Directors' duties breach, what happens and who can act

There is no single automatic penalty for a breach of directors' duties. Instead, a breach switches on a sequence of possible proceedings, and the outcome depends on which duty was broken, how serious the conduct was, and who decides to act. That enforcement machinery exists for a reason: the duties protect the company, its shareholders and its creditors from decisions that benefit individuals at the business's expense, and the consequences are designed to bite personally rather than just hurt the company.

This guide walks through how that machinery works in Australia, from the moment a breach occurs to the orders a court can make. We cover who the duties bind, what counts as a breach, who can take action, what each stage of the process produces, and where the risk is highest for a small or medium business.

Who the duties bind

The statutory duties sit in the Corporations Act 2001 (Cth), and they do not apply only to people with the word "director" in their title. The Act's definition of director covers anyone validly appointed, including alternate directors acting in that capacity, but it also reaches further (s 9AC). A person who is not validly appointed is still a director for most purposes if they act in the position of a director, or if the board is accustomed to act on their instructions or wishes. Those are the "de facto" and "shadow" directors that founders and investors often overlook.

The definition of officer is even wider (s 9AD). An officer includes a director or secretary, but also anyone who:

Makes decisions: a person who makes, or participates in making, decisions that affect the whole or a substantial part of the business
Affects financial standing: a person with the capacity to affect significantly the company's financial standing
Directs the board: a person in accordance with whose instructions or wishes the directors are accustomed to act

The practical effect is that a founder, a hands-on investor, or a senior manager who effectively runs the company can carry director-style obligations without ever holding the title. If they breach a duty, they can be treated as if they were a director for enforcement purposes.

What switches the mechanism on

A breach is a contravention of one of the duties. The core statutory duties in Part 2D.1 of the Corporations Act 2001 are:

Care and diligence: a director or officer must exercise their powers with the degree of care and diligence a reasonable person would exercise in the company's circumstances (s 180)
Good faith and proper purpose: powers must be exercised in good faith in the best interests of the company and for a proper purpose (s 181)
No misuse of position: a director or officer must not improperly use their position to gain an advantage or cause detriment (s 182)
No misuse of information: information gained through the role must not be used improperly (s 183)
No insolvent trading: a director must prevent the company from incurring a debt when it is insolvent or would become insolvent by incurring it, if there are reasonable grounds for suspecting insolvency (s 588G)

Two features of these duties matter more than most directors realise.

First, the standard is objective. A care and diligence breach is assessed by asking what a reasonable person in the director's position would have done, not what the director intended. So "I didn't mean any harm" is not a defence, and a director can breach the duty by failing to read financials, failing to ask questions, or rubber-stamping a decision without understanding it.

Second, intention only matters where it is built into the duty. The same conduct can have a civil version and a criminal version. Sections 180 to 183 are enforced through the civil penalty regime, while s 184 creates criminal offences where a director or officer is dishonest or reckless in failing to act in good faith, in using their position, or in using information.

The business judgment rule in s 180(2) gives some protection. A director who makes a business judgment is taken to have met the care and diligence standard if they made the judgment in good faith for a proper purpose, had no material personal interest in the subject, informed themselves to the extent they reasonably believed appropriate, and rationally believed the judgment was in the company's best interests.

Who can pull the trigger

A breach does not have to reach a regulator to produce consequences. Several different actors can start proceedings, and sometimes more than one acts at once:

ASIC: the regulator investigates suspected breaches and can bring civil penalty proceedings under Part 9.4B of the Act, or refer serious matters for criminal prosecution. ASIC is more likely to become involved where conduct is serious, where investors or creditors have been harmed, or where there are systemic governance failures
The company: the company itself, often under new management, can sue a former director for the loss its breach caused
Shareholders: shareholders have more limited avenues, but in some circumstances they can bring a statutory derivative action in the company's name, or pursue an oppression claim where conduct unfairly prejudices them. Whether a pathway is open depends heavily on the facts, and a lawyer should assess it before anyone commits to a costly proceeding
Liquidators: if the company fails, a liquidator investigates past transactions and can pursue directors personally to recover money for creditors, including insolvent trading claims and the clawback of unfair preferences or uncommercial transactions

Stage one: the civil penalty track

For most breaches that reach a court, the process runs through Part 9.4B of the Act. The stages are cumulative:

Declaration of contravention: If ASIC brings proceedings and the court finds a contravention of a civil penalty provision, it first makes a declaration under s 1317E recording what happened and who did it. The declaration itself has no dollar value, but it is the foundation for everything that follows, and it is a public record that tends to follow a director into future ventures and board roles.
Pecuniary penalty: The court can order the director to pay a pecuniary penalty to the Commonwealth under s 1317G. For an individual, the maximum is the greater of 5,000 penalty units or three times the benefit derived from the contravention. With the Commonwealth penalty unit now set at $330 for conduct on or after 7 November 2024, that cap is $1.65 million per contravention. Where a contravention affected many individual decisions or transactions, penalties can be imposed for each one and quickly reach very large sums. For a body corporate the maximum is the greatest of 50,000 penalty units, three times the benefit, or 10% of annual turnover, subject to a cap of 2.5 million penalty units. In deciding the amount, the court must weigh the nature and extent of the contravention, the loss or damage caused, the circumstances, and any similar prior conduct (s 1317G(6)).
Relinquishment orders: Under s 1317GAB, the court can also order a director to pay the Commonwealth an amount equal to the benefit derived and detriment avoided from the contravention. This is designed to strip out the profit, on top of any penalty.
Compensation orders: A court can order a director to compensate the company for damage suffered because of the contravention (s 1317H). The amount can include profits made by anyone from the contravention, and the order can be made even without a declaration of contravention. This is the order that turns a breach into a personal debt, because the director pays from their own assets, not the company's.
Disqualification: Finally, on ASIC's application, the court can disqualify a person from managing corporations for a period it considers appropriate, where a declaration of contravention has been made and disqualification is justified (s 206C). In deciding whether it is justified, the court looks at the person's conduct in managing any corporation. Disqualification does more than end a current role: it prevents appointment as a director, managing a corporation, and in practice much informal involvement in decision-making, which can shut down future ventures entirely.

Stage two: the criminal track

The criminal offences under s 184 apply where a director or officer acts dishonestly or recklessly in failing to act in good faith or for a proper purpose, in using their position, or in using information. Dishonest insolvent trading is also an offence: a director who suspects the company is insolvent and dishonestly fails to prevent it incurring further debts commits an offence under s 588G(3).

Criminal prosecution is the exception rather than the rule, and it is most likely where there is fraud, deliberate concealment from the board or shareholders, or reckless conduct causing major harm. Conviction can lead to fines and imprisonment, which is why criminal exposure changes the calculus entirely: a director facing a criminal charge needs specialist representation from the moment they are contacted, not after charges are laid.

Stage three: insolvency, where the claims bite hardest

The largest source of personal liability for directors of small and medium companies is insolvency. When a company goes into liquidation, the liquidator's job is to recover money for creditors, and directors are a primary target:

Insolvent trading: Under s 588G, a director contravenes the duty if the company incurs a debt while insolvent, or becomes insolvent by incurring it, and there were reasonable grounds for suspecting insolvency. Crucially, the director does not need to have actually known: a contravention is made out if a reasonable person in a like position in the company's circumstances would have been aware. Liquidators can then seek orders requiring the director to compensate the company for the amount of the debts, and that liability is personal.
Voidable transactions: Liquidators can also claw back money from creditors and related parties. An unfair preference is a payment to one creditor that gives them more than they would get in liquidation. An uncommercial transaction is one a reasonable person in the company's circumstances would not have entered into, and the Act expressly treats entering into an uncommercial transaction as incurring a debt for insolvent trading purposes. Director loans, payments to family entities, and asset transfers to related businesses are exactly the transactions a liquidator scrutinises first.
The documentation gap: This is where informal practice becomes expensive. A casual transfer between the company and a director, an undocumented loan, or a payment to a spouse's company may be perfectly legitimate, but without records showing the board turned its mind to the transaction, its terms and the company's solvency, a liquidator can fairly ask what was happening and why. The burden of explanation falls on the director.

The mechanism in action: Storm Financial

The enforcement machinery is not theoretical. In ASIC v Cassimatis (No 8) [2016] FCA 1023, the Federal Court found that the two directors of Storm Financial, Mr and Mrs Cassimatis, had contravened the care and diligence duty in s 180(1). Storm's business model recommended that almost 90% of its clients borrow against the value of their homes and invest the borrowed money in geared portfolios of ASX 300 securities. The directors personally approved the model. Edelman J found the breach lay in applying that single high-risk model to all clients without regard to their individual circumstances, including vulnerable retirees whose homes were put at risk.

The case then ran through the full sequence. Declarations of contravention were made, penalties were imposed under s 1317G, and disqualification orders followed in ASIC v Cassimatis (No 9) [2018] FCA 385. The directors appealed the contravention findings, and the Full Court dismissed the appeal in Cassimatis v ASIC [2020] FCAFC 52.

What makes the case instructive for any director is what was not alleged. ASIC did not need to prove dishonesty or self-dealing. The breach was a failure of process: approving a strategy without considering who it would reach. If a court can find a breach of the care and diligence duty in a decision that was, in the directors' minds, a bold business strategy, then the same standard applies to a founder approving a risky sales push, a related-party deal, or a round of cost-cutting without asking the hard questions.

Where directors most often get caught

The edge cases, where enforcement risk is highest, are predictable:

Cashflow pressure: late tax, overdue suppliers and "shortcuts" to survive are the classic lead-in to insolvent trading exposure
Rubber-stamping: approving financials or transactions without reading them, on the assumption that "the accountant checked it"
Informal decision-making: founder disputes and fast growth both push boards toward decisions made in corridors and group chats, with no record of what was considered
Related-party transactions: payments to director-owned suppliers, family entities, or director loans that are undocumented or uncommercial
Conflicts of interest: a director with a material personal interest who does not disclose it and step back from the decision

In each of these, the objective standard is what hurts. The question is never "did the director mean well?" It is "what would a reasonable director have done, and can the paperwork show it?"

Where a lawyer fits in

The right time to involve a lawyer depends on where you are in the sequence:

Before anything happens: a commercial lawyer can put in place the governance that makes a breach less likely and easier to defend, including board minutes that record the reasons for decisions, solvency assessments for major transactions, and processes for disclosing and managing conflicts. Where the company is near insolvency, advice on the safe harbour provisions may protect a director who takes a course of action reasonably likely to lead to a better outcome for the company
When a claim or inquiry appears: if ASIC contacts the company, a liquidator demands documents, or a shareholder threatens proceedings, a lawyer can assess the claim, identify the available defences such as the business judgment rule, and control what is said at a stage where statements are hard to walk back
In proceedings: penalty and compensation arguments, and submissions about disqualification, are highly specialised. The difference between a skilled penalty submission and an unrepresented one can be millions of dollars and the difference between a ban and a career

Because the consequences are personal, the cost of advice is almost always trivial compared with the exposure. A single conversation about solvency, or about whether a related-party transaction needs a proper process, is inexpensive; a liquidator's demand or an ASIC investigation is not.

The record you leave behind

If there is one thing that separates directors who weather a challenge from those who do not, it is the record they left behind. The objective standard means a court or liquidator reconstructs what a reasonable director would have done from the evidence of what this director actually did: the minutes, the financials, the emails, the solvency notes. A director who turned their mind to the risk, considered alternatives, and recorded the reasoning is in a fundamentally different position from one who cannot show any of it happened.

The moment to start is not when a letter arrives. It is the day a related-party payment is proposed, the day sales drop sharply, or the day a director realises the company may not pay its tax on time. Those are the points where a short conversation about process can be the difference between a documented, defensible decision and a personal liability that follows you out of the company.