Directors play a critical role in company governance. In Australia, directors are legally required to act in the best interests of the company and comply with duties set out in the Corporations Act 2001 (Cth).
Failure to comply can result in serious civil and criminal penalties – including personal liability.
This article written by our corporate and commercial lawyers, explains the general duties of directors in Australia, when liability can become personal, and how to stay compliant under the law.
Key Takeaways
Directors have strict duties under the Corporations Act 2001 (Cth).
Courts can lift the corporate veil and hold directors personally liable.
Directors must avoid conflicts of interest and prevent insolvent trading.
Criminal and civil penalties apply for serious breaches.
Directors should act in good faith and for the company’s benefit.
What Are the General Duties of Directors?
The relationship between the company and its directors is fiduciary in nature. This requires directors to act in the company’s best interests. According to the Corporations Act and other applicable laws, a director has the following obligations:
1. Duty to Act with Care and Diligence
Directors must exercise reasonable care and diligence in their role (s180). This is judged against what a reasonable person in a similar position would do.
The Business Judgement Rule protects directors if they:
Make the decision in good faith
Have no material personal interest
Are properly informed
Genuinely believe the decision is in the company’s best interests
2. Duty to Act in Good Faith and for a Proper Purpose
Under section 181, directors must act:
Honestly
In the company’s best interests
Not for their own benefit or for another party
This includes balancing the interests of shareholders, employees, creditors, and the broader community.
3. Duty Not to Improperly Use Position
Section 182 prohibits directors from misusing their position to:
Gain an advantage for themselves or others
Cause detriment to the company
This applies to formal and informal decisions.
For example, directors must vote for what’s best for the company, not for their own personal gain.
This duty encompasses all decisions by the director, whether during board meetings or informal decision-making. This is an integral part of maintaining trust and integrity within the corporate governance framework.
4. Duty to Avoid Conflicts of Interest
Directors of a company must avoid any conflict of interest. Directors must disclose any material personal interest in company affairs (s191). This should be recorded in board minutes unless the company is a sole-director proprietary company.
This rule has exceptions, such as when board members share a conflict of interest. An exception also applies where the interest involves a director’s pay.
A director’s violation of this disclosure duty does not invalidate any company actions or agreements.
5. Duty to Prevent Insolvent Trading
Section 588G holds directors liable if the company incurs a debt while insolvent – or if there were reasonable grounds to suspect insolvency.
Directors should actively monitor the company’s finances to prevent incurring debts that they cannot repay.
We have developed a guide for preventing insolvent trading.
Other Legal Obligations
Directors must also:
Maintain accurate financial records and statutory registers
Ensure shareholder meetings are held as required
Understand privacy, competition, workplace, and tax obligations
Exercise independent judgement when reviewing financial reports
Shadow directors may also be bound by these duties
If you’re planning to launch a new company, be sure to follow our legal checklist for starting a business in Australia to set up the right foundation from the start.
Piercing the Corporate Veil
In some cases, courts may “pierce the corporate veil”, treating the company and the director as one. This can occur if the company:
Was a sham or used for fraud
Hid critical information
Was managed in bad faith
The court will not be able to pierce the corporate veil if a director profits from a company’s actions or keeps poor records. These reasons are insufficient.
Where a court successfully pierces the corporate veil, a director or owner will face individual consequences.
Consequences of Breaching Directors Duties
Failure to fulfil directors’ duties has serious consequences, with both criminal and civil implications. Directors can also personally face liability.
Breaching directors’ duties can lead to:
Fines up to $1.11 million
15 years’ imprisonment
Disqualification from managing companies
Civil compensation orders
Reputational harm and loss of trust
Regulatory bodies like ASIC take non-compliance seriously.
These consequences aim to safeguard the interests of shareholders and other stakeholders. Additionally, they help maintain the integrity of corporate governance.
Case Law Highlights
ASIC v Healey
Also known as the “Centro case”, directors failed to notice errors in financial reports.
Outcome: Court found directors breached their duty of care, leading to significant penalties and bans.
ASIC v Adler
A director improperly used his position to benefit related entities.
Outcome: Disqualified, fined, and ordered to repay compensation.
Frequently Asked Questions
What are the main legal duties of company directors in Australia?
Duties include acting in good faith, with care and diligence, avoiding conflicts, and preventing insolvent trading under the Corporations Act 2001 (Cth).
Can directors be personally liable?
Yes, directors can face both civil and criminal penalties for breaching their duties. Courts do this by piercing the corporate veil. Consequences can include fines, banning from directorship, and in severe cases, imprisonment.
What is ASIC’s role in director compliance?
The Australian Securities and Investments Commission (ASIC) is the regulatory body responsible for enforcing compliance with the Corporations Act.
It can investigate breaches, commence legal action, and impose penalties on directors who fail to comply with their duties.
Are defences available for directors?
Directors have a number of defences available under the Corporations Act. These include the ‘business judgment rule’, ‘insolvency safe harbour’ and other legal rules.
Speak to one of our experienced lawyers if you need help with your director duties.
How can directors ensure compliance?
Directors can ensure compliance by:
- staying informed about the company’s operations
- seeking professional advice when necessary
- attending all board meetings
- regularly reviewing financial statements and other critical documents
If you need guidance on director duties, please reach out to our experienced lawyers.
