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(2) Directors must exercise their powers for the benefit of the company and must not seek any collateral advantage for themselves when doing this. If they use these powers of another purpose, there is a breach of duty. Much of the case law about this ‘proper purpose doctrine’ involves directors issuing shares for further their own interests other than to raise capital needed by the company. For example, in Punt v Symons, in order to secure the passing of a special resolution, the directors had issued new shares to five additional members. This was held to be an abuse of their powers. In many cases, however, directors are motivated by more than one purpose, the decision in Howard Smith Ltd v Ampol Petroleum Ltd indicates that regard is to be had to their primary purpose in deciding whether the court will intervene. The court is therefore required to find whether achieving the improper effects was the ‘substantial’ purpose, or the ‘dominant’ purpose. In White House v Carlton Hotel Pty Ltd, the majority (Mason, Deane and Dawson JJ) in a joint judgment said (at 721):
In this court, the preponderant view has tended to be that the allotment will be invalidated only if the impermissible purpose or a combination of impermissible purposes can be seen to have been dominant-‘the substantial object’…
Thus the fact that a director’s exercise of power benefits themselves does not invalidate the exercise of the power if the self-benefit was not the ‘dominant’ purpose.
The concept of a dominant purpose is not easy to apply in practice. Even if the directors are acting in good faith in the interests of the company as a whole, they still must not act for a dominant improper purpose. In Advance Bank of Australia Ltd v FAI Insurances Australia Ltd, Kirby P said (at 485):
… statements by the directors about their subjective intention, whilst relevant, are not conclusive of the bona fides of the directors or of the purpose for which they acted as they did. In this sense, although the search is for the subjective intentions of the directors, it is a search which must be concluded objectively as the court decides whether to accept or discount the assertions which the directors make about their motives and purposes: cf. Megarry V-C Cayne v Global Natural Resources plc (12 August 1982 unreported).
(I.I.II) The Non-conflict rules
One of the most difficult areas of company law is that relating to directors’ conflict of interest. The basic principles are quite clear, however, and very strict. As fiduciaries, directors must not place themselves in a position where there is an actual or potential conflict between their duties to the company and their personal interest or duties to others. It is easy to say, but what the courts have to face is by what criteria the courts judge whether a breach of fiduciary duty has occurred. There are three areas where this principle arises. (1) Transactions with the company. The effect of non-conflict rules at common law is that a director may not enter into a valid contract ( other than a service contract) with the company, even indirectly, unless the company gives its approval in general meeting, or the articles allow it. However, section 317 of the Company Act 1985 imposes an obligation on the director to disclose his interest to his fellow directors. In practice companies very commonly, perhaps universally, permit directors to have such interests in their. (2) The second area is where the director uses or exploits corporate property including a business opportunity or information which is properly to be treated as belonging to the company, for his own purposes or the purpose of any one else (other than the company). The question is how to confirm which opportunity belongs the company, for example, to opportunities of which a director becomes aware outside the course of his functions as a director – are these “the company’s”? or to the opportunity when a company could not, or has decided not to pursue itself? There are some argues about this issue. One way is to see business opportunities coming to the company as the property of the company. In Regal Ltd V Gulliver , the directors were liable for breach of duty in relation to the opportunity even though it was established that the company itself was not in a position to take up the opportunity. The rule of no conflict looks like strict. There is, however, a flexible approach can be detected in the case of Island Export Finance Ltdv Umunna , although the no conflict rule is still law, it is possible that the courts are now sometimes prepared to consider an application of it which seeks to strike a balance that is considerably more in favour of directors than hitherto. (3) The third area where conflicts of interest may arise is where a director receives a benefit in some other way in connection with the exercise of his powers. For example he carries on or is associated with a business competing with that of the company.
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