Is there any difference between the director's duty to act in good faith and the director's duty to act for a proper purpose?

Is there any difference between the director’s duty to act in good faith and the director’s duty to act for a proper purpose?

Directors have fiduciary duties and common law duties which they owe to the company. Fiduciary duties of directors include acting bona fide (in good faith) in the best interests of the company and to act for a proper purpose. Fiduciary, common law and statutory duties have evolved in order to eliminate abuse of power.

There are a number of duties regarding directors, in ways of managing a company, last years review of company law was proposed by the Department of Trade and Industry. The review suggested that there should be a standard statement of director’s duties.

The test of acting bona fide in the interests of the company is subjective; it looks at ‘whether the director honestly believed that his act or omission was in the interest of the company. This issue is as to the director’s state of mind’. This was held by Jonathan Parker J, noted in Regentcrest Plc v Cohen.

The interests of the company have been interpreted by the courts to mean the interests of the general body of shareholders. As stated by Lord Cullen, fiduciary duties arise from directors being agents of the company. Today, s.309 includes the interests of employees. However, the Company Law Review has suggested the inclusion of a wide group of people including stakeholders.

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In addition to the duty to act bona fide, there’s a duty to act for proper purpose. This means that directors can only exercise powers under the articles for a proper purpose and not for any collateral purpose. This is so even if he was acting in the best interests of the company. If they go beyond this rule, it will be unlawful. In Punt v Symons & Co which held that directors should not be interfering with decisions made by shareholders. In the case above, the shareholders aim was to issue new shares in order to manipulate the situation in order of personal gain. However, this amounted to improper purpose

The duty to act for proper purpose applies to the exercise of any of the director’s powers. A leading case on the application of the proper purpose duty is the Privy Council’s decision in Howard Smith Ltd v Ampol Petroleum. Lord Wilberforce held that ‘it is unconstitutional for directors to use their fiduciary powers over the shares in the company purely for a purpose of destroying an existing majority, or creating a new majority which did not exist’. This would constitute a breach of their duty to act for proper purpose.

In the case law, regarding the allotment of shares is has been determined that in order to decide whether the allotment was for a proper purpose, the court should first consider the bona fide intentions of the directors. Both the subjective and objective tests would need to be applied in order to see if the allotment had been made for a proper purpose.

To conclude, although there are fundamental differences between the fiduciary duties to act bona fide and for a proper purpose, both duties require good to be done in the interests of the company. However, by acting bona fide, this means the director must act honestly. If acting for proper purpose, this means the directors intentions must be for a proper purpose. Personal gain should not be a consideration in either.

Both duties require different application of tests, a subjective test is required for the duty to act bona fide and an objective test for the duty to act for proper purpose.

However, it can be strongly argued that both duties go hand in hand. It was held by Lord Hoffman LJ; ‘If a director chooses to participate in the management of a company and exercises powers on its behalf, he owes duty to act bona fide in the interests of the company. He must exercise the power solely for the purpose for which it was conferred. To exercise the power for another purpose is a breach of his fiduciary duty.

Case law has illustrated that where directors have acted bona fide in the interests of the company, the decision was struck down because the purpose for which the power was exercised was not one of the purposes for which it was given. Held in Hogg v Cramphorn .