Director duties under the Corporations Act, in plain English

Becoming a company director is easy. People often sign the consent form without thinking much about it. What they do not always realise is that a director carries real legal duties, and breaching them can mean personal liability, penalties, or disqualification. This guide explains the duties in plain English and what they mean day to day.

Why director duties matter

A company is a separate legal person, and one of the reasons people use a company is the limited liability it offers. But that protection is not unconditional. The law imposes duties on directors precisely because they control a separate entity that deals with other people's money, credit, and trust. Breach those duties, and the protection can fall away, exposing the director personally.

The pattern we see most often is a director of a small company who assumes the duties are for big-company boardrooms, not for them. They are not. The duties apply to every director, including the sole director of a small family company, and the consequences are just as real.

The core duties

The main duties sit in the Corporations Act 2001 (Cth). In plain terms, they are as follows.

• Care and diligence. You must exercise your powers and discharge your duties with the care and diligence a reasonable person would use in your position. You cannot simply switch off and leave everything to someone else. You are expected to stay informed about the company and its finances.
• Good faith and proper purpose. You must act in good faith in the best interests of the company as a whole, and use your powers for a proper purpose, not for your own ends or to benefit yourself at the company's expense.
• No improper use of position. You must not improperly use your position as a director to gain an advantage for yourself or someone else, or to cause detriment to the company.
• No improper use of information. You must not improperly use information you gained as a director for personal advantage or to harm the company.
• Avoiding conflicts of interest. You must manage conflicts between your own interests and the company's, including disclosing material personal interests in matters before the company.

These duties overlap, and together they add up to a simple idea. As a director you are a steward of the company, and you must act in its interests, carefully and honestly, not your own.

The duty not to trade while insolvent

One duty deserves its own heading, because it is where small company directors most often come to grief. A director has a duty to prevent the company from trading while it is insolvent, meaning it cannot pay its debts as they fall due. If a director lets the company incur debts when there are reasonable grounds to suspect it is insolvent, the director can be personally liable for those debts.

This is the duty we most often have to warn clients about in hard times. When a business is struggling, the instinct is to trade on and hope things turn around. That instinct, left unchecked, can convert a company problem into a personal one. If your company is under financial pressure, this is the moment to get advice, not to push on and worry about it later. There are safe harbour protections that can apply where a director is genuinely working on a better outcome, and taking advice early is part of accessing them.

The consequences of getting it wrong

Breaching a director duty is not a technicality. Depending on the breach, the consequences can include civil penalties, personal liability to compensate the company or its creditors, disqualification from managing a company, and in the most serious cases, where there is dishonesty, criminal liability. Directors can also face personal exposure for certain company tax debts through the director penalty regime.

The point is not to frighten anyone out of being a director. It is to make clear that the role is a real legal responsibility, and that acting carefully and honestly, keeping proper records, and getting advice when things are difficult, is how directors protect both the company and themselves.

Practical steps for directors

In our experience, directors who stay out of trouble tend to do a few simple things. They keep the company's money separate from their own. They stay genuinely informed about the company's finances, rather than signing off blind. They document decisions, especially significant ones and anything involving a conflict. They disclose personal interests properly. And they get advice early when the company is under financial strain, rather than trading on and hoping.

None of this is onerous, and all of it is far cheaper than dealing with a breach after the fact.

How we help

We advise directors on their duties, help set up the governance and records that keep them on the right side of the line, and act quickly when a company is under financial pressure, where early advice can be the difference between a manageable situation and personal liability. If you are a director, especially of a company under strain, a conversation now is worth far more than one later.

Frequently asked questions

Do director duties apply to a small company? Yes. The duties apply to every director, including the sole director of a small family company, not just large boards.

What is insolvent trading? Allowing a company to incur debts when there are reasonable grounds to suspect it cannot pay its debts as they fall due. A director can be personally liable for those debts.

Can a director be personally liable? Yes. Breaching a duty can lead to personal liability, penalties, disqualification, and, for dishonest conduct, criminal liability, as well as exposure for certain tax debts.

What should I do if my company is in financial trouble? Get advice immediately. Early advice can open options, including safe harbour protections, and help you avoid converting a company problem into a personal one.

Keep reading

• Corporate and commercial law
• How to set up a company in Australia: step by step
• Responding to a statutory demand: what to do and the deadline

This article contains general information only and is not legal advice. For advice about your situation, please contact us. Liability limited by a scheme approved under Professional Standards Legislation.