What Is Your Duty To Act In Good Faith? Understanding Section 181 Of The Corporations Act For Australian Business Owners

Learn what s181 of the Corporations Act requires, what “good faith” and “proper purpose” mean in plain English, and the practical steps Australian directors and business owners can take to stay compliant and build trust.

Running a company in Australia means making tough calls under pressure. Whether you’re a first‑time founder, a seasoned director, or stepping into an officer role, one duty sits at the heart of every decision you make: acting in good faith, in the best interests of the company, and for a proper purpose.

This duty comes from section 181 of the Corporations Act 2001 (Cth). It informs big boardroom votes and everyday operational choices alike. When you understand it-and build your processes around it-you reduce legal risk, strengthen your governance, and set your business up for sustainable growth.

In this guide, we’ll break down what s181 actually requires, who it applies to, how “good faith” is applied in real life, and the simple governance steps that make compliance much easier.

What Is Section 181 Of The Corporations Act?

Section 181 requires directors and other officers to exercise their powers and discharge their duties:

• In good faith;
• In the best interests of the corporation; and
• For a proper purpose.

In practice, that means your decisions shouldn’t be driven by personal agendas or side benefits. They should be made honestly, thoughtfully, and with the company’s long‑term interests in mind.

It’s not just a “nice to have.” It’s a legal standard that a court or the corporate regulator (ASIC) will assess your conduct against if things go wrong.

Who Does It Apply To (And When)?

The duty under s181 applies to:

• Directors (including de facto and shadow directors-people who act as directors even without a formal appointment);
• Company secretaries and other “officers” of the company (for example, senior managers with real decision‑making power); and
• Directors of both public and proprietary (private) companies.

If you have meaningful influence over company affairs, this duty is likely to apply to you. It also applies continuously-there’s no “off switch” when decisions are less formal. Day‑to‑day operational choices, the way you handle information, and how you set strategy can all be assessed against s181.

What Do “Good Faith” And “Proper Purpose” Mean In Practice?

“Good faith” and “proper purpose” often go together, but they’re not identical. Here’s how to think about each in plain language.

Good Faith And The Company’s Best Interests

Acting in good faith means you are genuinely trying to advance the company’s interests as a whole. In practice, that usually looks like:

• Being honest and transparent-no misleading, hiding key facts, or selective disclosure;
• Showing loyalty to the company-avoiding decisions that put your personal interests ahead of the company;
• Exercising independent judgment-making up your own mind based on the merits and the company’s objectives;
• Managing conflicts-disclosing material personal interests early and, where appropriate, stepping out of the decision;
• Reasonably believing the decision will benefit the company as a whole (not just one shareholder group).

Remember, “the company” is a separate legal entity. Its interests aren’t the same as yours, your family’s, or any single investor’s-especially when those interests diverge.

Proper Purpose

Using your powers “for a proper purpose” means you use your role to pursue legitimate, company‑aligned objectives-not to achieve unrelated goals.

For example, issuing new shares to raise capital for growth is a proper purpose. Issuing shares mainly to dilute a particular shareholder’s voting power because of a personal dispute is unlikely to be.

Directors often wear multiple hats (shareholder, employee, founder). The “proper purpose” limb helps keep those hats from unduly influencing how you use formal powers as a director or officer.

Everyday Scenarios Where s181 Matters

• Approving related‑party contracts: If the company buys services from your spouse’s business, the terms should be arm’s‑length and demonstrably in the company’s interests.
• Using company money or assets: Company resources shouldn’t be used for private expenses or side projects-even temporarily-with a plan to “fix it later.”
• Strategic moves: Relocating, pivoting, or taking on major debt requires careful consideration of benefits and risks for the company overall.
• Information handling: Using confidential company information for personal gain or to help a third party cuts across good faith and other duties.

How To Comply With s181: Practical Steps And Documents

Good compliance is mostly about clear processes, sensible documentation, and a healthy decision‑making culture. Here’s a practical roadmap.

1) Build The Right Board Culture

• Encourage genuine debate. Directors should feel safe to challenge proposals and ask for more information.
• Keep clear minutes and board papers that show the issues considered, the options weighed, and why a decision was made.
• Deal with conflicts of interest early and transparently. A simple Conflict Of Interest Policy helps everyone follow a consistent process.

2) Document Authority And Process

• Make it clear who can decide what (and at what dollar thresholds). Your Company Constitution is a great place to embed decision‑making rules and director powers.
• When decisions need formal sign‑off, follow the Section 127 signing requirements and use the right resolution process. If you’re the only director, a short written record using a sole director resolution is often appropriate.

3) Make Decisions On Full And Fair Information

• Ask for the information you need-financial models, risk analysis, legal advice, and alternative options-before voting.
• Note in the minutes when you rely on expert advice, management reports, or external data. This helps show you acted in good faith and with diligence.

4) Manage Conflicts And Related‑Party Deals

• Disclose material personal interests to the board (or, if you’re a sole director, keep a written record).
• For related‑party contracts, record why the terms are fair to the company-comparable quotes, market benchmarks, or independent valuation can help.
• Consider abstaining from votes where you have a conflict, and ensure conflicted directors don’t receive non‑public information that could be misused.

5) Use The Right Contracts

Clear, tailored agreements reduce the risk of misunderstandings and help demonstrate proper purpose and sound governance. Common documents that support s181 compliance include:

• Shareholders Agreement: Sets expectations between owners, outlines decision‑making thresholds, and reduces pressure on directors to serve competing shareholder interests.
• Board and committee charters: Define responsibilities and escalation pathways, keeping decisions aligned with the company’s best interests.
• Service, supply, and contractor agreements: Document terms with related entities and third parties. If you need help getting terms right, a quick contract review can reduce risk.

6) Use The Business Judgment Rule Wisely

If you act in good faith, for a proper purpose, inform yourself appropriately, and rationally believe a decision is in the company’s interests, the business judgment rule under s180(2) can assist if a decision is later challenged. For a deeper dive into this protection for directors’ bona fide decisions, see how the rule operates in section 180(2).

What Happens If You Breach s181?

Consequences can be serious. Common outcomes include:

• Civil penalties: ASIC can seek penalties and disqualification orders in court.
• Compensation: The company can pursue compensation for loss. In many cases, shareholders seek relief via a derivative action on behalf of the company, rather than in their own right.
• Reputational damage: Allegations of bad faith can affect investor confidence, partnerships, and future opportunities.

Importantly, criminal liability for dishonest or reckless breaches sits in section 184-not s181. If dishonesty is proven, criminal charges, fines, and even imprisonment may be on the table under s184.

How s181 Works Alongside Other Duties

Section 181 is part of a broader set of directors’ and officers’ duties designed to keep company decision‑making fair and responsible. You’ll often consider them together:

• Care and diligence (s180): Take reasonable steps to inform yourself and make prudent decisions. The business judgment rule under s180(2) may assist if used correctly.
• Improper use of position (s182): Don’t use your role to gain an advantage for yourself or someone else, or to harm the company.
• Improper use of information (s183): Don’t misuse information you acquire through your role to your advantage or the company’s detriment.

Thinking about all these duties up front tends to produce better decisions-and better records-if your choices are ever reviewed.

Real‑World Tips That Make A Difference

• Pause when something feels rushed or incomplete. Ask for the missing information, or defer the decision to a later meeting.
• Capture the “why.” One or two sentences in the minutes that explain why the board believes a decision benefits the company are invaluable.
• Refresh your governance toolkit annually. As your business grows or your cap table changes, update documents like your constitution, delegations, and conflict policies.

Key Takeaways

• Section 181 requires directors and officers to act in good faith, in the company’s best interests, and for a proper purpose-across big strategic calls and day‑to‑day decisions.
• “Good faith” is about honesty, loyalty, independence, and acting on sufficient information; “proper purpose” ensures you use your powers to advance legitimate company objectives, not personal agendas.
• Strong governance beats guesswork: clear minutes, smart delegations, and accessible policies (like a Conflict Of Interest Policy) make compliance with s181 much easier.
• Use fit‑for‑purpose documents to avoid disputes and show proper purpose-your Company Constitution, a well‑drafted Shareholders Agreement, and targeted contract reviews all help.
• Breach of s181 can lead to civil penalties, disqualification and compensation orders; criminal liability arises under s184 where dishonesty or recklessness is proven.
• When decisions are tough, the business judgment rule in section 180(2) may assist if you act in good faith, for a proper purpose, and on adequate information.

If you’d like a consultation about your duties under s181 or help putting the right governance documents in place, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.