Every person who takes a seat on an Australian company board steps into a web of legal obligations that sit alongside — and sometimes override — their commercial instincts. Those obligations come from two sources: the common law that has developed through court decisions over more than a century, and a codified set of duties in the Corporations Act 2001 (Cth). For most directors of small and medium businesses, the statutory duties are the ones that matter most in practice, because they are the framework ASIC enforces and courts apply when things go wrong.
This article explains each of the key statutory duties — what they require, where they are found in the legislation, and what the consequences of a breach look like. It also covers the business judgment rule, the treatment of shadow and de facto directors, and the practical steps directors can take to keep themselves on the right side of the law.
The duties covered here are:
- The duty of care and diligence (s 180)
- The duty to act in good faith for a proper purpose (s 181)
- The duty not to misuse position (s 182)
- The duty not to misuse information (s 183)
- The criminal liability overlay for dishonest conduct (s 184)
- The duty to prevent insolvent trading (s 588G)
Duty of care and diligence
Section 180 of the Corporations Act 2001 (Cth) requires a director to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in the same circumstances and occupied the same office with the same responsibilities.
This is an objective standard. It is not enough to say you did your best or that you were busy with other matters. The comparison is always to a hypothetical reasonable director in your position. In practice, that means:
- Understanding the company's business model and financial position well enough to make meaningful decisions
- Reading financial reports and asking questions when the numbers do not make sense
- Taking steps to be properly informed before making any significant decision
- Ensuring the company has appropriate systems for managing risks and compliance
The duty under s 180 is a civil obligation only — ASIC cannot pursue a criminal prosecution for a breach of this section alone. However, a civil penalty can still be substantial, and courts can also order that a director repay losses caused to the company.
The business judgment rule
Section 180(2) provides a specific safe harbour known as the business judgment rule. A director who makes a business judgment is taken to have satisfied the care and diligence requirement if they:
- make the judgment in good faith for a proper purpose
- have no material personal interest in the subject matter of the judgment
- inform themselves about the subject matter to the extent they reasonably believe appropriate
- rationally believe the judgment is in the best interests of the corporation
The key word is "rational" — the belief must be one that a reasonable person in the director's position could hold. A belief that no reasonable person would hold does not qualify. The business judgment rule only protects against the duty of care; it does not shield a director from liability under the other duties in the Act.
Duty to act in good faith for a proper purpose
Section 181 of the Corporations Act 2001 (Cth) requires a director to exercise their powers and discharge their duties in good faith in the best interests of the corporation, and for a proper purpose.
These are two distinct requirements. Acting in good faith means being honest in your intentions — you genuinely believe what you are doing is right for the company. Acting for a proper purpose means the power you are using must be exercised for the purpose for which it was granted, not for a collateral or personal objective.
A classic example of a breach of the proper purpose limb is using the power to issue new shares to dilute the voting rights of a particular shareholder who is threatening a takeover, rather than to raise capital. Even if the director honestly believed diluting that shareholder was in the company's long-term interest, the power to issue shares is not granted for that purpose.
Section 181 is also a civil obligation only, but dishonest conduct that amounts to a breach of good faith or proper purpose can be picked up by the criminal provision in s 184.
Duty not to misuse position
Section 182 of the Corporations Act 2001 (Cth) prohibits a director from improperly using their position to gain an advantage for themselves or someone else, or to cause detriment to the corporation.
"Improperly" captures a wide range of conduct. You do not have to actively steal from the company — directing a business opportunity to a company you own, or to a relative's business, can be enough if you are using your director's position to do it. The section applies whether or not the director actually succeeds in gaining the advantage; the attempt or the misuse itself is the wrong.
Duty not to misuse information
Section 183 of the Corporations Act 2001 (Cth) applies the same logic to confidential information obtained in your capacity as a director. You must not use that information improperly to gain an advantage for yourself or someone else, or to cause detriment to the corporation. Importantly, the obligation continues after you leave the role — information obtained while you were a director remains subject to this duty even once you have resigned.
This provision is particularly relevant for directors of competing companies or those who serve on multiple boards. Information absorbed in one boardroom must not find its way into decisions made at another company, where using it would be improper.
Criminal liability for dishonest conduct
Section 184 of the Corporations Act 2001 (Cth) converts the civil duties in ss 181, 182, and 183 into criminal offences where the conduct is dishonest. A director commits a criminal offence if they:
- act in a way that is not in good faith, or for an improper purpose, dishonestly
- use their position dishonestly to gain an advantage or cause detriment, whether intentionally or recklessly
- use information obtained as a director dishonestly to gain an advantage or cause detriment, whether intentionally or recklessly
The maximum penalty for a conviction under s 184 is 15 years' imprisonment. This is not a theoretical risk — ASIC brings criminal charges under s 184 against directors who have used their positions to systematically advantage themselves or third parties at the company's expense.
Duty to prevent insolvent trading
Section 588G of the Corporations Act 2001 (Cth) is the duty that catches the most directors off guard. It prohibits a director from allowing a company to incur a debt at a time when the company is insolvent, or when incurring that debt would cause the company to become insolvent, where the director was aware — or a reasonable person in their position would have been aware — that there were grounds to suspect insolvency.
The civil penalty provision under s 588G(2) applies where the director failed to prevent the debt being incurred in circumstances where they had grounds to suspect insolvency. The criminal offence under s 588G(3) applies where the director suspected insolvency and the failure to prevent the debt was dishonest.
Two defences are particularly relevant for directors of smaller companies:
- Safe harbour (s 588GA): A director is protected from the civil penalty if, after starting to suspect insolvency, they begin developing one or more courses of action that are reasonably likely to lead to a better outcome for the company, and the relevant debts are incurred in connection with that course of action. The safe harbour is designed to encourage early restructuring rather than an immediate rush to administration.
- Reliance on advice: A director may also have a defence where they obtained advice from a qualified person with adequate information and reasonably relied on that advice.
ASIC's Regulatory Guide 217 provides detailed practical guidance for directors on understanding and complying with s 588G.
Who counts as a director?
The Corporations Act 2001 (Cth) uses a broad definition of "director" in s 9. It captures not just formally appointed directors but also:
- De facto directors: People who act in the position of a director without having been formally appointed
- Shadow directors: People in accordance with whose instructions or wishes the company's directors are accustomed to act
The practical implication is that being unlisted on ASIC's register does not protect a person who is effectively running the company. A founder who steps back from a formal director role but continues to give binding instructions to the board, a private equity controller who dictates strategy without taking a seat, or a spouse who manages operations behind the scenes can all be found to be directors in law and held to the same standards and penalties as formally appointed directors.
Where directors commonly get into trouble
The most common points of failure for directors of small and medium businesses are not dramatic acts of fraud — they are quieter missteps that escalate:
- Continuing to trade through financial difficulty without monitoring whether the company is technically insolvent. Many directors mistake "we have enough cash for this month" for solvency. Solvency is about whether the company can pay all its debts as and when they fall due — not just the immediate ones.
- Mixing personal and company interests without disclosure. Even relatively minor conflicts — approving a contract with a supplier in which a family member has an interest, or awarding a consulting contract to a company the director controls — can breach ss 181 and 182 if they are not disclosed and managed properly.
- Delegating and assuming. Directors can delegate tasks, but they cannot delegate their duties. A director who relies entirely on management without independent scrutiny of the financial position, and who avoids asking difficult questions, will find it hard to claim they exercised care and diligence.
- Resigning when trouble starts. Resigning as a director when the company is heading toward insolvency does not necessarily end liability. If debts are incurred after the circumstances giving rise to suspicion arose, liability may have already attached.
How Artificer Legal can assist
Directors' duties give rise to a surprisingly wide range of practical questions: how to structure a conflict-of-interest policy, when to seek independent legal advice before a major decision, how to document decision-making to protect yourself under the business judgment rule, and how to engage a restructuring adviser to access the safe harbour when the company is under financial pressure.
At Artificer Legal, we work with company directors, founders, and in-house teams on:
- Reviewing and advising on conflict-of-interest disclosures and management procedures
- Advising directors on their obligations when the company is facing financial difficulty, including the scope of safe harbour protection under s 588GA
- Reviewing board minutes and governance processes to identify gaps that could create liability
- Advising on the scope of duties that apply to shadow or de facto directors in a particular structure
- Acting for directors who are facing an ASIC investigation or enforcement proceeding
Directors' duties are not a compliance checkbox — they are a live set of obligations that require ongoing attention as the company's circumstances change.
Key points
Directors' duties under the Corporations Act 2001 (Cth) are not optional guidelines. They impose personal liability on every person who holds — or effectively acts as — a director of an Australian company. The core statutory duties require directors to exercise care and diligence, act honestly and for proper purposes, avoid misusing their position or information, and prevent the company from trading while insolvent. Dishonest conduct in breach of those duties can carry criminal penalties of up to 15 years' imprisonment.
The business judgment rule in s 180(2) and the safe harbour in s 588GA provide genuine protection — but only for directors who are genuinely engaged with the company's affairs, properly informed, and acting in the company's interests. Protection does not accrue to directors who are asleep at the wheel.
If you are a director and have questions about your obligations in your specific situation — particularly where the company is under financial pressure or a conflict of interest has arisen — seek legal advice early. The cost of getting it right upfront is a fraction of the cost of a civil penalty proceeding or a compensation claim.