Good Faith and Proper Purpose

8/18/2019 Good Faith and Proper Purpose

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Chapter 12: Director’s Duties

Good Faith

and ProperPurposeCORPORATIONS LA: IN PRINCIPL! TON" CIRO # C$RISTOP$!R S"%!S%ARIA ANG!L ICA &AL%!O # RODA CR IS


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Topic Outline Out'ine o( duties o( 'o)a't) and *ood (aith

To +ho, are the duties o+ed-

Dut) to act in *ood (aith in the interest o( theco,pan)

Dut) to use po+ers (or proper purposes

Section 1.1 / Good (aith and proper purpose

Dut) to retain discretion


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Overview of duties of

directors S$O DIAGRA% $IG$LIG$T $IC$ PART AR! ! DISC0SSING


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Overview of duties of

directorsDirectors are in duciar) re'ationship +ith theco,panies on +hose eha'( the) act3

• To act in *ood (aith in the interests o( theco,pan)4

• To use po+ers (or their proper purpose4

•

To retain discretionar) po+ers4• To a5oid actua' and potentia' con6icts o(

interests and dut)3


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To whom are the duties

owed? The duties o( 'o)a't) and *ood (aith are

owed to the company7 not the

individual members3


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owed? Percival v Wright [1902]• Shareho'ders in Ni8on9s Na5i*ation Co3 +anted to

se'' their stocs3

• The) re;uested that the co,pan)9s secretar) 'oo(or purchasers3

• So,e directors purchased the shares at


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owed? Percival v Wright [1902] Judgment

•

Court he'd that the directors o+ed duties to theco,pan) and not shareho'ders indi5idua'')3

• There is no ;uestion o( un(air dea'in* in this case3

The directors did not approach the shareho'ders +ith

the 5ie+ o( otainin* their shares3

• The shareho'ders approached the directors7 and

na,ed the price at +hich the) +ere desirous o(

se''in*3 The p'ainti>s’ case +ho'') (ai's7 and ,ust e

dis,issed +ith costs3@


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Persons to whom duty

may also be owed13 Indi5idua' ,e,ers

23 Creditors

3 &eneciaries o( trust

B3 !,p'o)ees


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Persons to +ho, dut) ,a) a'so e o+ed

Individual Members

In specia' circu,stances:

+here ,e,ers dependent on in(or,ation orad5ice *i5en ) directors

C'ose re'ationship o( condence et+een,e,ers and directors


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Individual Members

Coleman v. Myers 1E

The oard directors o( a (a,i') o+ned co,pan)had reco,,ended to the shareho'ders a

taeo5er o>ered ) a co,pan) contro''ed )one o( the directors


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Individual Members


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Individual Members


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Creditors

Dut) arises +here co,pan) is inso'5ent ornearin* inso'5enc)7 ut dut) does not *i5ecreditors the ri*ht to sue directors (or reach o(

dut)3


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Creditors

Geneva Finance Ltd v eso!rce "nd!stry Ltd 2==2

hat duties o( the directors o( a co,pan) that is in nancia'diHcu't) are o+ed to creditors3 $a+ins7 +ho +as a none8ecuti5e director o( Gene5a7 +as a'so a director o( another

co,pan)7 +hich 'ater chan*ed its na,e to Resource Industr) LtdJResourceK3 That co,pan) deposited AMM=7=== +ith Gene5aand eca,e a secured deenture ho'der3 Gene5a 'ater 'entA2M=7=== to another director o( Resource and this 'oan +as*radua'') increased3 There +ere serious ;uestions aout +hetherthe director had pro5ided suHcient securit) to support the 'oan3Gene5a a*reed to e8tend the ti,e (or repa),ent o( the 'oan7 utno steps +ere taen ) it to see repa),ent (or so,e ti,e e5enthou*h the director +as in arrears3


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Creditors


Later7 $a+ins ne*otiated (or the 'oan to the director to erepaid ) a trustee o( a (und that +as ,ana*ed ) his co,pan)3 That co,pan)7 Fide'it)7 eca,e a secured creditor o( the director

and too up securities issued ) Gene5a3 $a+ins +as a'so adirectors o( Fide'it)3 In order to pro5ide this ,one) to Gene5a7$a+ins’ co,pan) had to +ithdra+ A==7=== o( it’s aMM=7===deposit +ith Gene5a7 ad5ances that a,ount to Fide'it)7 +hichthen used that to repa) the director’s 'oan3

Gene5a encountered nancia' diHcu'ties and therecei5er,ana*er ar*ued that the re'e5ant transactions hadcaused Gene5a Finance 'oss or da,a*e (or +hich $a+ins andhis co,pan) +ere 'ia'e and constituted a reach o( dut) )$a+ins as a director o( Ge5ena7 +hich resu'ted in his co,pan)7as a third part)7 deri5in* an i,proper ad5anta*e33


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Creditors


Ru'e::


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Beneciaries of Trust

here trust is ,ana*ed ) directors o(co,pan) / eneciar) ,a) e a'e to sue (orreach o( trust3


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!MP"O#!!$

Dut) ,a) e i,posed ) other 'a+s dea'in* +ith 'aour7consu,er or en5iron,ent protection3


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Dut) to act in*ood (aith in the

interest o( theco,pan)


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Dut) to act in *ood (aith in theinterest o( the co,pan)

%!$C&IPTIO' O( %)T#

to act *bona de +in good faith, in what

they consider is in the best interestof the company-

not in the est interest o( the court

directors ,ust *i5e proper consideration to the interest o( theco,pan) in their dea'in*s

the courts are re'uctant to inter(ere +ith the interna' ,ana*e,ento( co,panies ) second *uessin*@ their ,ana*e,ent decisions


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$O)&C!$ O( %)T#

13 the *enera' 'a+ / co''ecti5e') no+n as duciar) 'a+@

23 ss 1.1 and 1.B o( the corporations act


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!./MP"!$ O( B&!/C0 O( %)T#

contro''in* ,e,ers treatin* co,pan) assets as i( the) areassets he'd in their o+n na,es

pro5idin* persona' enets to directors or particu'ar ,e,ers

undertain* transactions +ith directors or particu'ar ,e,erson ter,s 5er) (a5ora'e to the,

(or*i5in* dets o+ed to the co,pan) ) directors orparticu'ar ,e,ers

trans(errin* co,pan) assets to others in an atte,pt to a5oidreco5er) ) creditors or recei5ers


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Dut) to act in *ood (aith in the interest o( the co,pan)

!1amples of breach of duty

contro''in* ,e,ers treatin* co,pan) assets as i( the) areassets he'd in their o+n na,es

pro5idin* persona' enets to directors or particu'ar ,e,ers

undertain* transactions +ith directors or particu'ar ,e,erson ter,s 5er) (a5ora'e to the,

(or*i5in* dets o+ed to the co,pan) ) directors orparticu'ar ,e,ers

trans(errin* co,pan) assets to others in an atte,pt to a5oid

reco5er) ) creditors or recei5ers


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$cope of duty

the dut) re;uires directors to act (or the benet ofthe company as a whole7 not Qust the,aQorit) o( ,e,ers


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$cope of duty

Greenhalgh v #rderne Cinemas Ltd 1EM1

(acts

%r Greenha'*h +as a ,inorit) shareho'der in ArderneCine,as and +as in a protracted att'e to pre5ent ,aQorit)shareho'der7 %r %a''ard se''in* contro'3 The co,pan) had t+oc'asses o( shares4 one c'ass +as +orth ten shi''in* a share andthe other c'ass +orth t+o shi''in* a share3 The ten shi''in*s+ere di5ided into t+o shi''in* shares7 and a'' carried one 5ote3%r Greenha'*h had the pre5ious t+o shi''in* shares7 and 'ostcontro' o( the co,pan)3

The artic'es o( association pro5ided ) c'3 1= JaK: No sharesin the co,pan) sha'' e trans(erred to a person not a ,e,ero( the co,pan) so 'on* as a ,e,er o( the co,pan) ,a) e+i''in* to purchase such shares at a (air 5a'ue to eascertained in accordance +ith suc'ause JK hereo(3


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$cope of duty


(acts

The co,pan) chan*ed its artic'es ) specia' reso'ution in

*enera' ,eetin* a''o+in* e8istin* shareho'ders to o>eran) shares to person,e,ers outside the co,pan)3 %r%a''ard7 the ,aQorit) shareho'der7 +ished to trans(er hisshares (or shi''in*s each to %r So' Shec,an in return(or


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$cope of duty


Judgements2

$hare issues

Lord Greene %R he'd7 instead o( Greenha'*h ndin*hi,se'( in a position o( contro'7 he nds hi,se'( in aposition +here the contro' has *one7 and to that e8tentthe ri*hts are a>ected7 as a ,atter o( usiness3 As a,atter o( 'a+7 I a, ;uite una'e to ho'd that7 as a resu'to( the transaction7 the ri*hts are 5aried4 the) re,ain +hatthe) a'+a)s +ere / a ri*ht to ha5e one 5ote per share $ari $ass! +ith the ordinar) shares (or the ti,e ein* issued+hich inc'ude the ne+ 2s ordinar) shares resu'tin* (ro,the sudi5ision3@


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$cope of duty


%erivative action

Lord !5ershed %R J+ith +ho, As;uith and enins LL concurredKhe'd that the


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Scope o( dut)

Members

The dut) re;uired directors to ha5e re*ard (or theinterests o( oth:

13 The co,pan) as a co,,ercia' entit)

23 The ,e,ers o( the co,pan)

Corporations act pro5ides re,edies to ,e,ers+here the a>airs o( the co,pan) are conducted in a,anner +hich is contrar) to the interests o( the

,e,ers as a +ho'e@

http://www.digplanet.com/wiki/Shillings


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Scope o( dut)

Classes of shares

In co,panies +ith t+o or ,ore c'asses o( shares7directors ,a) ,ae decisions +hich a>ect the di>erentc'asses in di>erent +a)s3 One c'ass o( shares ,a) enetand the other su>er (ro, the transaction3 In those

situations7 the courts ha5e (ocused on +hether thedecision +as (air as et+een the di>erent c'asses o(,e,ers3

http://www.digplanet.com/wiki/Pari_passuhttp://www.digplanet.com/wiki/Pari_passuhttp://www.digplanet.com/wiki/Pari_passu


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Scope o( dut)

Classes of shares

Mills v Mills 1E.

Case (acts2

A reso'ution +as appro5ed ) the directors o( Char'es

%iss J0ard)K Ltd +hich increases the ,ana*in* director’se8tent o( 5otin* po+er3 This +as increased in order (or thepassa*e o( an increase in the di5idend recei5ed ) theordinar) shareho'ders7 inc'udin* the ,ana*in* director7 inthe (or, o( onuses3

The re'iai'it) o( the reso'ution +as cha''en*ed ) the,inorit) director on the reasonin* that the passa*e o( thereso'ution +as not a %ona &de act (or the interest o( theenterprise3


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Scope o( dut)

Classes of shares

Mills v Mills 1E.

Case Issue2

The issue o( the case +as +hether or not the ,aQorit)

directors in(rin*ed their duciar) dut) to act truth(u'') (orthe enet o( the co,pan)7 and i( pro5en so7 can thereso'ution e chan*ed on the said *rounds3


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Scope o( dut)

Classes of shares

Mills v Mills 1E.

Case %ecision2

The decision o( the court +as that the reso'ution passed

) the ,aQorit) directors +as ,ade under %ona&de *rounds e5en thou*h it resu'ted to the enet o( the,aQorit) directors3

There(ore7 i( a *roup o( directors carr) on decisions +hich

enets a *roup o( directors it does not i,,ediate')e;uate to in(rin*in* their duciar) duties3


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Scope o( dut)

Classes of shares

Mills v Mills 1E.

Case $ignicance2

This case is si*nicant in the aspect that +hen directors

enet (ro, a decision then the directors hadauto,atica'') 5io'ated their duties to+ards the co,pan)7specica'') actin* i,proper') +ithin a purpose3


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Scope o( dut)

Creditors

I( the co,pan) is inso'5ent or nearin*inso'5enc) then interests o( the co,pan)@

inc'udes the interests o( creditors3 The directors ,ust a5oid action contrar) totheir interest3

Directors are to e ,ind(u' o( creditor ri*hts3


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Scope o( dut)

Corporate 3roups

The dut) to act in *ood (aith in the interests o( aco,pan) a'so app'ies to dea'in*s et+een co,paniesin a corporate *roup3

!3*3 inter*roup 'oan or *uarantee *i5en ) oneco,pan) on eha'( o( another +ithin the *roup3


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Scope o( dut)

'ominee %irectors

Con6ict can arise et+een the est interests o( theco,pan) o( +hich the) are a director and the interestso( the *roup or co,pan) that has appointed the,3

S1. per,its directors o( +ho'') o+ned susidiar)co,panies7 +ho +ere no,inated ) the ho'din*co,panies7 to ha5e dua' 'o)a'ties pro5ided that the)satis() certain re;uire,ents3

Dua' 'o)a't) is possi'e ut in the e5ent o( an actua'con6ict7 a no,inee director’s (ore,ost dut) is to theco,pan) o( +hich he is a director


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Scope o( dut)

!mployees and the Community

Interests o( e,p'o)ees shou'd not e considered ) thedirectors ahead o( the interests o( the co,pan) as a+ho'e3

&ut7 i( the interests o( current e,p'o)ees can ere*arded as a>ectin* the interests o( the co,pan)7then the) cou'd e taen into account3


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Scope o( dut)


Par(e v )aily *e+s 1E2

Facts:

Dai') Ne+s Ltd +as the o+ner o( 2ne+spapers3

&oth ne+spapers had dec'inin* sa'es and theoard decided that it +as in the est interests

o( the co,pan) to se'' the ne+spapers to ane8terna' part)3

&oard decided to se'' the intan*i'e assetsand their p'ants and e;uip,ent3

This 'ead to +idespread Qo 'osses3


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Scope o( dut)



Facts:

S),pathetic to the past e,p'o)ees7 the oarddecided to distriute the surp'us (unds (ro,the sa'e o( usiness to the sta> that the) no'on*er e,p'o)3

A ,inorit) shareho'der oQected to thedistriution o( the surp'us proceeds to thepast e,p'o)ees


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Scope o( dut)



Decision:

The oard +as not entit'ed to distriute thesurp'us proceeds (ro, the sa'e o( the usinessto its past e,p'o)ees ecause to do so +ou'dnot e in the est interests o( the co,pan)

Past e,p'o)ees do not pro5ide current or(uture enet to the co,pan)3


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Impact of Company4s Internal &ules

the co,pan)’s constitution ,a) per,itdirectors to tae account o( a particu'arstaeho'der’s interests ahead o( others

% t t


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%uty to use

powers forproperpurposes


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%uty to use powers for properpurposes

$o+ directors e8ercise the po+ers *i5en to the,)33

their e,p'o),ent contract7

the co,pan)’s interna' ru'es andthe Corporations Act

!8a,p'e:

s1E.S / rep'acea'e ru'e 'istin* po+ers o(directors

s1E.C / rep'acea'e ru'e 'istin* po+ers o(,ana*in* directors

Dependin* on the particu'ar co,pan)7 directors’


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%escription Of %uty

Directors are under a dut) to the co,pan) toe8ercise their po+ers accordin* to certainstandards3

Directors o( a co,pan) are duciar) a*ents7and a po+er con(erred upon the, cannot ee8ercised in order to otain so,e pri5atead5anta*e or (or an) purpose (orei*n to thepo+er3


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$ources Of %uty

13 the *enera' 'a+ / co''ecti5e') no+n asduciar) 'a+@

23 ss 1.1 and 1.B o( the corporations act


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%etermining breach of duty

&urden o( proo( rests on the part) ,ain* thea''e*ations

13 Ascertain nature o( the po+er and the purposes (or

+hich it +as con(erred / the 'e*a' purpose@23 Ascertain (ro, the circu,stances the actua' purpose

or reasons (or +hich the po+er +as e8ercised ) thedirectors3

Ui( the actua' purpose (or the e8ercise o( the po+er is+ithin the ran*e o( 'e*a' purposes7 the directors ha5eacted proper') and dischar*ed their dut)3

Ui( the actua' purpose is outside the 'e*a' purposes7 a

reach o( dut) +i'' ha5e taen p'ace


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$cope of duty

Le*a' purpose

Actua' purpose

%u'tip'e purposes


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Dut) to use po+ers (or proper purposes / SCOP! OF D0T"

"egal Purpose

Found in the interna' ru'es o( the co,pan)

Interna' ru'es ,a) 'i,it the circu,stances in+hich the po+er is to e e8ercised

The court interprets the po+er in 'i*ht o( an)such restrictions ans the other interna' ru'es o(the co,pan)3

In the asence o( an) *uidance (ro, the interna'

ru'es7 court in(er +hat the purpose o( the po+eris (ro, the t)pe o( co,pan)7 its interna'structure and acti5ities3


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/ctual Purpose

This re;uires the court to deter,ine tV+hat thedirectors suQecti5e') e'ie5ed at the ti,e the)e8ercised the po+er3

It can e 5er) diHcu't (or the court to ascertain thisin(or,ation3

It ,ust e sho+n that the sustanti5e purpose o( thedirectors +as i,proper or co''atera' to their duties asdirectors3

$onest or +e''intended actions ) directors do notpre5ent the court (ro, ndin* that their conducta,ounted to an i,proper use o( their po+er3


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Multiple Purposes

hat i( se5era' purposed can e ascried to thedirectors’ actions-

The ,ere presence o( an i,proper purpose +i'' not o( itse'( ,aethe directors’ act in5a'id3

I( the sustanti5e or do,inant oQecti5e is i,proper7 ho+e5er7 theact +i'' e in5a'id3

I( there are a nu,er o( si*nicant') contriutin* causes@7 )ou,ust as +hether7 ut (or@ that i,per,issi'e purpose7 thedirectors +ou'd not ha5e e8ercised the po+er3


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Dut) to use po+ers (or proper purposes / !WA%PL!

Power to /llot $hares

5o6otovich Constructions Pty "td v 7allington89:;


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0oward $mith "td v /mpol Petroleum89:>=

Pri5) counci' said that it +as i,possi'e to sa)

in ad5ance +hat +ou'd e a proper or i,properpurpose3 $o+e5er i( the predo,inate purpose o(the a''ot,ent o( shares +as to de(eat a hosti'etaeo5er or to di'ute the ho'din*s o( a particu'ar

shareho'der the a''ot,ent +ou'd e in5a'id3


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/llotment of shares may be invalid if2

13 To trans(er contro' o( a ,aQor co,pan) asset

23 To preser5e the position o( the e8istin*,aQorit) ,e,ers7 or to disp'ace the,

3 To ,ae the ri*hts o( the e8istin* ,e,ers5a'ue'ess and there is no other de,onstra'eenet to the co,pan)


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CO&PO&/TIO'$ /CT @AA9 $!CT 9


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%uty to retain discretions

Directors’ po+er ,a) a'so e thou*ht o( asdiscretion

Directors ha5e a discretion to deter,ine i( and

+hen to e8ercise their po+ers


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Dut) to retain discretions

%escription Of %uty

13 a dut) to e8ercise an acti5e discretionDirectors cannot unthinin*') (o''o+ the directions o(

another person

23 a dut) to retain their discretionsDirectors cannot de'e*ate their responsii'ities or

(etter the e8ercise o( discretions +ithout authorit)


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$ources Of %uty

&) an a*ree,ent7 +ritten or ora'7 to 5ote in acertain +a) in re'ation to the e8ercise o( theirpo+ers

3No,inee director a*rees +ith their appointor to 5otein a certain +a)

3I( the directors ha5e entered into a contract on eha'(o( the co,pan) in the ona de e8ercise o( their

po+ers7 then the) can 5a'id') a*ree in that contract to5ote in (a5our o( certain ,atters3


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"imits on the %uty

Scope o( the dut) ,a) e 'i,ited ) theco,pan)’s interna' ru'es: Appoint a*ents to carr) out the oard’s po'icies

De'e*ate (unctions to a ,ana*in* director

De'e*ate a ,atter to a co,,ittee od senior ,ana*e,ent

Act pri,ari') in the interests o( the person or co,pan) +hono,inated or appointed the,
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1317e.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s187.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1317e.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s79.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#directorhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s187.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1317e.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#director

Good Faith and Proper Purpose

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Transcript of Good Faith and Proper Purpose