Director's duties in Victoria: what every business owner must know

Setting up a company is easy. Understanding what you sign up for as a director is where most business owners fall short. The moment you accept an appointment, whether as the sole director of your own business or alongside co founders, the law imposes personal legal duties on you, separate from the company itself. Get them wrong and the limited liability that a company is supposed to offer can quietly stop protecting you. This guide explains what those duties actually require, where directors most often come unstuck, and the one duty that causes more personal liability than any other: trading while insolvent.

Who actually counts as a director?

The duties apply to anyone validly appointed as a director, but they are not limited to the person whose name appears on the company register. A person who is not formally appointed but acts in the position, or whose instructions the appointed directors are accustomed to follow, can also be treated as a director for the purposes of these duties. A silent partner who nonetheless runs the show, or a parent who directs a young company from behind the scenes without ever being appointed, does not automatically escape the obligations that come with the role.

What are a director's core duties?

Australian law imposes four general duties on every company director, on top of anything specific to your industry or your company's constitution.

• Care and diligence. A director must exercise the degree of care and diligence a reasonable person would show if they held that office, in that company, with those responsibilities. It is judged against what a sensible person in your position would do, not against perfection.
• Good faith and proper purpose. A director must act in good faith in the best interests of the company and for a proper purpose, putting the company first even where that conflicts with a personal interest.
• Proper use of position. A director must not use their position to gain an advantage for themselves or someone else, or to cause detriment to the company.
• Proper use of information. Information obtained because you are a director, including information that is not yet public, cannot be used for personal gain or to harm the company.

These duties exist because a company is run by directors but owned, in an economic sense, by shareholders and depended on by creditors and employees. The law expects the people making decisions to act for the company, not simply for themselves.

What is insolvent trading, and why does it matter most?

Separately from the four general duties, directors carry a specific duty to prevent the company incurring new debts once there are reasonable grounds to suspect the company is insolvent, meaning it cannot pay its debts as and when they fall due. This is the duty responsible for the largest share of personal director liability in Australia, because it can attach even where a director has otherwise done nothing dishonest. Continuing to trade, order stock or accept customer deposits after the warning signs appear, rather than at the point of formal insolvency, is usually where the exposure begins.

A safe harbour exists for directors who, once they start to suspect the company may become insolvent, begin developing and following a course of action reasonably likely to lead to a better outcome than an immediate liquidation. It rewards directors who confront a problem early and get proper advice, rather than directors who look away and hope trading conditions improve.

Insolvent trading is also where the gap between a company's protection and a director's personal position is starkest. Our guide to choosing a business structure in Victoria explains what a company does and does not protect you from more generally.

How should conflicts of interest be handled?

Conflicts are common in small and family companies, where directors are also shareholders, employees, landlords or suppliers to the business they direct. The duty of good faith does not forbid a director from ever having an interest that touches the company. It requires the interest to be disclosed and managed properly, usually by declaring it to the other directors, staying out of the discussion and the vote, and making sure the company's constitution and any shareholder agreement are followed. A related party transaction handled transparently rarely causes trouble. The same transaction pushed through quietly is where disputes, and sometimes claims for breach of duty, tend to start. Where a company has more than one owner, a well drafted shareholder agreement is usually the clearest way to set out how conflicts and related party dealings should be managed before one arises.

Is there a defence if a decision turns out badly?

Yes, and it matters because directors are regularly asked to decide under uncertainty. The business judgment rule protects a director who makes an informed decision, in good faith, for a proper purpose, with no material personal interest in the outcome, and with a rational belief that the decision serves the company's best interests. If those elements are met, the director is generally taken to have satisfied the duty of care even if the decision loses money. The rule protects considered judgement properly arrived at. It does not protect a decision made without basic inquiry, without reading the numbers, or without disclosing an obvious conflict.

What happens if a director breaches their duties?

The consequences scale with the seriousness of the conduct. A company, a liquidator acting for the company, and in some circumstances a shareholder, can pursue a director for compensation for loss the breach caused. The regulator can seek civil penalties and, in serious or repeated cases, an order disqualifying a person from managing any company for a period. Where a breach involves recklessness or intentional dishonesty, criminal liability can also follow. It is common for one set of facts, a related party deal pushed through while the company was already in financial difficulty, for example, to raise more than one of these consequences at the same time.

Directors should also be aware that some liabilities can attach personally even outside a breach of duty claim: a personal guarantee given to a landlord or lender, superannuation guarantee shortfalls, and certain unpaid tax debts the Australian Taxation Office can pursue directly from a director through a director penalty notice. None of these require proving you breached a duty. They exist alongside the duties as separate sources of personal exposure.

Do these duties apply to small and family companies too?

Yes, in full, regardless of the company's size. A sole director of a company with one employee owes exactly the same statutory duties as a director of a listed company, even though the practical risks look different. In practice, the areas that catch small business directors most often are the informal ones: paying yourself or a related entity ahead of the tax office or suppliers when cash is tight, continuing to trade on hope rather than a plan once warning signs appear, and treating company money as interchangeable with personal money. None of these require bad intentions to create a real problem. Our guide to buying a business in Victoria touches on the personal guarantees that often extend a director's exposure beyond the duties themselves.

How we help

Spencer Alexander Lawyers advises directors and companies across Melbourne and Victoria on their statutory duties, from setting up sound governance and related party processes at the start, to responding when a company is trading in difficult conditions or a director faces a claim over past conduct. We help directors understand where the real exposure sits, take the steps that protect both the company and its directors personally, and act quickly where insolvency risk is emerging. Learn more about our commercial law practice.

Common questions

What are the main legal duties of a company director in Australia? To act with reasonable care and diligence, to act in good faith in the company's best interests and for a proper purpose, not to improperly use your position, and not to improperly use company information. A separate duty requires directors to prevent the company trading while insolvent.

Can a director be personally liable for company debts? Generally no, because a company is a separate legal entity. But personal liability can arise from trading while insolvent, a personal guarantee, unpaid superannuation and some tax debts pursued through a director penalty notice, and a breach of duty that causes the company loss.

What happens if a director breaches their duties? The company, a liquidator, sometimes a shareholder, or the regulator can pursue compensation or disqualification from managing companies. Serious or dishonest breaches can also carry criminal liability. A single set of facts can trigger more than one of these outcomes.

Is there a defence if a business decision goes wrong? Yes, the business judgment rule. An informed, good faith decision believed to be in the company's best interests, with no material personal interest involved, is generally protected even if it later turns out badly. It does not protect careless or uninformed decisions.

This guide reflects the law applying in Victoria as at August 2026. It is general information only, not legal advice, and does not take your circumstances into account.