What Does 'Acting in Good Faith’ Really Mean for Directors? Lessons from Sunnya v He

In the recent New South Wales decision of Sunnya Pty Ltd v He [2025] NSWCA 79 (Sunnya), the courts clarified how they decide whether company directors have acted honestly and for the right reasons when exercising their powers. Sunnya was applied this year in the decision of In the matter of Empireal Ltd (in Liq) (Receiver and Manager Apptd) [2026] NSWSC 252 (Empireal). These cases considered directors’ obligations under section 181 of the Corporations Act 2001 (Cth) (the Act), which requires directors to act in good faith in the best interests of their company, for a proper purpose, and not to misuse their position. Together, the two decisions offer important guidance for directors operating within complex corporate group structures.

The Decision in Sunnya v He

Sunnya was an appeal case which involved two directors of an Australian milk products company who arranged for the company to issue artificially low invoices to a Chinese import agent in order to reduce customs duties on goods entering China. When Chinese authorities began investigating, the arrangement was changed so that the agent started buying the products at those deflated prices, rather than merely handling imports on the company’s behalf. This resulted in redirecting a significant share of the company’s revenue to a business controlled by the family of one of the directors. In the NSW Court of Appeal, Bell CJ, Leeming JA and Basten AJA held that the directors had breached their duty to act in good faith and for a proper purpose under section 181(1) of the Act.

The Court also examined section 184 of the Act, which outlines the circumstances in which a director commits an offence. When reading sections 181 and 184 of the Act together, Basten AJA rejected the long-running debate about whether the test for good faith is ‘subjective’ (based solely on what the director honestly believed) or ‘objective’ (based on what was actually in the company’s interests), calling the use of these words for this purpose ‘a false dichotomy^’1 . Instead, his Honour held that good faith requires an honest belief that must also be rational.²  The Court also confirmed that a director’s obligations under section 181 only apply when they are acting in their capacity as a director of the relevant company; so conduct in a different role, even if harmful to the company, may fall outside the provision³.

Application in Empireal

These principles were put to the test almost immediately in Empireal. In this case, the company, Empireal Ltd (which was by then in liquidation) claimed that its director, Mr Hooker, had acted improperly by voting to place Empireal and related companies into voluntary administration and then carrying out a restructure that left him as the ultimate owner of the group’s operating businesses, free of a large debt the group owed to an external lender. The Court dismissed all of Empireal’s claims.

Applying Sunnya, the Court held that when Mr Hooker took steps as a director of other companies in the group, such as signing a restructuring agreement on behalf of a different entity, he was not exercising his powers as a director of Empireal, and so had not breached any duty he owed to Empireal. The Court was also satisfied that the directors had genuinely and rationally believed that the relevant companies were unable to pay their debts as they fell due (or were likely to reach that point), which gave them a proper basis for appointing administrators under section 436A of the Act.

Practical Implications for Directors

These decisions offer several practical lessons for directors. To start with, honest intentions are not enough on their own. A director’s belief that they are doing the right thing must also be rational, meaning it must be one which a reasonable director in the position of a director of the particular corporation could have made.⁴  It is equally important to be aware of which role you are acting in; directors who sit on the boards of multiple companies in a group need to understand that their statutory duties attach only to decisions they make as a director of a particular company, not to steps taken wearing a different hat.⁵ Directors should also keep clear records of their reasoning. In Empireal, the directors’ written record of why they believed the companies were insolvent showed they genuinely formed the opinion, on the information available to them and on rational grounds.⁶  Keeping these records proved central to the defence of the directors.

Looking Ahead

The approach endorsed in Sunnya, requiring directors to hold an ‘honest and rational belief’ that they are acting in the company’s best interests, has already been picked up in Special Gold Pty Ltd (in liq) v Dyldam Developments Pty Ltd (No 2) [2025] FCA 825 and in Empireal. For directors of companies facing financial difficulty or operating within a complex corporate structure, the key takeaway is this: make decisions you can rationally justify, be clear about which company you are acting for, and put your reasons in writing. Don’t let the complexity of a corporate group obscure the clarity of your obligations to each company you serve.

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[1] Ibid [27].

[2]Ibid [25].

[3] In the matter of Empireal Ltd (in Liq) (Receiver and ManagerApptd) [2026] NSWSC 252 (Empireal), [288]-[289] (Nixon J) quotingSpecial Gold Pty Ltd (in liq) v Dyldam Developments Pty Ltd (No 2)[2025] FCA 825, [87] (Jackman J).

[4] Sunnya [25].

[5] Empireal[527].

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