Every company director in Victoria owes four core statutory duties: care and diligence, good faith in the company's best interests and for a proper purpose, and no improper use of their position or company information. A separate duty requires directors to prevent the company trading while insolvent, one of the most significant sources of personal liability. These duties apply in full, even to the sole director of a small company.
In this article
- Who counts as a director?
- What are a director's core duties?
- What is insolvent trading, and why does it matter most?
- How should conflicts of interest be handled?
- Is there a defence if a decision turns out badly?
- What happens if a director breaches their duties?
- Do these duties apply to small and family companies too?
- How we help
- Common questions
Who 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 improperly 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 improperly used to gain an advantage for yourself or someone else or to harm the company, and the duty continues after you stop being a director.
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 a new debt when it is already insolvent, or would become insolvent by incurring that debt, and there are reasonable grounds to suspect as much. A company is insolvent when it cannot pay all its debts as and when they fall due. This is one of the most significant sources of personal liability for directors 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 for the company than the immediate appointment of an administrator or liquidator. It is generally not available while the company is behind on paying employee entitlements, including superannuation, or on lodging the returns and other documents the tax law requires, and it is for the director to point to evidence that the safe harbour applies, so records of the advice taken and the steps followed matter. It rewards directors who confront a problem early and get proper advice, rather than directors who look away and hope trading conditions improve, and our guide to safe harbour and small business restructuring explains what that protection asks of a director and the options open to a smaller company.
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, and the Australian Securities and Investments Commission, which regulates companies and their directors, sets out on its website what it expects of directors and officeholders.
Worried a company you direct is heading towards insolvency, or already facing a claim over past conduct? Call (03) 9125 8355 or send an enquiry.
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. A director must generally give the other directors notice of a material personal interest in a matter that relates to the company's affairs. In a proprietary company the default rule in the Corporations Act allows a director who has disclosed the interest to take part in the discussion and vote unless the constitution says otherwise, and standing aside is often the safest course. Directors of public companies face stricter rules and generally cannot be present for the discussion or vote on a matter in which they have a material personal interest. 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 the same core 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. A director who makes an informed decision in good faith and for a proper purpose, with no material personal interest in it and a rational belief that it is in the company's best interests, is taken to have met the duty of care and diligence even if the decision later turns out badly. It does not protect careless or uninformed decisions. It gives no protection against the other duties, including the duty to prevent insolvent trading.
Taking on a directorship, or already facing a question about your conduct as one? One conversation clarifies where you stand. Call (03) 9125 8355 or send an enquiry.
Sources: Corporations Act 2001 (Cth).
This guide reflects the law applying in Victoria as at September 2026. It is general information only, not legal advice, and does not take your circumstances into account.
