Maya and Tom each own half of a construction services company and both sit on its board. For three years the arrangement ran smoothly. Then Tom started using the company credit card for personal spending, paid himself a director's fee without telling Maya, and stopped answering her calls. Board meetings now stall at the second agenda item, staff can feel the tension, and a major client has started asking pointed questions about the company's future. Maya knows she cannot keep papering over the problem, but she also does not want to be the person who destroys the business she spent years building.
What a director dispute puts at stake
Director disputes are common in small proprietary companies, where the directors are usually also the shareholders and often friends or family. They can start over anything from the strategic direction of the company to a breakdown in a personal relationship, but what makes them legally dangerous is that they rarely stay personal. Two things are at stake.
First, personal liability. Directors owe duties to the company, not to each other, and a dispute that distracts the board is exactly when those duties get breached. If the company keeps trading while insolvent, each director can be personally liable for the debts it incurs. Second, the company itself. A deadlocked board cannot make decisions, lenders and customers notice, and the dispute can end with the company being wound up rather than saved. There is also a regulatory dimension: ASIC can investigate suspected breaches of duty and take enforcement action against directors.
The good news is that most disputes follow a well-trodden path. What follows are five steps, in the order a real person should take them. The exception is step five: if the company is already struggling to pay its debts as they fall due, jump straight to that one.
Five steps to work through a director dispute
Pull the constitution and any shareholders' agreement out of the drawer
The first thing to do is check what documents already govern the relationship between the directors and the shareholders. Most small companies have a constitution, and many have a shareholders' agreement. Both can say a great deal about what is supposed to happen when the people running the company fall out. Look for:
- Dispute resolution clauses: a requirement to meet, negotiate or mediate before either side starts proceedings, sometimes with a specific mediation process to follow.
- Deadlock provisions: a casting vote for the chair, or a buy-sell clause, sometimes called a shotgun clause, under which one side names a price for the shares and the other chooses whether to buy or sell at that price.
- Conduct rules: restrictions on director fees, expenses and related-party dealings, and any consequences the parties agreed would follow a breach.
- Transfer restrictions: preemptive rights or forced-transfer obligations that kick in when a director leaves the company.
Where the company has no constitution, the replaceable rules in the Corporations Act 2001 (Cth) fill the gaps unless they have been displaced. The practical point is that the agreement you already have, or the rules that apply in its absence, determine which of the later steps are open to you. A shareholders' agreement cannot override the statutory duties directors owe under the Corporations Act 2001, but it can set out how disputes will be run, how shares will change hands, and what happens if a director steps away. If there is no shareholders' agreement, that is a gap worth noting, but signing one mid-dispute requires both parties to agree on its terms, which is often difficult when trust has broken down.
Separate the personal falling-out from the legal duties
The second step is to work out, on paper, what is actually a breach of duty and what is just a disagreement about direction. Directors of a company owe duties to the company itself, set out in the Corporations Act 2001 (Cth):
- s 180 requires a director to exercise powers and discharge duties with the care and diligence a reasonable person would exercise in the same circumstances.
- s 181 requires a director to act in good faith in the best interests of the company and for a proper purpose.
- s 182 prohibits a director from improperly using their position to gain an advantage for themselves or someone else, or to cause detriment to the company.
- s 183 prohibits the improper use of information obtained through the role, and that duty continues after a director leaves.
These are civil penalty provisions, so a contravention can lead to penalties, compensation orders and disqualification from managing companies. A dishonest or reckless breach can also be a criminal offence under s 184.
The classification exercise matters because the two categories are treated very differently. A strategy disagreement is usually not a breach: the business judgment rule in s 180(2) protects a director who makes a decision in good faith, for a proper purpose, after informing themselves, and with a rational belief that it is in the company's interests. Courts do not second-guess commercial calls that meet that test. By contrast, a director using company funds for personal expenses is squarely the kind of conduct that s 182 targets, and using company information to advantage a competing venture is the kind of conduct s 183 targets.
Two practical points follow. First, both directors carry these duties. The "wronged" director does not get a holiday from ss 180 and 181 just because they are angry, and a director who retaliates by locking the other out or freezing the company's bank accounts can quickly become the one in breach. Second, document everything from day one: keep contemporaneous notes, preserve emails and board minutes, and get the company's records and accounts in order. If the dispute ends up before a court or in an ASIC investigation, the evidence is what will decide it.
Try a structured conversation or mediation before escalating
Negotiation is the cheapest option and the one most likely to preserve the business. Both directors should meet, explain their positions, and be specific about what each wants: repayment of funds, a change in roles, a buy-out of one side's shares, or a restructure of the board. If the constitution or shareholders' agreement requires mediation before proceedings, follow that process, because a court will generally expect the parties to have complied with it before coming to court.
If direct negotiation is not working, a mediator can be appointed. A mediator is a neutral third party who facilitates the conversation rather than deciding it. The parties can agree in advance whether the mediator's proposal will be binding, or use the process simply to test whether a settlement is possible. The cost is modest compared with litigation, and anything agreed can be documented in a binding settlement agreement that also deals with the shareholding and any repayment obligations.
What to avoid during this phase matters as much as what to do:
- Do not threaten the other director in writing or by email; anything you send can later be produced in court.
- Do not raid the company's accounts or unilaterally stop payments the company is obliged to make.
- Do not withhold information the other director is entitled to, or exclude them from decisions, because that conduct can itself become the basis of an oppression claim.
- Do not agree to anything informally; get the terms of any resolution into writing.
Use the formal levers if talks fail
If negotiation and mediation do not resolve the dispute, the law provides a set of escalating remedies:
- Removal of a director: A proprietary company may remove a director by resolution of its members under s 203C, which is a replaceable rule, so check whether the constitution changes it. A public company may remove a director by resolution of its members, with two months' notice of the intention to move the resolution given to the company (s 203D). The reality check is that in a 50/50 company no resolution passes without the other side's votes, so removal only works where there is a voting majority behind it or the constitution gives the board that power.
- The oppression remedy: A member can apply to the court where the company's affairs are being conducted in a way that is oppressive, unfairly prejudicial or unfairly discriminatory, or contrary to the interests of the members as a whole (s 232 of the Corporations Act 2001 (Cth)). The test is objective: whether reasonable directors would consider the conduct unfair by ordinary standards of reasonableness and fair dealing (Wayde v NSW Rugby League Ltd (1985) 180 CLR 459). The court's orders under s 233 are broad and include ordering one side to buy the other's shares at a fair value, regulating the company's conduct, appointing a receiver, or winding the company up.
- Winding up: The court can order a winding up where it is just and equitable to do so under s 461(1)(k) of the Corporations Act 2001 (Cth), which is the classic remedy for a deadlocked 50/50 company that can no longer function. Courts are cautious about winding up a solvent company where a less drastic order would do, which is why a court-ordered buy-out of shares is often the practical endgame.
- Reporting to ASIC: Suspected breaches of duty can be reported to ASIC, which can investigate and take enforcement action. This is not a weapon to deploy during negotiation; it is a serious step, and a report made in bad faith can backfire.
Litigation is expensive, slow and public, and a court order rarely restores a working relationship. For most small companies, the realistic outcome of court proceedings is a structured exit for one of the parties, not a reconciliation.
Move fast if the company is heading towards insolvency
This step comes first if the company is already struggling to pay its debts. A board consumed by a personal dispute is exactly when the insolvent trading risk spikes, because decisions stall and cash keeps going out. Under s 588G of the Corporations Act 2001 (Cth), a director can be personally liable for debts the company incurs while insolvent, or that make it insolvent, if there were reasonable grounds for suspecting insolvency at the time the debt was incurred. That exposure applies to both directors regardless of who caused the dispute, and any compensation recovered is for the benefit of creditors.
Directors facing this situation have options:
- Safe harbour: A director is protected from the insolvent trading provisions if, after starting to suspect the company may be or become insolvent, they develop and pursue a course of action reasonably likely to lead to a better outcome for the company than immediate administration or liquidation (s 588GA).
- Voluntary administration: The directors can appoint an administrator by board resolution if they form the opinion that the company is insolvent, or likely to become insolvent, at some future time (s 436A). The administrator takes control of the company and investigates its affairs, and the creditors then decide whether the company executes a deed of company arrangement, returns to the directors' control, or goes into liquidation.
- Small business restructuring: Eligible small businesses can instead use the streamlined restructuring process under Part 5.3B, which allows the directors to remain in control while a restructuring practitioner works with them on a plan.
None of these are punishments; they are the mechanisms that stop directors from trading an insolvent company into deeper debt. Acting early on this front is the most protective thing a director in dispute can do for themselves personally.
When to bring in a lawyer for a director dispute
Most director disputes are manageable without a lawyer during the negotiation phase, but professional help becomes important quickly, and the earlier it is sought, the more options remain open. If you brought your situation to a legal practitioner, the work would typically look like this:
- review the constitution and any shareholders' agreement and map the dispute resolution, deadlock and transfer machinery against your situation
- assess each director's conduct against the duties in ss 180 to 183 and advise on exposure, including personal insolvent trading risk
- advise on evidence: what to preserve, what records exist, and what a court or ASIC would need to see
- draft the correspondence and set up the negotiation or mediation, or negotiate directly on your behalf
- if talks fail, prepare and run the formal options: a removal, an oppression application, a court-ordered buy-out, or a winding up application, and manage any interaction with ASIC
- coordinate with accountants and insolvency practitioners where the company's finances are part of the problem
The situations that call for early advice are identifiable: you suspect a co-director is breaching their duties, the company is having trouble paying its debts as they fall due, a deadlock is stopping decisions the business needs, or one director has already taken unilateral action. Advice obtained before you act is far cheaper than unpicking a unilateral decision after it has been made.
Why the first week of a dispute matters most
The single thing to remember is that the options open to you narrow quickly, and the document that determines most of them is the one you already signed, or failed to sign. The shareholders' agreement and constitution decide whether you can force mediation, trigger a buy-out, or remove a director, and the insolvent trading clock starts running the moment the company cannot pay its debts. A director who pulls those documents out, separates the personal conflict from the legal duties, and gets advice in the first week keeps every door open. One who waits until the dispute has consumed the boardroom is often left with only the expensive ones.
In short: check your constitution and shareholders' agreement first, work out which conduct is actually a breach of duty, try structured negotiation and mediation, use the statutory remedies such as removal, oppression and winding up only if talks fail, and treat insolvency as the priority that overrides everything else. Most disputes end with one party buying the other out, not with a courtroom victory, and the earlier you act, the more likely that outcome stays in your control.