The best interests duty, what it means for directors and officers

Every company director in Australia owes a duty to act in the best interests of the company. It sounds straightforward, but the duty is stricter than most directors realise. It governs the quality of decisions, not just the outcome. It reaches people who are not formally appointed as directors. And breaching it can trigger civil penalties, disqualification and, where dishonesty is involved, criminal prosecution.

This article covers the statutory duty in s 181 of the Corporations Act 2001 (Cth), who owes it, what acting in the company's best interests actually requires, the common ways it is breached, and what happens when it is.

The statutory duty: good faith, best interests and proper purpose

Under s 181(1) of the Corporations Act 2001 (Cth), a director or other officer of a company must exercise their powers and discharge their duties in good faith in the best interests of the corporation, and for a proper purpose. The section bundles two limbs into one duty.

The first limb is good faith. The decision must be made honestly, with a genuine belief that it serves the company rather than some private agenda. The second limb is proper purpose. Each power a director holds, such as the power to issue shares or enter contracts, must be used for the purpose for which it was given, not for a collateral aim such as entrenching control or rewarding a friend.

The statutory duty sits alongside an equivalent fiduciary duty at general law and in equity. Directors are fiduciaries, and the equitable obligation to act in the company's interests continues to apply whether or not the statute is invoked. A breach can therefore be pursued under the Act, at general law, or both.

Who owes the best interests duty

The duty in s 181 is owed by directors and other officers. That covers every formally appointed director, but the law deliberately looks past the ASIC register.

The Act's definition of an officer in s 9AD is broad. An officer includes a director or secretary, but also:

a person who makes, or participates in making, decisions that affect the whole or a substantial part of the business;
a person who has the capacity to affect significantly the company's financial standing;
a person in accordance with whose instructions or wishes the directors are accustomed to act, which catches shadow directors who control a board from behind the scenes;
external appointees such as receivers, administrators and liquidators.

The position of employees is more nuanced. The best interests duty in s 181 is not owed by employees generally, but an employee can be an officer. A chief financial officer, general manager or head of operations will often participate in decisions affecting a substantial part of the business and therefore owe the full duty. On top of that, s 182 (use of position) and s 183 (use of information) apply to employees as well as officers, and the information duty continues to apply after a person has left the company.

There is one practical exception for corporate groups. Under s 187, a director of a wholly owned subsidiary can act in the best interests of the holding company instead, provided the subsidiary's constitution authorises it and the subsidiary is not insolvent.

What counts as the company's best interests

The duty is to act in the interests of the company as a whole. In practice that means the collective interests of the shareholders as a general body, not the interests of any individual shareholder, and not the interests of whoever appointed the director. A director nominated by a major investor or a family member still owes the duty to the company itself, not to their appointor.

Acting in the company's best interests also means protecting its long-term health: its financial position, its reputation and its commercial relationships. It does not mean maximising this quarter's profit at any cost, or taking risks that could destroy the business.

The identity of the company's interests shifts as its financial position changes. While a company is solvent, its interests are essentially those of its shareholders. Once the company is insolvent, or on the verge of insolvency, the interests of creditors become paramount, and directors must act with those interests in view. That principle, established in Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722, is why directors of a struggling company cannot keep trading to protect their own position. It also connects to the related prohibition on insolvent trading in s 588G of the Act.

The business judgment rule: honest mistakes are protected

Acting in the company's best interests does not require directors to be right, and it does not require them to be clairvoyant. The business judgment rule in s 180(2) protects a director or officer who makes a business judgment in good faith for a proper purpose, without a material personal interest in the subject matter, having informed themselves to the extent they reasonably believe is appropriate, and with a rational belief that the judgment is in the company's best interests.

If those conditions are met, a court will not second-guess the decision merely because it turned out badly. The rule is a shield for honest, informed decision-making, but it is not a licence to ignore obvious risks or to skip basic diligence before a significant commitment.

How the duty is breached

Breaches of the best interests duty take a recognisable set of forms:

Improper use of position: under s 182, a director, secretary, other officer or employee must not improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the company.
Improper use of information: under s 183, information obtained through the role cannot be improperly used for personal advantage or to the company's detriment, and this duty survives leaving the company.
Conflicts of interest: a director must not let a personal interest, or the interest of a related business, override the company's. Where a director has a material personal interest in a matter, s 191 requires them to notify the other directors, and the notice must be recorded in the minutes.
Secret profits and misappropriation: taking bribes, diverting company assets, or harvesting a company opportunity for personal gain are classic breaches of the duty.
Improper purpose: using a power for a collateral purpose, such as issuing shares to dilute a rival rather than to raise capital, breaches the second limb of s 181.

A worked example: the supplier contract that never reached the board

Consider a wholesale food distribution company with two directors, Anna and Ben, and a general manager, Chris. The company's largest supplier offers a three-year renewal of its supply contract. Anna, who manages the relationship, tells Ben the supplier has decided not to renew. In fact, Anna has arranged for the contract to go to a distribution business owned by her husband, which will pay her a finder's fee. Ben signs off on a more expensive replacement supplier, unaware of the arrangement.

Anna has breached her duty on several fronts at once. She has failed to act in good faith in the company's best interests by putting her family's gain ahead of the company's commercial position. She has improperly used her position to gain an advantage under s 182. She holds a material personal interest in the matter and has not disclosed it as s 191 requires. If the company suffers loss from the more expensive contract, Anna may be ordered to compensate the company, and ASIC could seek a declaration of contravention and a pecuniary penalty against her.

Chris is not off the hook either. As general manager, he participates in decisions affecting a substantial part of the business, so he is an officer and owes the same core duties. Even an accounts clerk who passes inside information to a competitor breaches s 183, because the improper use of information duty extends to employees.

What happens when the duty is breached

The Corporations Act's civil penalty regime is the primary enforcement tool. A court can make a declaration of contravention under s 1317E, then order a pecuniary penalty under s 1317G. For an individual, the maximum penalty is the greater of 5,000 penalty units, currently $1.65 million at a unit value of $330, or three times the benefit obtained from the contravention. For a company, the maximum is far larger: 50,000 penalty units, three times the benefit, or 10% of annual turnover. The court can also order the director to pay compensation to the company for the loss the contravention caused, and ASIC can apply for an order disqualifying the director from managing corporations under s 206C.

Where the conduct is dishonest or reckless, the same conduct can be prosecuted as a criminal offence under s 184, which exposes the director or officer to fines and potential imprisonment. Most matters are pursued as civil penalty proceedings, but criminal referrals happen where dishonesty is involved.

ASIC enforces these duties actively. In ASIC v Adler [2002] NSWSC 483, a director in the HIH group was found to have breached his duties by directing company funds to a company he controlled, which then used the money to buy HIH shares; the court ordered him to pay compensation and disqualified him from managing corporations for a lengthy period. In ASIC v Cassimatis (No 8) [2016] FCA 1023, the directors of Storm Financial were found liable under the related duty of care and diligence in s 180(1) for approving a business model that exposed the company to the risk of catastrophic loss. Both cases show that ASIC will pursue directors personally, and that the court assesses the quality of the decision itself, not just whether anyone profited.

Common misconceptions

Several misconceptions about the best interests duty recur in practice:

"The duty just means don't steal from the company": Wrong. The duty governs the quality of decisions. Approving a deal that exposes the company to serious risk can breach it even where the director gains nothing personally, as the Storm Financial case shows.
"Only directors owe duties": Wrong. Officers owe the s 181 duty, and employees owe the s 182 and s 183 duties. A senior employee who participates in decisions affecting a substantial part of the business is an officer, whether or not their title says so.
"The company means the majority shareholder": Wrong. The duty runs to the company as a whole, and once the company is insolvent or close to it, the interests of creditors become paramount.
"A bad outcome means a breach": Wrong. The business judgment rule protects decisions made in good faith, for a proper purpose, without a material personal interest, and on a reasonable information base. It is the process and the purpose that a court examines, not the outcome.
"Resigning fixes everything": Wrong. The duty not to misuse information continues after a person stops being an officer or employee, and conduct while in office can still be pursued after resignation.

When a lawyer should be involved

Directors should seek advice before a problem becomes an investigation, not after. A commercial lawyer can review board processes so that significant decisions are documented in a way that demonstrates good faith, proper purpose and a reasonable information base. A lawyer can also advise on conflicts of interest, including how and when to disclose a material personal interest, and on the harder questions that arise when a company is in financial difficulty and the duty to creditors starts to bite.

If ASIC has already contacted the company, or a liquidator is examining director conduct, legal advice is essential before responding to anything. Statements made in that context can feed into penalty proceedings or a criminal referral, so directors should not try to manage it alone.

The moment the duty is actually tested

The best interests duty is rarely tested by deliberate fraud. It is tested in ordinary decisions where a director's interest and the company's interest quietly diverge: the contract that benefits a related business, the supplier relationship that comes with a personal benefit, the deal that fixes this month's cash flow at the company's long-term expense.

The cheapest protection is disclosure. Before a decision that touches your own interests, tell the board in writing and make sure it is recorded in the minutes. Before any significant decision, ask yourself the question a court would ask: can I show that I acted in good faith, for a proper purpose, properly informed, with a rational belief that this serves the company? If you cannot answer that, slow down and get advice before signing.