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- What do the terms 'good faith' and ‘best interests of the company’ mean as they are used in the Corporations Act 2001 (Cth)?
- Do the expressions ‘best interests of the company’ and ‘in the interests of the company as a whole mean the same thing?
What do the terms 'good faith' and ‘best interests of the company’ mean as they are used in the Corporations Act 2001 (Cth)?
Good faith, in the legal sense, means the sincere belief or intention without any animus or aspiration to fraud others. The term good faith has special importance in the corporate world. Under the Corporation Act, 2001 (cth), there is a special provision regarding the duties of the directors of the company to act in good faith. Under Australian Company law, the Directors of the company have the duty to act in good faith in the best interest of the company. The Directors of the company are in a fiduciary relationship with the company, due to which they have the duty of good faith and loyalty with the company. The terms good faith and best interest of the company are co-related with each other as the term best interest of the company relates to the company’s body of the shareholder. It is to be seen that if the Directors of the company acted in the best interest of the company, then it will automatically benefit the shareholders of the company by increasing their accountability, profitability, capital gains and dividends. But acting in good faith, in legal terms generally, means to act honestly. Under the Corporations Act, 2001 (cth), the directors have the duties of good faith and loyalty as the directors of the company are in a fiduciary relationship with the company. Section 181 of the Corporations Act, 2001 (Cth) deals with the duty of the directors to act in good faith in the best interest of the company. There is a number of verdicts where the courts had held that the directors are duty-bound to act in good faith and in the best interest of the company. In Mills Vs Mills (1938) 60 CLR 150 at 185 (Dixon J.), it was held by the Court that the directors are in a fiduciary relationship with the company and are required to act in good faith. Under the act, it is upon the courts to decide whether the directors of the company had acted in good faith for the best interest of the company or not. Like in the case of Howard Smith Ltd. Vs Ampol Petroleum Ltd (1974) AC 821 whereby the Court held that the directors had exceeded their powers and breached their duties of good faith towards the company. The brief facts of the case are that Howard Smith and the associated company were required to take over the miller. Howard Smith was also anxious to get control of the Millers. The Directors of the company, namely Millers issued the shares of his company to Howard Smith and, in effect, inspired Howard Smith to give the best take over offer. The company, namely Millers was in requirement of additional capitals at that time and at that time, they had received the advice that the company must borrow in spite of issuing more shares. It was held by the Court that the Directors of the company had eclipsed the powers by issuing the shares, and also, the directors of the company had breached their duty of good faith towards the company. If we talk about the duties of the Directors, the decision was taken by him which are so genuine as to be in the best interest of the company, but if the director works for personal gain, then it is known to be work done in bad faith. The Corporations Act, 2001 (Cth), the duty of the director of the company to act in good faith in the best interest of the company bound them to act honestly, for the gain of all the shareholders. As discussed earlier, it is clear from the readings that the Directors are in a fiduciary relationship with the company, which bounds the person to act for the gain of the beneficiary. Even if the duty of the director of the company focuses on genuine beliefs and honest actions, the test for breach is not wholly subjective. If the Court wanted to find as the director of the company has acted in good faith in the best interest of the company or not, then the courts use the test which is both objective and subjective. If the director of the company genuinely believed that the actions taken by him were in the best interest of the company, then the Court would not contradict the affirmation by appraising the commercial value of the act itself. No doubt, the Court can look for independent evidence that the director acted in good faith.The Court also held that the use of the curator powers for modifications of voting power was invalid. The courts go into the motive behind issuing the shares, and it was found by the Court that the reason for issuing the shares is not to raise funds but to defeat the takeovers. Therefore the issuing of shares was invalid.
Best Interest of the Company:
The phrase “best interest of the company” can also be known as the benefit of the company or the commercial benefit. Fundamentally it means that the directors of the company can take unrestricted decisions for the benefit of the company, i.e., for the best interest of the company. Section 181 of the Corporation Act, 2001 (Cth) talks about the powers of the directors or the other officers of the corporation as they should exercise their powers and duties in good faith and in the best interest of the company. No doubt, sometimes the dispute has arisen in some circumstances where some of the directors of the company use their power for their interest. It is well-settled law that if the particular decision is likely to cause the benefit only to the director of the company and not to the corporation, then such director can no longer be in the position to take the unrestricted decisions, or it can be said that such director or officer has a conflict of interest. Lord Greene MR has specifically mentioned the expression “Best interest of the company' in Re Smith & Fawcett Ltd  Ch 304, “The directors of the company should exercise their unrestricted bonafide in what the directors considered and not in what the courts could consider, what is in the interest of the company and not for any of the ancillary purpose.' As per the various judgments and the settled law, there are two tests for considering the use of powers by the directors. These tests are the subjective and the objective tests. The objective test considers the question of law, and the subjective test is to find out the motive and objective of the director’s decision. Justice Bowen had stated in Hutton Vs. West Cork Railway Co  23 Ch D 654,673 that at the time of taking the management decisions the directors of the company must consider in their best opinion and then they have to act accordingly.