Understanding Directors’ Duties Under the Corporations Act: A Guide for Australian Company Directors

Two-minute summary

Company directors in Australia are subject to strict duties under the Corporations Act 2001 (Cth) and the common law. These duties are designed to promote integrity, accountability, and sound corporate governance.

Key statutory obligations include:

• Acting in good faith and for a proper purpose (s 181): Directors must act in the company’s best interests, not for personal gain.

• Exercising care and diligence (s 180): Directors are expected to stay informed, make well-reasoned decisions, and participate actively in governance.

• Avoiding conflicts of interest (s 191): Personal interests must be disclosed, and conflicted directors should not participate in decision-making.

• Not misusing position or information (ss 182-183): Using one’s role or access to information for personal advantage or to harm the company is strictly prohibited.

• Preventing insolvent trading (s 588G): Directors must ensure the company does not incur debts it cannot pay.

• Maintaining proper financial records (s 286): Accurate and up-to-date accounts are essential to meet compliance obligations.

Breach of these duties can lead to civil penalties, personal liability, disqualification, and in serious cases, criminal charges with imprisonment.

To minimise risk, directors should stay legally informed, seek professional advice when in doubt, disclose potential conflicts, and foster a culture of compliance.

For tailored advice, the team at Farahs Legal can assist directors in navigating their responsibilities and avoiding legal pitfalls.

Full article

Company directors in Australia occupy a position of significant trust and responsibility. Whether leading a small business or a large corporation, directors must ensure their conduct complies with both statutory and common law obligations. The Corporations Act 2001 (Cth) (the Act) sets out key legal duties that, if breached, can result in serious civil and criminal consequences, including personal liability, fines, disqualification, and even imprisonment.

This article provides a practical overview of the core duties imposed on company directors and offers guidance on how to remain compliant.

1. Duty to Act in Good Faith and for a Proper Purpose

Under section 181 of the Act, directors must exercise their powers:

• In good faith in the best interests of the company; and

• For a proper corporate purpose.

This aligns with common law expectations that directors prioritise the company’s welfare, broadly interpreted to include shareholders, employees, and other stakeholders. Deliberate disregard of a company’s interests may attract criminal penalties, including up to 15 years' imprisonment where dishonesty or recklessness is involved.

2. Duty to Exercise Care and Diligence

Section 180(1) requires directors to act with the degree of care and diligence that a reasonable person would exercise in the same position. This means:

• Staying informed about the company’s operations;

• Carefully considering risks and potential benefits of business decisions; and

• Making judgments in good faith based on appropriate information.

Directors should attend board meetings regularly, review key documents, and seek independent advice when necessary.

 3. Duty to Avoid Conflicts of Interest

Directors must avoid situations where their personal interest' conflict, or may potentially conflict, with the interests of the company. Section 191 requires disclosure of any material personal interest in company matters. In many cases, directors may be prohibited from voting on resolutions where such a conflict exists.

Failure to disclose conflicts or acting where a conflict arises can result in a breach of both statutory and fiduciary duties.

4. Duty Not to Improperly Use Position or Information

Sections 182 and 183 prohibit directors from using their position or company information to gain an advantage for themselves (or others) or to cause harm to the company. This includes insider trading, misappropriating opportunities, or leaking confidential information.

Importantly, it is no defence to claim the advantage was intended to benefit the company, misuse of position or information can still amount to a breach, and criminal sanctions may apply.

5. Duty to Prevent Insolvent Trading

Directors have a continuing obligation under section 588G to ensure their company does not trade while insolvent or incur debts likely to push it into insolvency. A company is insolvent when it cannot pay its debts as they fall due.

If a director allows insolvent trading and there were reasonable grounds to suspect insolvency, they may be personally liable for any resulting debts. In civil proceedings, presumptions of insolvency may apply, particularly where adequate financial records are not maintained.

6. Duty to Keep Proper Financial Records

Section 286 imposes a duty on directors to ensure that the company maintains accurate financial records that fairly reflect its position and performance. Poor record-keeping not only breaches the Act but may also complicate insolvency assessments and regulatory compliance.

Best Practices to Minimise Risk

To discharge their duties effectively and avoid liability, directors should:

• Stay informed about their legal obligations and changes to corporate law.

• Actively participate in governance and oversight, not just delegate responsibility.

• Seek professional advice where uncertainty exists, especially in relation to solvency, conflicts, or major transactions.

• Implement internal controls to promote compliance, especially with financial reporting and disclosure.

• Foster a culture of integrity, transparency, and accountability across the organisation.

 Final Thoughts

At Farahs Legal, we regularly advise company directors on how to meet their governance obligations while achieving their strategic goals. With the right legal guidance, directors can navigate their responsibilities with confidence and reduce the risk of breach, liability, and reputational damage.

If you are a current or prospective director and require advice on corporate governance, statutory compliance, or boardroom disputes, contact our team to speak with a corporate law specialist.