This is not just relevant for directors of companies regulated by the Corporations Act 2001 (Cth).
The Facts
In Sunnya a director approved a series of internal transactions he claimed were designed to stabilise the company’s financial position and protect its commercial interests. The transactions were not on their face unlawful, and they did not clearly result in personal benefit to the director. He maintained that he acted in good faith and in what he believed were the company’s best interests.
But the Court took a deeper look and concluded that the true purpose behind the transactions was to entrench the control of a dominant shareholder group and exclude others. Despite the director’s sincere belief and the arguable commercial benefits of the transactions, the Court held that he had acted for an improper purpose.
In doing so, the Court clarified the interpretation of section 181 of the Corporations Act – the duty to act in good faith and for a proper purpose.
Why This Case Matters
The Court reinforced that the duties to act in good faith and for a proper purpose are distinct and cumulative. A director cannot rely solely on an honest belief that they were acting appropriately. Even if intentions are good, the underlying purpose may render the conduct unlawful.
Notably, the Court emphasised that purpose must be objectively legitimate, not just subjectively sincere. While the business judgment rule in section 180(2) of the Corporations Act protects directors who make rational decisions in good faith, that protection does not extend to decisions made for improper purposes – even if they seem commercially beneficial.
A director cannot simply say “I believed this was best for the company” – the belief must be reasoned, informed, and justifiable based on the facts known at the time.
The Court also rejected the idea that an improper purpose requires personal gain or corporate loss. That is distinct from duties in sections 182 and 183, which focus on misuse of position or information. Under section 181, it is the integrity of the director’s purpose, not the consequence of the action, that is taken into account.
Implications for Directors
In practical terms, Sunnya signals that directors should look beyond procedural compliance and honest intent. They should reflect critically on why they are exercising a particular power, and how that purpose would appear under scrutiny.
Explanations and rationalisations after the fact are unlikely to satisfy the Court. Directors should ensure that their purpose is legally and ethically sound at the time of the decision, and supported by a transparent decision-making process.
Application to Incorporated Associations in WA
While Sunnya concerned the Corporations Act, its principles are relevant to not-for-profit entities and associations in Western Australia.
Under section 45 of the Incorporation Act, committee members must act in good faith and in the best interests of the association, and for a proper purpose. The language closely mirrors section 181 of the Corporations Act.
Final Thought
Board members must make decisions that serve the association’s legitimate objectives and to be able to demonstrate this if challenged. The trend evident in Sunnya, is toward greater accountability for the quality of judgment; legitimacy of purpose; and the reasonableness of beliefs – not just the conduct itself or the director’s honesty.
Directors and committee members should, therefore, ask themselves:
- What is the true purpose of this action?
- Could it be seen as self-serving or politically motivated?
- Would this purpose withstand legal or public scrutiny?
- Is our decision-making process clearly documented and objectively reasoned?
Directors who rely on good intentions or vague justifications may find themselves falling short of the required standard. To perform effectively, Boards should govern with purpose, accountability, and a mindset that meets both legal and ethical expectations.
This article was written by David McMullen, Principal Lawyer and Practice Leader – Commercial and Ryan Callanan, Associate.
