Directors’ duties are the legal obligations every Australian company director owes under the Corporations Act 2001 (Cth) and the general law. In short: act with care and diligence, act in good faith for a proper purpose, don’t misuse your position or company information, disclose conflicts, and stop the company trading while insolvent. ASIC enforces them, and they apply to a one-person Pty Ltd exactly as they apply to a listed board.
Most people become a director by ticking a box on a company registration form. Nobody mentions that the tick comes with personal liability. The good news? Once you know which duties actually bite small businesses, staying on the right side of them is mostly about habits, not heroics.
- Company size doesn’t matter. A sole director of a small Pty Ltd owes the same directors’ duties as a director of a public company.
- Civil penalties now reach $1.82 million. For conduct from 1 July 2026, the maximum for an individual is 5,000 penalty units ($364 each) or three times the benefit gained, whichever is greater.
- Tax debts can land on you personally. A director penalty notice (DPN) gives you 21 days to act on unpaid PAYG withholding, GST or super, and late lodgement can remove that option entirely.
- Resigning doesn’t wipe the slate. You stay liable for breaches that happened while you were on the register, and the duty not to misuse company information follows you out the door.
- Honest, informed decisions are protected. The business judgment rule shields directors who inform themselves, have no personal stake and genuinely believe the decision is in the company’s interests.
What are the 6 directors’ duties in Australia?
Sections 180 to 184 of the Corporations Act set out the general statutory duties. Section 588G adds the duty to prevent insolvent trading, and section 191 covers disclosure of conflicts. Sitting behind all of them are the older fiduciary duties courts developed, which run in parallel and let the company (or a liquidator) sue you directly.
| Duty | Where it lives | What it means in plain English | Where small businesses trip up |
|---|---|---|---|
| 1. Care and diligence | s 180 | Act like a reasonable director in your position would | Signing off accounts nobody read |
| 2. Good faith and proper purpose | s 181 | Put the company first and use powers for their real purpose | Issuing shares to win a founder dispute |
| 3. Misuse of position | s 182 | Don’t use the role to benefit yourself or harm the company | Steering work to a related business |
| 4. Misuse of information | s 183 | Don’t use what you learned as a director for personal gain | Taking the client list to a new venture |
| 5. Prevent insolvent trading | s 588G | Don’t let the company take on debts it can’t pay | Using ATO money as working capital |
| 6. Disclose conflicts | s 191 | Tell the other directors about any material personal interest | Hiring a partner’s firm without saying so |
Dishonest or reckless breaches of the first four can also become criminal offences under section 184.
Who counts as a director (even without the title)?
The law looks at what you do, not what your business card says. There are three ways to end up owing directors’ duties.
- Appointed directors. You consented in writing, you’re on the ASIC register, and since 2021 you needed a director ID before your appointment.
- De facto directors. You act like a director, negotiating major deals, directing staff and making board-level calls, without ever being formally appointed.
- Shadow directors. The official board is used to doing what you say. This catches investors, lenders and “silent” founders who pull the strings from behind a partner’s name.
That last one surprises people. Putting the company in a spouse’s name while you run everything does not move the liability off you. It can put it on both of you.
What does the role of a director actually involve day to day?
Directors manage the company’s business. For most small proprietary companies, that means hands-on responsibility for strategy, money and the corporate housekeeping that ASIC expects, whether or not you have a company secretary. If you don’t, those secretary obligations fall to you.
The recurring director responsibilities worth putting in your calendar:
- Annual review. Check ASIC’s annual company statement, fix anything wrong and pay the review fee on time.
- Solvency resolution. Unless the company lodged a financial report that year, the directors must pass a resolution within two months of the review date confirming the company can pay its debts.
- Change notifications. Tell ASIC about new officeholders, address changes and share issues, generally within 28 days.
- Records. Keep financial records that explain every transaction, plus minutes and registers, for at least seven years.
Here’s the uncomfortable bit. That annual solvency resolution is you personally declaring the company can pay its debts. Sign it without looking at a cash flow forecast and you’ve created evidence against yourself.
What does the duty of care and diligence require?
Section 180 asks whether a reasonable person in your position, with your responsibilities, would have acted the way you did. Your inexperience isn’t a defence. The Federal Court made this clear in ASIC’s case against the Centro directors: every director has a core, irreducible duty to understand the company’s finances and question what’s put in front of them.
In practice, that means reading the financials before approving them, asking why the numbers moved, and not signing anything just because the accountant said it was fine.
How the business judgment rule protects you
Bad outcomes aren’t breaches. Under section 180(2), you meet the care and diligence duty for a business decision if you:
- made it in good faith and for a proper purpose
- had no material personal interest in it
- informed yourself to the extent you reasonably believed was appropriate
- rationally believed it was in the company’s best interests.
Two catches. The rule only protects business decisions under section 180, so it won’t help with insolvent trading or conflicts. And you can only prove point three if you wrote something down. Keeping directors’ meeting minutes that record what you considered is the cheapest insurance a director can buy.
You can also rely on advice from employees, accountants and lawyers under section 189, as long as the reliance is reasonable, in good faith and backed by your own independent look at the issue. “My bookkeeper handles it” only works if you checked.
What does acting in good faith and for a proper purpose mean?
Section 181 requires you to act in the best interests of the company as a whole, not yourself, one shareholder or a related business. It also requires you to use each power for the reason it exists.
The classic breach in small companies is a founder dispute. Issuing new shares to dilute a co-founder you’ve fallen out with, when the company doesn’t need the capital, is using the share-issue power for an improper purpose. It doesn’t matter that you believe you’re the better person to run the business.
One shift most directors don’t know about: as a company nears insolvency, “the company’s interests” start to include its creditors’ interests. Decisions that gamble creditors’ money on a long-shot recovery get far more scrutiny once cash is tight.
What counts as misusing your position or company information?
Section 182 bans using your position to gain an advantage for yourself or someone else, or to cause the company detriment. Section 183 does the same for information you obtained because you’re a director. You don’t need to have actually profited. Trying is enough.
Everyday examples we see:
- Taking a client opportunity personally that came to you through the company
- Awarding a supply contract to a sibling’s business at above-market rates
- Launching a competing venture using the customer list or supplier pricing you had access to as a director
The information duty doesn’t end when you resign. If you’re planning an exit to start something similar, get advice before you leave, not after the letter of demand arrives.
How does the duty to prevent insolvent trading work?
Under section 588G, you breach this duty if the company incurs a debt while insolvent (or becomes insolvent by incurring it) and there were reasonable grounds to suspect insolvency at the time. A company is insolvent when it can’t pay all its debts as and when they fall due. Profitable on paper doesn’t count if the cash isn’t there.
“Debt” is broader than invoices. Paying a dividend, buying back shares or entering an uncommercial transaction all count.
Warning signs to take seriously:
- ATO debts building up or a payment plan you keep defaulting on
- Super or employee entitlements paid late
- Suppliers moving you to cash on delivery
- Paying this month’s bills with next month’s expected sales
Defences and safe harbour
Section 588H gives you defences, such as reasonable grounds to expect solvency, reasonable reliance on competent information, illness, or taking all reasonable steps to stop the debt. Our guide to insolvent trading defences walks through each one.
The safe harbour in section 588GA protects you while you develop a course of action reasonably likely to lead to a better outcome than immediate administration or liquidation. It comes with conditions that trip up a lot of small companies. You must be paying employee entitlements as they fall due and keeping tax lodgements up to date. Fall behind on either and the protection disappears.
Moving assets out is not a rescue plan
Since 2021, transferring company assets for less than market value in a way that keeps them from creditors is a “creditor-defeating disposition”. A liquidator can unwind it, and directors who allowed it face civil and criminal penalties. This is the core of illegal phoenix activity, and ASIC and the ATO treat it as a priority.
How can a director penalty notice make you personally liable?
This is the one that catches most small business directors. Under tax law (not the Corporations Act), the ATO can recover a company’s unpaid PAYG withholding, GST and super guarantee charge from its directors personally, using a director penalty notice.
The key question is whether the company lodged on time.
| Type of DPN | When it applies | How to get out of it |
|---|---|---|
| Non-lockdown | The company reported the debt on time but didn’t pay | Within 21 days: pay in full, appoint an administrator or small business restructuring practitioner, or start winding up |
| Lockdown | BAS or IAS wasn’t lodged within three months of the due date, or super wasn’t reported on time | Pay in full. Administration or liquidation won’t remit it |
Two things most directors get wrong. A payment plan with the ATO does not remit the director penalty or stop the 21-day clock. And safe harbour doesn’t protect you from DPNs at all.
Payday Super raised the stakes. From 1 July 2026, super must reach each employee’s fund within seven business days of payday in most cases, so a shortfall now builds every pay cycle instead of every quarter.
How do you disclose and manage conflicts of interest?
Section 191 requires you to tell the other directors about any material personal interest in a company matter. Give details of the interest and how it relates to the company, and record it in the minutes. You can give a standing notice of a director’s interest for ongoing connections, like owning the building the company leases.
Conflicts are normal in small companies. You’re a shareholder, employee, lender and landlord all at once. The breach is keeping quiet, not having the interest. A short conflict of interest policy turns an awkward conversation into a routine step.
What are the penalties for breaching directors’ duties?
ASIC can pursue civil penalties, a liquidator or creditor can seek compensation, and serious cases go to criminal prosecution. Here’s what applies to conduct from 1 July 2026.
| Breach | Civil consequences | Criminal consequences |
|---|---|---|
| Care and diligence (s 180) | Up to $1.82m or 3x the benefit, compensation, disqualification | None (civil only) |
| Good faith, position or information (ss 181 to 183) | Up to $1.82m or 3x the benefit, compensation, disqualification | Up to 15 years’ imprisonment if dishonest or reckless (s 184) |
| Insolvent trading (s 588G) | Civil penalty, personal compensation for creditors’ losses, disqualification | Up to 5 years’ imprisonment and a fine if dishonest |
| Failing to disclose an interest (s 191) | Civil penalty | Strict liability offence and fine |
| Unpaid PAYG, GST or super (DPN) | Personal liability for the amount owed | Not applicable |
The penalty that ends careers is disqualification. A court can ban you from managing companies, and ASIC can ban you for up to five years if you’ve been a director of two or more failed companies within seven years.
What we see in Lawpath consultations
Across our legal and accounting consultations, the same directors’ duties problems come up again and again. Few of them start with bad intentions.
Former directors get DPNs for periods they thought were behind them. We regularly speak with directors who sold their shares, resigned and moved on, then received DPNs months later for tax the company didn’t pay while they were still on the register. Many had a tax indemnity in the share sale deed. That indemnity doesn’t stop the ATO pursuing you. It only gives you a claim against the buyer, and that claim is worth what the buyer can pay.
The accountant didn’t lodge, and the director finds out from the ATO. A consistent pattern: the director assumed the external accountant was handling BAS, the lodgements quietly stopped, and the first sign was a DPN. You can outsource the work. You can’t outsource the duty. And the ATO will usually want outstanding lodgements finalised before it’ll talk about a payment plan.
Directors stop lodging because they can’t pay. It feels logical to avoid lodging a BAS you can’t cover. It’s the most expensive mistake on this list, because late lodgement is what turns a DPN you could escape into a lockdown one. Our accountants give the same advice every time: lodge on time, even when you can’t pay.
Struggling owners try to “protect” assets by moving them out of the company. Shifting equipment or property into your own name when trading is hard triggers tax at market value, can be unwound by a liquidator, and doesn’t shield you from a DPN. If the business is in trouble, the answer is advice and a plan, not a transfer.
Which director mistakes cause the most trouble?
Beyond tax, these are the habits that turn directors’ duties into personal exposure:
- Treating the company account as your own. Money you take out that isn’t wages or dividends is a loan, with Division 7A tax consequences if it isn’t documented. Before you dip in, read up on whether directors can borrow money from their company. The reverse applies too: if you fund the company personally, record it as a director loan so you can be repaid properly.
- Making big decisions in the group chat. Share issues, guarantees and major contracts need a resolution or minutes. A thumbs-up emoji won’t prove you informed yourself.
- Running on default rules. Without a tailored company constitution, the Corporations Act’s replaceable rules decide how directors meet, vote and get removed. Founders usually discover this mid-dispute.
- Leaving disputes to fester. Deadlocked co-directors stop making decisions, and a company that can’t decide can’t manage its solvency. Our guide on handling director disputes covers the options before it reaches court.
How can you protect yourself as a director?
Good governance is the main protection. Two documents fill the gaps it can’t.
Directors and officers (D&O) insurance covers legal costs and some liabilities from claims about your conduct as a director. It won’t cover fines, criminal penalties, fraud or deliberate wrongdoing.
A deed of indemnity for directors commits the company to cover certain costs and gives you access to company records after you leave. That second part matters. Without it, a former director defending a claim may not be able to get the board papers that prove they acted properly. The Corporations Act limits what a company can indemnify, so it complements insurance rather than replacing it.
A five-minute director self-check
- Could you say today, with evidence, whether the company can pay its debts as they fall due?
- Are all BAS and IAS lodged, even the ones you haven’t paid?
- Is super reaching employees’ funds within seven business days of each payday?
- Are your conflicts of interest disclosed and minuted?
- Were your last three major decisions recorded in minutes or resolutions?
- Do you have D&O cover or a deed of indemnity in place?
Any “no” is your next job, not a crisis.
What happens to your duties when you resign as a director?
You can resign by giving the company written notice, and an officeholder resignation letter makes the date clear. Three rules, most of them introduced in 2021 to stop phoenixing, decide whether it actually works:
- Your resignation doesn’t take effect if it would leave the company with no directors, unless it’s being wound up.
- If ASIC isn’t notified within 28 days, your resignation dates from when ASIC was told, not from your letter, unless ASIC or a court agrees otherwise.
- Liability for anything that happened while you were a director stays with you, including DPNs for those periods.
Resigning the week before a company collapses is exactly the move liquidators look for. If you’re leaving because things are going wrong, get advice first.
Frequently asked questions about directors’ duties
Do directors’ duties apply to small proprietary companies?
Yes. The Corporations Act sets the same directors’ duties for a sole director of a small Pty Ltd as for a public company director. What changes is how they apply: a reasonable director of a small company is expected to be across the finances personally, because there’s usually no one else to catch problems.
What is ASIC’s role in directors’ duties?
ASIC is the regulator that enforces the Corporations Act. It can investigate directors, seek civil penalties and compensation orders in court, refer cases for criminal prosecution and disqualify directors from managing companies. Liquidators and creditors can also bring their own claims.
Can shadow or de facto directors be liable?
Yes. If you act as a director or the board is used to following your instructions, you owe the same duties as an appointed director. This regularly catches founders who run the business through a partner’s name and investors who control decisions behind the scenes.
Does resigning remove past liability?
No. You remain liable for breaches and tax debts from your time as a director, and the ATO can issue a DPN after you’ve gone. Your duty not to misuse company information also continues after you leave.
Are non-executive directors less exposed?
Not much. Non-executive directors aren’t involved day to day, but they must still understand the company’s financial position, read board papers and question management. Being part-time or unpaid isn’t a defence.
Can I rely on my accountant to meet my duties?
Partly. Section 189 lets you rely on professional advice if the reliance is reasonable and you assess it independently. You’re still responsible for making sure lodgements happen and for understanding the numbers you sign off.
Does an ATO payment plan stop a director penalty notice?
No. A payment plan helps the company manage its debt, but it doesn’t remit the director penalty or pause the 21-day deadline. Only paying in full, appointing an administrator or restructuring practitioner, or starting a winding up does that, and only for non-lockdown amounts.
What is the maximum penalty for breaching directors’ duties?
For conduct from 1 July 2026, the maximum civil penalty for an individual is $1.82 million (5,000 penalty units) or three times the benefit gained, whichever is greater. Dishonest or reckless breaches under section 184 carry up to 15 years’ imprisonment.
Do I need a director ID before becoming a director?
Yes. You must apply for a director ID before you’re appointed, and the company must hold your signed written consent to act. The ID stays with you for life, across every company you direct.
Stay on top of your directors’ duties with Lawpath
If you’ve read this far and spotted a few gaps, you’re in good company. Most directors we speak with learned these rules on the job. What matters is fixing them before the ATO or a liquidator asks, and most fixes are a lodgement, a minute or a single conversation away.
You don’t have to work it out alone. With Lawpath’s Legal Advice Plan, you get unlimited calls with an experienced lawyer whenever a directors’ duties question comes up, for a fixed monthly fee instead of hourly bills. Book your first call today.
