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The creditors‟ main concern is the company‟s ability to make payment for its debts
and this concern is heightened when the company is in financial difficulties. 33
Therefore, the courts have begun to acknowledge creditors‟ interests in situations
where the company is insolvent. This approach has raised questions as to whether
this is sufficient or whether the duty should be expanded to include pre-insolvency
situations as well, and if so, how the duty should be formulated. 34 In addition to the
common law duty, there are other provisions in the statute which have the aim of
protecting creditors. (This topic will be explored in a later chapter).
The duty to act bona fide or in good faith is the core concept from which other duties
flow. 35 Directors are expected, in discharging their duty, to act in the interests of the
company in accordance with their fiduciary position. These duties were initially
developed in the common law but have now been incorporated into statutes which
either strengthen or modify the common law position. The duty of directors to the
company to act bona fide can be divided into four categories:
a) Duty to act bona fide in the interests of the company;
b) Duty to use powers for proper purposes;
c) Duty not to fetter discretion; and
d) Duty to avoid actual and potential conflict of interest.
9.3.1 Duty to Act Bona Fide in the Interests of the Company
Directors owe loyalty and good faith to the company, which means they must
advance the interests of the company. 36 This concept is wide enough to cover the
33 Austin and Ramsay above n26 at [20-160].
34 Keay above n5 at Ch13.
35 John Farrar Corporate Governance Theories, Principles and Practice (3rd ed., Oxford University
Press, South Melbourne, 2008) at 113.
36 Lord Greene MR in Re Smith & Fawcett Ltd [1942] 1 All ER 542 held “They must exercise their
discretion bona fide in what they consider not what the court may consider to be in the interests of
the company and not for any collateral purposes;” Evershed MR in Greenhalgh v Arderne Cinemas
Ltd [1951] Ch 286 stated: “The phrase „the company as a whole‟ does not (at any rate in such a
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