitution first, then case law), find the purposes actually pursued, and where they are mixed run the substantiality and but-for analysis. 6. Liability. Civil penalty for contravention or involvement (s 181(2)), criminal where reckless or dishonest (s 184). Read exclusion lists to the paragraph.

The duty of good faith in the best interests

RULE. Directors and officers must exercise their powers and discharge their duties in good faith in the best interests of the corporation (s 181(1)(a)), a duty the general law doubles, and contravention or involvement in contravention attracts the civil penalty regime (s 181(2)).

RULE. Good faith means honesty (Bell). The best interests of the company are the financial interests of the shareholders as a whole (Bell; Greenhalgh). The composite duty is therefore to act honestly in the interests of the shareholders as a whole.

RULE. checklistThe test is mixed. The director must honestly believe they were acting in the best interests, which is the subjective core. The action must also not be one that no reasonable director could think was in the best interests, which is the objective check (s 181(1)(a); Bell). The check applies across the whole content of the duty, reaching members and where relevant creditors.

Directors are well placed to determine the best interests, but they must act honestly, must not mislead, and must provide information (Bell; see Meinhard).
Where the breach is subjective (dishonesty), criminal liability may follow. Where it is merely the objective limb, it does not (s 184).

The interests of the company

"Interests of the company". The financial interests of the members as a whole: existing members above all, since they have risked their capital (Pilmer), but their future interests count too. It is not the company's commerciality or its status as a corporate entity (Greenhalgh; Ngurli Ltd). In a takeover involving short-term and long-term considerations, directors may balance between members who want to sell and members who want to hold (Darvall).

Employees and other stakeholders

Their interests cannot be taken into account as such: only where they align with the shareholders' interests. Employees cannot come before shareholders: selling the company to distribute the proceeds to employees is not permissible (Parke). The route back in is always a business case for member benefit, never a freestanding stakeholder claim.

Nominee directors

A nominee is a director appointed to represent a particular interest, typically an appointing shareholder. Acting only for the appointor's interests is impermissible where it runs against the company. Where the appointor's interests and the company's align, that is acceptable (Re Broadcasting Station 2GB).

Creditors on approaching insolvency

RULE. Where the chance of insolvency becomes real and not remote, the interests of creditors become increasingly relevant to the best interests of the company (Kinsela). The closer the company moves to insolvency, the closer the creditors come to being the parties at risk.

The creditors' interests are subsumed within the company's interests and do not override them. The position is most problematic where the director acts knowing there will be prejudice to creditors, even while subjectively considering the company's best interests (Bell on appeal).
Directors must consider the prejudice to creditors and must avoid preferring some creditors over others (Bell; Kalls Enterprises).
Shareholders cannot ratify a breach against creditor interests in an insolvency context (Kinsela). "Ratify" here means approve after the event so as to cure the breach.

Corporate groups

RULE. arrowEach company in a group is a separate entity and its interests must be considered alone, so directors cannot simply move money between group companies to cover the group's debts (Walker; Maronis Holdings; Charterbridge). A wholly owned subsidiary remains its own company whose interests its directors must serve.

A subsidiary's director may consider the holding company where some benefit comes to the subsidiary itself. On intercompany loans, weigh each company's own benefit and detriment: a commercial benefit such as a more successful subsidiary flowing value back can suffice (Doran Constructions).
Even without evidence that the director considered the subsidiary's interests at all, there is no breach if an intelligent and honest person in the director's position could have believed the transaction was for its benefit: an objective rescue (Charterbridge Corp).

Wholly-owned subsidiary safe harbour: s 187. A director of a wholly-owned subsidiary is taken to act in the best interests of the subsidiary if (1) the subsidiary's constitution expressly authorises acting in the best interests of the holding company, (2) the director acts in good faith in the best interests of the holding company, and (3) the subsidiary is not insolvent at the time and does not become insolvent because of the act. All three are needed: insolvency switches the section off exactly when the group temptation is strongest.

The duty of proper purpose

RULE. Directors and officers must exercise their powers and discharge their duties for a proper purpose (s 181(1)(b), doubled at general law). Where the substantial purpose is improper or collateral to the purpose for which the power was given, honesty is no answer and the breach stands (Wheeler).

The duty applies whenever anything is done under a discretion, including the general management power (s 198A) and the company's capacity powers (s 124), and each discretion has its own particular purposes.

Step one: determine the power's proper purposes

Look to the constitution first. If it is silent, turn to case law, with Darvall as a last step.

RULE. The scope of a power's purposes is derived from its text and function, read against the constitution and the relationship between directors and shareholders (Howard Smith; Eclairs Group). In Howard Smith the power to issue shares could not be used to defeat the existing majority's power to remove the directors. In Eclairs Group a power to force disclosure of interests in shares existed to obtain the information and not to knock out votes at an AGM.

Share issues can validly serve multiple purposes: raising capital, incentivising employees or members, capitalising profits, statutory compliance (Kirwan; Howard Smith). But issuing shares to affect control is improper unless it is a by-product of the only way to raise the needed capital.
Powers that influence control must not be used to entrench or shift power (Howard Smith). A dominant purpose that is a legitimate commercial objective unrelated to control is fine even where control is incidentally entrenched: the best deal available may entrench control (Teck Corp).
The larger, more widely held and more public the company, the less its powers can properly be used to govern member or majority identity.
An apparently improper use may be justified where it advances the company's commercial interests by getting the best price for uncommitted shareholders, such as raising the share price to counter a takeover (Darvall): a narrow, last-resort argument.

Step two: determine the purposes actually pursued, and test them

RULE. compassThe inquiry is objective and considers all the circumstances, but the director's bona fide or honestly held opinion matters and may be credited even though honesty alone will not clear them (Howard Smith). Perception and circumstance can be used to ascertain the state of mind (Re Southern Resources; Hindle). It is the purpose of the majority of the directors that counts (Harlowe's Nominees).

RULE. staircaseWhere purposes are mixed there is breach only if the improper purpose is substantial and not merely incidental (Mills; Winthrop Investments; Darvall). Distinguish being prompted by an external event such as a takeover from acting to defeat it (Darvall; Whitehouse). A but-for analysis may then be required, asking whether the power would have been exercised without the improper purpose (Whitehouse, Mason, Deane and Dawson JJ).

Circumstantial badges of improper purpose: acting hastily, running a script to get through the directors' meeting, not considering any other financial approach (the Howard Smith line).

Established improper purpose	Authority
Avoiding income tax	BCI Finances
Using IP and company connections to start a rival	Hurd
Transferring assets to avoid creditors and tax	Kijurina
Issuing shares before an EGM where the capital raised was never deposited	Resource Equities Ltd (contrast Bell IXL Investments, where the money was genuinely needed and sought)
Rebalancing minority shareholders	Netbush
Removing value from a shareholder with no benefit to the company	Kokotovich Constructions

	Good faith limb: s 181(1)(a)	Proper purpose limb: s 181(1)(b)
Core question	Whose interests, honestly served?	Which purposes, actually pursued?
Test	Subjective honesty core plus no-reasonable-director check (Bell)	Objective, all circumstances. Bona fides credited but not decisive (Howard Smith)
Honesty	The heart of the duty	Not a defence (Wheeler)
Signature exam facts	Charity and stakeholder spending, creditor-zone decisions, group transfers	Share issues, control contests, ranked mixed motives
Analysis on mixed motives	Belief about whose interests count, per director	Substantial vs incidental, then but-for (Whitehouse)

Remedies and liability for breach

Section 181 is a civil penalty provision, engaged by contravention or by involvement in the contravention (s 181(2)): declaration, pecuniary penalty, disqualification and compensation run through the Module 4 pathway.
Criminal liability attaches where the defendant was reckless or dishonest as to the relevant element (s 184). A merely objective failure is not criminal.
The general law duplicate supplies equitable remedies against the director and grounds attacks on the exercise of power itself: an improperly purposed share issue is voidable, which is why the proper purpose cases so often arise as challenges to the issue (see Ngurli Ltd; Kokotovich Constructions). The improperly purposed issue is voidable at the instance of the company, and a prejudiced member may also challenge it.
A fully informed general meeting may ratify an improperly purposed issue, but the majority cannot ratify an expropriation or diversion that is a fraud on the minority (Hogg v Cramphorn; Cook v Deeks).

CSR, ESG and stakeholders: the essay angle

Corporate social responsibility (the claim that companies should serve social and environmental ends alongside profit) cannot be a separate consideration under the duty: acting for CSR ends is defensible only where it arguably benefits members. Is there a business case? Treating workers well may lift productivity, profits and the share price. A donation may build the brand the members own. The focus on members' financial interests remains paramount: the stakeholder categories enter as instruments of member benefit, under that umbrella, never as independent claims.

The doctrinal anchors are the same cases: Parke (employees), Greenhalgh and Ngurli (members, not the entity), Kinsela and Bell (creditors as the exception that proves the structure, they enter only when their money is effectively at stake).
Essay propositions already set: 2019 ("the section 181(1) … duty … should be interpreted as requiring directors to trade-off short-term profit maximisation" for climate), 2020 ("the 'interests of the company' … has been expanded so much that it no longer properly protects … its shareholders"), 2023 (s 1324 standing to "move beyond shareholder primacy"). The examiners have run the proposition in both directions. Build an answer that can argue either way from the same authorities.

Critical pitfalls and counter-arguments

Trap. Unanimous shareholder agreement does not oust the duty. If all shareholders approve the action, s 181(1)(a) still applies. The agreement may affect matters such as penalties, but it is not a defence.

Trap. The 2024 report demands the mixed test per director. Who cares about the creditors? This plan will be great for the shareholders." A single global conclusion is wrong for at least one of them: run the subjective limb on each speaker's own words, then the reasonable director check.

Trap. No freestanding creditors' duty. There is no independent duty to creditors that a creditor can enforce: only the company or a liquidator can act (Spies; Re New World Alliance). If the question hands the claim to a creditor personally, the answer is standing, not breach.

Trap. The 2024 mixed purposes twist. The examiners' report flagged s 181(1)(b) "noting mixed purposes". A good outcome for the company, even an independently confirmed one, cannot answer the question: the improper purpose is expressly ranked "most important", so it is substantial, and the but-for analysis is unavoidable. Concluding no breach because the price was fair is exactly the planted error. The same facts also fed s 182 with different elements (Module 8). Run them separately.

Trap. The planted emotive motive. A recurring hypothetical structure pairs corporate giving with a personal motive, so separate the interests of the company from those of the actor. The business case and the personal passion must be separated per director: one director may honestly hold a member-benefit rationale while another votes on sympathy alone, and the subjective limb splits them.

Exam calibration. The charitable-spending architecture pairs this module with Module 9 remedies. The creditor-zone version (2024) pairs it with Module 7, where the same insolvency indicators do double duty. Expect the limbs to be split by the exclusion list: in 2024, ASIC "does NOT want your advice on sections 180, 181(1)(b), 182, 183, 184, 191 or 195", leaving s 181(1)(a) as one of only two live routes. Read the scope to the paragraph before writing a word.

Take it to the practice bank

This module is drilled in the Corporations Law practice bank. Every problem there carries a realistic Pass answer, an H1 model answer, and an examiner's comment explaining the decisive fact and where the marks are lost.

Practice prompts

Take a three-director fact pattern in the 2024 style and run the mixed subjective and objective test on each director's own words in turn, then the reasonable director check.
Write the paragraph that brings creditors' interests into the analysis: state the real and not remote trigger from Kinsela, then say why the shareholders cannot ratify.
On a group transfer, state the separate-entity rule (Walker; Maronis Holdings), then test the Charterbridge objective rescue and the three limbs of s 187.
Take a share issue with ranked mixed motives and run the full sequence: the power's purposes from text and function, substantiality, then the but-for question (Whitehouse).
Draft an essay skeleton on shareholder primacy that argues both directions from the same authorities: Parke, Greenhalgh, Kinsela and Bell.

Check your understanding

Auto-marked drills. Answer, then see the authority in the feedback.