What happens when a director breaches their duties in Australia

Every person who accepts a directorship of an Australian company takes on a set of legal obligations that sit squarely on their own shoulders — not the company's. Most directors understand, in a general sense, that they have duties. Fewer understand exactly what happens when those duties are broken, or that the consequences can reach well past a fine and into their personal finances, their freedom, and their right to run a company at all.

This article explains what directors' duties are under Australian law, how breaches are enforced, and what a director faces if ASIC or a liquidator decides to act. It covers:

the core duties and the sections of the law that create them
the difference between civil and criminal liability
personal liability for company debts, including insolvent trading
disqualification from managing corporations
the safe harbour that can protect a director who acts early

The core duties and where they come from

Directors' duties in Australia are primarily set by Division 1 of Part 2D.1 of the Corporations Act 2001 (Cth). Four sections are the main source of civil liability:

s 180 — duty to exercise care and diligence. A director must act with the degree of care and diligence that a reasonable person in the same position, with the same responsibilities, would exercise.
s 181 — duty to act in good faith in the best interests of the corporation and for a proper purpose.
s 182 — duty not to improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the company.
s 183 — duty not to improperly use information obtained in their role as a director.

A fifth provision — s 588G — imposes a specific duty on directors to prevent the company from incurring debts while it is insolvent, or in circumstances where incurring the debt would make it insolvent.

These duties exist in parallel with any obligations imposed by the company's constitution or a shareholders agreement. A director can breach their statutory duties even if nothing in the company's internal documents says they have done anything wrong.

One principle that sits underneath all of these duties is worth naming clearly: a company is a separate legal entity. Its assets belong to it, not to its directors personally. That separation is what makes the duties necessary — directors are managing something that belongs to the company and its shareholders, not themselves.

Civil liability: penalties, compensation, and disqualification

A breach of ss 180–183 is what the Act calls a civil penalty contravention. ASIC can apply to the Federal Court for a civil penalty order against the director personally.

The maximum civil penalty for an individual is 5,000 penalty units. At the current penalty unit value of $330 (which applies to offences committed on or after 7 November 2024), that is a ceiling of $1,650,000 — or three times the benefit obtained or detriment avoided if that amount is higher. Courts do not automatically impose the maximum, but the ceiling gives a clear signal about how seriously the legislature treats these obligations.

Beyond the monetary penalty, a court that finds a civil penalty contravention can also:

Order the director to pay compensation to the company for any loss caused by the breach. Unlike the penalty ceiling, compensation is not capped — it tracks the actual loss, which in serious cases can be substantial enough to cause the director's personal bankruptcy.
Disqualify the director from managing corporations under s 206C. There is no prescribed maximum disqualification period for a court-ordered disqualification; the court determines what is appropriate given the circumstances.

ASIC also has its own administrative power to disqualify under s 206F. If a director has been an officer of two or more companies that were wound up within a seven-year period, and a liquidator has reported that each company could not pay its debts, ASIC can disqualify that person from managing corporations for up to five years without court involvement.

Criminal liability: when dishonesty or recklessness is involved

The civil and criminal regimes overlap but are not the same thing. A director who breaches ss 181–183 dishonestly — or recklessly as to whether their conduct would gain an advantage or cause detriment — commits a criminal offence under s 184 of the Corporations Act 2001 (Cth).

The consequences under that provision are substantially more serious:

Up to 15 years' imprisonment
A fine of up to 4,500 penalty units
Or both

"Dishonestly" in this context is assessed objectively — the question is whether a reasonable person in the same circumstances would have considered the conduct dishonest, not whether the director believed they were acting properly.

A criminal conviction also carries the consequence that the director may be automatically prevented from managing corporations, in addition to whatever other orders a court imposes. A conviction cannot be expunged and will appear in director-related background checks indefinitely.

Personal liability for company debts

As a general rule, directors are not personally liable for the debts of the company. That is one of the main reasons people incorporate. But several circumstances cut through that protection and expose directors personally.

Insolvent trading

The most significant exposure for small company directors is insolvent trading under s 588G. A director breaches this duty if:

the company is insolvent at the time it incurs a debt (or becomes insolvent as a result of incurring the debt), and
there were reasonable grounds to suspect that the company was insolvent or would become insolvent by incurring that debt, and
the director was aware of those grounds, or a reasonable person in the same position would have been aware of them.

Where a breach is proven, the director can be ordered to personally compensate the company's creditors for the amount of the debts incurred while insolvent. In a liquidation scenario, it is the liquidator who typically pursues this claim on behalf of creditors.

Personal guarantees

Separate from the statutory regime, a director who has personally guaranteed a company's loan or lease is personally liable on that guarantee regardless of any breach of duty finding. Guarantees given to banks, landlords, and major suppliers are common — and often signed quickly when the company is in a growth phase and the consequences feel abstract.

Illegal phoenix activity

Illegal phoenix activity is a specific category of conduct that ASIC actively pursues. It occurs when a director transfers assets from an insolvent or near-insolvent company to a new company for little or no value, leaving creditors of the old company unpaid, and then continues the same business through the new entity. The distinction between illegal phoenix activity and a legitimate business rescue is primarily the director's intent — if the purpose of the transfer is to defeat creditors rather than genuinely preserve the business, it is illegal. Directors found to have engaged in illegal phoenix activity face criminal penalties, civil penalties, and disqualification.

The safe harbour: acting early creates a defence

Since September 2017, a director who genuinely acts to turn around a financially distressed company may be able to rely on the safe harbour from insolvent trading liability under s 588GA.

To qualify, the director must:

begin developing a course of action that is reasonably likely to lead to a better outcome for the company than immediate administration or liquidation, after they start to suspect insolvency
ensure the debts incurred are directly connected to that restructuring course of action or to the company's ordinary business operations during the process
keep the company's tax lodgements current and continue paying employee entitlements

ASIC's Regulatory Guide 217 (updated December 2024) sets out in practical terms how the safe harbour works and what documentation supports a director's reliance on it. The guide is worth reading if the company is under financial pressure.

The important point is that the safe harbour requires action. It is not available to a director who simply continues operating and hopes for the best. Documenting the steps taken, the advice obtained, and the rationale for each decision made during the distress period is essential.

Common misconceptions directors carry

"I didn't know the company was in trouble." Ignorance of financial position is not a complete defence. The care and diligence duty under s 180 requires a director to be informed. A director who delegates all financial oversight and signs whatever is put in front of them may still breach s 180 if a reasonably diligent director in the same role would have caught the problem.

"I'm a non-executive director — these rules don't apply to me." The Act applies to all directors. The standard of care expected is assessed by reference to the actual responsibilities the director holds, but there is no category of director that is exempt from ss 180–184 or s 588G.

"The company is still trading, so it's fine." Insolvent trading liability attaches at the time each debt is incurred. A company can be insolvent — that is, unable to pay its debts as and when they fall due — while still appearing to operate. The test is cash-flow insolvency, not whether the company has assets on paper.

"A civil penalty is just a fine — I can absorb it." The civil penalty is separate from any compensation order. A director who has caused the company a significant loss through a breach can face both a penalty and a compensation order. Together, these can exceed any insurance the director holds and result in personal bankruptcy.

How Artificer Legal helps directors in this situation

Directors who suspect they may have breached a duty, or who are managing a company under financial stress, benefit most from early legal advice — before a liquidator is appointed and before ASIC opens an investigation.

When a director brings their situation to Artificer Legal, our approach typically involves:

Reviewing the relevant transactions and decisions — identifying which duties may be engaged and what the evidentiary position looks like.
Assessing the insolvent trading exposure — mapping cash-flow against the timeline of debts incurred to identify the period of risk and its quantum.
Advising on safe harbour eligibility — determining whether the conditions for s 588GA protection are met, and what steps are needed to maintain that protection going forward.
Preparing for ASIC engagement — if an investigation is likely or already underway, advising on document preservation, the scope of any cooperation, and the director's rights throughout the process.
Coordinating with the accountant or insolvency practitioner — directors' duties issues rarely exist in isolation from the company's financial position; legal and financial advice need to run together.

Acting early matters because the safe harbour requires the director to have already started their restructuring course of action before the debt is incurred. Once a liquidator is in place, those options close.

Key points

Breaching directors' duties in Australia is not a technical infraction — it is a regime with real teeth, and the consequences are personal. The key points to take away:

The core duties are set by ss 180–183 of the Corporations Act 2001 (Cth). Civil penalties can reach $1,650,000 per contravention, plus unlimited compensation for loss caused.
Where dishonesty or recklessness is involved, the same conduct becomes a criminal offence under s 184, carrying up to 15 years' imprisonment.
Insolvent trading under s 588G exposes directors personally to the debts incurred while the company was insolvent. Liquidators pursue these claims as a matter of course.
The safe harbour under s 588GA is available to directors who act early and document a genuine restructuring effort. It requires proactive steps, not passive hope.
ASIC can disqualify directors administratively for up to five years; courts can disqualify without any fixed ceiling.
If you think something has gone wrong, the time to get advice is now — not after the liquidator's first report lands.