Directors’ duties govern the relationship between directors, the company, and shareholders and creditors when in financial difficulty.
The fundamental principle governing directors’ responsibilities is that directors must comply with the Corporations Act 2001 (Cth) as well as a myriad of other legislation and common law principles.
Rule 1 and this is the most important rule –There is no such thing as a silent director!
A non-active, non-executive director carries as much liability as any other active or executive director.
- Directors’ primary duties include:
1.1 to act bona fide (in good faith) in the interests of the company as a whole;
1.2 not to act for an improper purpose;
1.3 a duty of care and diligence;
1.4 a duty to avoid conflicts of interest;
1.5 to not make improper use of their position;
1.6 to not make improper use of information; and
1.7 a duty not to trade, while insolvent.
- Legal Duties include:
2.1 to act with reasonable care and diligence (s180(1) of the Corporations Act).
The standard required is the degree of care and diligence which a reasonable person would exercise if they
were a director. The business judgement rule may give directors protection for breach of this duty (see
section 5 (below).
2.2 to act in good faith in the best interests of the company (s 181).
Directors must exercise their powers and duties in good faith in the best interests of the company, avoid
conflicts of interest and disclose & manage conflicts if they arise. This duty also requires a director to act honestly
in the company’s best interests as would be determined by an intelligent director in their position.
2.3 to act for a proper purpose (s 181)
Directors must not do something that a reasonable person would perceive to be contradictory to the aims
or charter of the company.
2.4 not use their position as a director for personal gain (s 182(1))
Directors must not improperly use their position for personal gain to the detriment of the company or to
benefit a third party.
2.5 not to make improper use of information gained whilst acting as a director for personal advantage,
detriment or disadvantage of the company (s183(1)).
2.6 disclose to other directors, any material personal interest in a transaction involving the company.
Material means there is a substantial likelihood in all the circumstances, the interest would have assumed
actual significance in the directors deliberations;
2.7 not cause the company to conduct its affairs or to act or refrain from acting in a manner that is either:
2.7.1 contrary to the interest of the shareholders as a whole; or
2.7.2 oppressive to, unfairly prejudicial to, or unfairly discriminatory against one or more shareholders
(s232).This is the well-recognised oppression action often raised in shareholder disputes.
2.8 to account for profit made by a director whilst a director where:
2.8.1 there may be or may be a possibility of a conflict between the director’s duty to the company and
the director’s personal interests; or
2.8.2 the benefit was obtained by reason of their position as director or from the opportunity or
knowledge from that position;
2.8.3 prevent the company from insolvent trading (s588G). This means the company is not able to pay
its debts as and when they become due. A director would fail this duty if a director at the time the
company incurred a debt;
(i) the company was insolvent or became insolvent as a result of incurring the debt; and
(ii) there were reasonable grounds to suspect the company is or would become insolvent and the
director was aware at the time there were grounds for suspecting insolvency or a reasonable
person in that position knowing the company’s circumstances would have been so aware;
2.9 additional duties to individual shareholders.
This may arise depending on special circumstances in each case, where a director is reliant on information
and advice, there is a relationship of confidence, a transaction is of particular significance to a shareholder;
or the directors actively promote the transaction.
Directors can delegate their powers to a committee and to a single director, employee of the company or any other
person, subject to any restrictions in the constitution (s 198D).
But a director who delegates their powers remains responsible for the actions of the delegate, as though the action
had been taken by the director themselves (s 190).
This does not mean active daily inspection of activities but they still need to monitor the delegates actions, remain
informed and take reasonable steps to ensure the delegate is compliant with your directors duties.
4. Financial and Compliance duties
Directors have a duty to manage and monitor their financial performance and ensure accurate financial records are
kept including their secretarial compliance with ASIC & ATO, ensure their website does not contain false or
misleading information, assess business risks and take out appropriate insurances and meet relevant Fair Work Act
and OH&S laws and more recently ensure the business adopts ESG objectives and policies for the Business.
5. Business Judgement Rule
The “business judgement rule” (s180(2)) gives directors limited protection, but only in relation to the duty of care
and diligence (s180(1)) not to other duties.
Directors are taken to have met this duty under the Act and at general law, in making a business judgement if they:
5.1 make the judgement in good faith for a proper purpose;
5.2 did not have a material personal interest in the subject matter of the judgement;
5.3 informed themselves about the subject matter and they reasonably believed it to be appropriate; and
5.4 rationally believed that the judgement was in the best interest of the company.
A reasonable belief occurs when it is in the best interest of the company and it is taken to be a rational one, unless
the belief is one that no reasonable person in the director’s position would hold.
6. Reliance on Expert Advice
A director may rely on professional or expert advice to determine if the director has performed their duties (s 189)
and reliance on such advice is taken to be reasonable, unless the contrary is proved, if it was given or prepared by:
6.1 an employee of the company whom the director believes on reasonable grounds to be reliable and competent
in relation to the matter; or
6.2 a professional advisor or expert in relation to matters that the director believes on reasonable grounds to be
within the person’s professional or expert competence; or
6.3 another director or officer of the company in relation to matters within that director’s or officer’s authority; or
6.4 a committee of directors on which, the director did not serve in relation to the matters within the committee’s
It must be established that reliance on the information or advice was made in good faith after making an
independent assessment of the information or advice, having regard to the director’s knowledge of the company,
the complexity of the structure and operations of the company at the time.
Fines and civil penalties may be imposed by ASIC for breaches of duty by a director as well a personal liability and a
declaration of contravention may be made by the court. A director may also be liable to compensate the company
and be disqualified from holding office if a civil penalty is imposed.
Criminal penalties and/or equitable remedies may also apply and include:
7.1 personal fines up to $200,000.00;
7.2 disqualification from acting as director;
7.3 imprisonment of five (5) years, a fine of up to $200,000.00 or both for insolvent trading;
7.4 derivative actions by shareholders;
7.5 actions by employees and creditors claiming personal liabilities; and
7.6 legal claims for damages.
If the company is found to have traded while insolvent, a director may be required to pay damages to the
company’s creditors or the ATO for any loss suffered from the insolvent trading.
8. Shareholder Minority Oppression action – What is it?
A minority shareholder may raise a claim of oppression from conduct of the majority shareholder, owner, or director
and apply for a court order set out in Part 2F.1(s 232 to 235) of the Corporations Act. The claim is brought on behalf
of a member of the company against the company itself.
8.1 A shareholding transmitted by will (from a death) or by operation of law is taken to be a member of the
company so even an executor can bring a claim.
8.2 An application for a court order under s 232 of the Actcan also be made by:
8.2.1 a person who has been removed from the register of members because of a selective reduction; or
8.2.2 a person who has ceased to be a member of the company if the application relates to the
circumstances in which they ceased to be a member; or
8.2.3 a person ASIC thinks appropriate after investigations into the company’s affairs or matters connected
with the company’s affairs.
8.3 The actions of the company must be more than just a shareholder not agreeing with the majority decision. The
Court may make an order if the actual or proposed conduct of a company’s affairs is (s 232):
8.3.1 contrary to the interests of the members as a whole; or
8.3.2 oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in
that capacity or in any other capacity.
8.4 Possible Court orders include an order (s 233):
8.4.1 the company be wound up;
8.4.2 the company’s existing constitution be modified or repealed;
8.4.3 regulating the conduct of the company’s affairs in the future;
8.4.4 the purchase of shares by a member who receives the share under a will ;
8.4.5 the purchase of shares with an appropriate reduction of the company’s share capital;
8.4.6 the company or member institute, defend or discontinue proceedings;
8.4.7 appointing a receiver / manager of any or all of the company’s property;
8.4.8 restraining orders preventing conduct or ordering a person to act.
This is an area that needs specialist legal advice. It is often combined with a shareholder “Derivative Leave” application (see section 10) that allows a shareholder to sue in the name of the company.
9. Shareholder Derivative Leave applications: What are they?
9.1 A statutory derivative action is an action brought on behalf of and in the name of the company, by a
shareholder against a director or an officer of the company alleging a wrong to the company.
9.2 The shareholders act as the “representative plaintiff” of the company and sue the officers or directors for
adverse conduct that caused harm to the company. The action is derivative because the applicant relies on a
cause of action belonging to the company rather than a personal cause of action.
9.3 The procedure for bringing statutory derivative actions is in Part 2F.1A (s 236 to 242) and requires application
for leave “to bring or intervene in proceedings on behalf of a company” (s 237(1)). .
The Court must grant the leave application if it is satisfied of the criteria set out in 237(2) (a) to (e) (the leave
criteria) which requires proof that the action may harm the company. The Court may make any order it
considers appropriate regarding the costs of the application and the derivative action (s 242).
10. Directors’ personal liability
Directors can be held personally liable for losses of the company as we have seen for insolvent trading, acting in
conflict for personal gain, under personal guarantees, for breach of director’s duties and for taxation debts PAYG
and superannuation contributions as well as for illegal phoenix activity.
11. OH & S liability
Directors have a legal duty to implement and monitor systems to safeguard the employees’ health and wellbeing
and exercise due diligence regarding workplace health and safety.
11.1 This requires directors to minimise OH & S risks as reasonably practical, actively participate in the process
and gather information.
11.2 Directors should have the topic of health and safety of its workers as a topic at every board meeting and
ensure it has proper procedures, processes and records in place.
Directors can still be liable for OH & S risk even if they are not involved in the day-to-day operations of the company. The penalties for a breach involving risk of death or serious injury or illness to an individual can be a fine of $600,000 and/or up to 5 years imprisonment.
12. Privacy Act Duties
The Privacy Act grants the Court the power to impose civil penalties on corporations, but regulators are taking a
wider approach to hold directors personally liable for a company’s breach of the Privacy Act and non-compliance
with the Notifiable Data Breaches (NDB).
This is a hot and current issue and risk, directors need to ensure the company’s privacy policies, cyber security
measures and appropriate data breach notification training are in place as a failure to implement compliance for
data and privacy protection may be a breach of their duty of care, skill and diligence owed to the company.
13. Insolvent Trading (s558G)
The Act prohibits a company from trading whilst insolvent and directors can be made personally liable for
insolvent trading as well as being in breach of civil and criminal provisions of the Act.
There are certain defences available to directors from personal liability if:
13.1 they had reasonable grounds to expect the company was solvent at the time the debt was incurred and
would remain solvent after that time; or
13.2 at the time the debt was incurred they did not participate in management due to illness or some other good
13.3 they took all reasonable steps to prevent the company from incurring the debt.
The risk of becoming personally liable often requires directors to seek advice from an insolvency expert and their
lawyer to determine whether the company can trade on without that risk or to go in Administration which then
protects the director from personal liability.
- Safe Harbour Protections
14.1 These provisions mean a director is not liable for insolvent trading if after suspecting the company is in threat
of insolvency, the directors took positive steps to achieve a better outcome rather than administration or liquidation
and the debts were incurred directly or indirectly from this conduct.
14.2 Factors that can support the above include whether the director:
14.2.1 was properly informed of the company’s financial position;
14.2.2 prepared a business restructure plan to improve its financial viability;
14.2.3 obtained professional advice to advise on the restructuring;
14.2.4 took steps to prevent the conduct that affected its ability to pay its debts.
Directors cannot rely on the safe harbour provisions where the company has failed to meet its obligations for
employee entitlements as they fall due, failed to maintain accurate financial accounts and records, or failed to
substantially comply with reporting and filing requirements under taxation law.
15. Phoenix Activity
Phoenix activity is illegal and refers to the practise where a new company is created to continue the business of an
existing company. The assets of the existing company are stripped out or transferred below market value to the
new company and then the old company is wound up leaving creditors, employees and the ATO singing dixie as
Illegal phoenix activity is a breach of director’s duties and can incur civil and criminal penalties, large fines, and up
to 5 years imprisonment for company directors and secretaries. and even insolvency advisers, valuers and
liquidators can be subject to the same penalties as the directors if they aided, abetted, counselled or procured a
director to engage in illegal phoenix activity.
The key difference between a legitimate business rescue and illegal phoenix activity is the director’s dishonest
intention and subsequent actions such as not paying debts, changing the name to its ACN and setting up a newco
with a similar name, transferring assets to a newco for less than market value and operating from the same
premises using the same assets. All indicators of dishonest intention and conduct.
We recommend before any legitimate restructure directors seek proper professional insolvency and legal advice
and the assets are independently valued and acquired at true market value so creditors are not disadvantaged.
There is a lot to know and learn to be a director to personal risk. That risk can be covered to a certain extent by understanding the laws ,duties and responsibilities and also taking out Directors and Officers liability insurance (D & O) to cover certain risks which will all help to protect personal assets. Sanicki Lawyers has a network of professional insurance consultants who can assist with D & ) and related business insurances. New and existing directors could also undertake training via the AICD directors course as a form of professional development and protection.
Sanicki Lawyers commercial team can provide in house training workshops for prospective directors and provide compliance advice to existing directors at a reasonable cost. To get in contact, please call (03) 9510 9888 or email firstname.lastname@example.org