Critical Legal Obligations Under Australian Corporations Law
Directors duties are fundamental legal obligations that protect companies and stakeholders in Australia’s corporate framework. In Australia, a company is recognised as a separate legal entity who can sue and be sued in its own name. Generally, this corporate structure protects directors from personal liability for the company’s debts and obligations. However, this protection is not absolute. Directors are bound by strict legal duties, and failure to comply can result in personal liabilities.
Under the Corporations Act 2001 (Cth) and general law principles, directors duties require them to exercise their powers and responsibilities with due care, diligence, and integrity. These directors duties are owed primarily to the company itself and include both statutory obligations and fiduciary duties under common law.
Core Directors Duties Under the Corporations Act
Key directors duties include:
- Acting in good faith in the best interests of the company;
- Avoiding conflicts of interest and disclosing any material personal interest;
- Exercising care and diligence that a reasonable person would exercise in the same position;
- Acting for a proper purpose and not using their position to gain an unfair advantage or cause detriment to the company;
- Ensuring informed decision-making, based on adequate knowledge and understanding of the company’s operations and finances.
Modern Application of Directors Duties in 2024
Below is a table of some key statutory director duties under the Corporations Act and their applications to the recent market situations and challenges:
| Duty | Traditional Scope | 2024 Emphasis |
| Care & Diligence (s180) | Make informed, reasonable decisions | Active oversight of AI, cyber resilience, and deep understanding of business models and risks |
| Good Faith (s181) | Act in the company’s best interests | Management of climate change related risks and opportunities |
| Disclose Conflict of interests (s 191) | Disclose material personal interests | Heightened transparency in ESG, tech-linked ventures, and avoiding perceived conflicts |
| Insolvent Trading (s588G) | Prevent trading while insolvent | Early detection of financial stress amid market volatility and a duty to act decisively (e.g. adopt post-pandemic solvency triage protocols). |
Who Can Enforce Directors Duties?
Although companies generally take action against its directors for breaches, claims can also be initiated by:
- Liquidators (in the event of insolvency);
- Shareholders or creditors (in certain circumstances, such as derivative actions);
- Regulatory bodies, including ASIC, which may pursue civil penalties or criminal charges.
Legal Remedies for Breach of Directors Duties
There are various legal avenues available to hold directors accountable for breaches of duty:
1. Damages or Compensation
If the company suffers a loss due to a director’s breach, it can claim compensation. The aim is to restore the company to the financial position it was in before the breach. Directors may be jointly and severally liable, meaning a claim can be made against one or multiple directors for the full amount of the loss. A director who pays damages may then seek contribution from others.
2. Account of Profits
Even where the company suffers no loss, a director who has improperly benefited (e.g., through a conflict of interest or misuse of company information) may be ordered to return profits to the company. This equitable remedy prevents unjust enrichment.
3. Rescission of Contract
If a director had an undisclosed personal interest in a contract entered into by the company, the contract may be set aside or rescinded. Any profits gained under the contract may also be subject to an account of profits claim.
4. Return of Property & Constructive Trusts
Where a director improperly acquires property through a breach of duty, the court may declare that the property is held on constructive trust for the company. This remedy may also be extended to third parties who knowingly received company assets in breach of directors’ duties.
Critical Directors Duties During Insolvency
One of the most serious risks for company directors arises when the business is facing financial distress. Directors are not only expected to manage the company’s operations in good times, but also to make responsible decisions when there are signs of financial instability. Trading while insolvent, which occurs when a company cannot pay its debts as and when they fall due, which can lead to personal liability, regulatory action, and even criminal charges. Under section 588G of the Corporations Act, directors must not allow a company to incur debt when there are reasonable grounds to suspect insolvency.
Specific Directors Duties in Insolvency Include:
- Monitor the financial health of the company at all times;
- Cease incurring debts if insolvency is suspected or likely;
- Balance the interests of creditors with that of the shareholders’ when the company is nearing insolvency; and
- Avoiding the transfer of assets below market value or giving away company property. These may be considered uncommercial transactions and can trigger personal liability on the Directors of the company.
Directors must also maintain accurate financial records. If records are missing or inadequate, courts may presume that the company was insolvent during the relevant period, increasing the director’s exposure to liability.
Penalties for Breach of Directors Duties
Breaches of directors’ duties may result in the following penalties:
- Civil penalties, including disqualification from managing companies;
- Compensation orders;
- Being disqualified from managing a company for up to 20 years;
- Criminal prosecution, particularly for dishonest conduct or fraud;
Need Legal Advice?
Citilawyers assists individuals and businesses with legal issues related to Corporate and Commercial law, including corporate governance, director responsibility and liability. Contact our solicitors if you need any practical, timely, and strategic advice tailored to you.
