Director duties under the Corporations Act
Directors of Australian companies owe a range of legal duties under the Corporations Act 2001. These duties are personal, meaning they apply to each director individually and cannot be delegated to others. Breach of director duties can result in civil penalties, criminal penalties, disqualification from managing a company, and personal liability for the company’s debts.
The duty of care and diligence (section 180) requires directors to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise in the same circumstances. This includes staying informed about the company’s financial position, attending board meetings, and questioning management when appropriate.
The duty to act in good faith (section 181) requires directors to act in the best interests of the company and for a proper purpose. Directors must not exercise their powers for their own benefit or for the benefit of a third party at the expense of the company. This duty applies even if the director was nominated or appointed by a particular shareholder. The director’s duty is to the company, not to the appointing shareholder.
The duty not to misuse position or information (sections 182 and 183) prohibits directors from using their position or information obtained through their role to gain an advantage for themselves or someone else, or to cause detriment to the company. Separately, section 191 requires directors to give the other directors notice of any material personal interest in a matter relating to the affairs of the company.
The duty to prevent insolvent trading (section 588G) requires directors to not allow the company to incur a debt if there are reasonable grounds to suspect that the company is insolvent or will become insolvent. Personal liability for insolvent trading debts is one of the most significant risks facing company directors. Directors may be protected by the safe harbour in section 588GA while developing a course of action reasonably likely to lead to a better outcome for the company, and by the defences in section 588H, so early advice matters. Directors should regularly review the company’s cash flow position and seek professional advice at the first sign of financial difficulty.
Frequently asked questions
Do these duties apply to a nominee or non-executive director?
Yes, in full. The duties attach to the office, not to how active the director is. A nominee director appointed by a shareholder owes their duty to the company, not to the appointing shareholder, which is the point most often misunderstood in nominee arrangements.
What is the biggest personal liability risk for a director?
Insolvent trading under section 588G. A director who allows the company to incur debts when there are reasonable grounds to suspect insolvency can be personally liable for those debts. Directors should monitor cash flow closely and take professional advice at the first sign of difficulty, because the safe harbour in section 588GA and the defences in section 588H may protect a director who acts early.
Can a director delegate their duties to a manager or adviser?
A director can delegate tasks but not responsibility. The duties are personal, and the director remains answerable for the delegate’s conduct unless reliance on them was reasonable and the director made their own inquiries. Signing documents without understanding them is not a defence.
This article is general information only and does not constitute legal, financial, or tax advice. While we endeavour to keep content accurate and current, laws and regulations change frequently. For advice specific to your circumstances, please consult a qualified professional adviser. CoSec Partners Pty Ltd accepts no liability for actions taken based on this content.