Directors' duties and corporate administration, what Australian SME directors must do

If you are a director of an Australian company, the law does not treat you as an employee of your own business. Under the Corporations Act 2001 (Cth), you carry personal statutory duties that apply no matter how small the company is, and the company itself must keep records and keep ASIC informed. The two overlap: most directors' duty problems surface through a company's paperwork, or through a lack of it.

This article sets out who these duties apply to, the core duties themselves, the administration obligations that sit alongside them, and what happens when they are breached. It is general legal information, not legal advice for your own circumstances.

Who the directors' duties apply to

The duties apply to every director of every company registered under the Corporations Act, including the proprietary companies that most Australian SMEs operate through. There is no turnover test and no minimum headcount. A director of a one-person company owes the same care and diligence, good faith and solvency duties as a director of a listed company.

The company itself also carries obligations. It must keep financial records, registers and minutes, and it must lodge notices with ASIC when details change. These are company obligations, but in practice directors are the people responsible for making sure they happen, and it is usually directors who are pursued when they do not.

Two clarifications matter for SME operators:

Sole traders and partnerships: they are not companies and have no directors, so these duties do not apply to them directly. Their obligations sit mainly in consumer law and privacy, discussed below.
Shadow and de facto directors: someone who acts as a director without formal appointment can be treated as a director for the purposes of these duties. If you call the shots for a company, the duties may follow you even if your name is not on the ASIC record.

The thresholds that do exist sit in other areas of law. Under the Privacy Act 1988 (Cth), a business with an annual turnover of $3 million or less is generally treated as a small business and exempt from most of the Act's obligations. The Australian Consumer Law, by contrast, applies to anything done in trade or commerce, regardless of size.

Duty 1: care and diligence

s 180(1) of the Corporations Act 2001 (Cth) requires a director to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise in the corporation's circumstances, in that office and with those responsibilities. It is a civil obligation only, but it is the duty most often at the centre of claims against directors.

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

In day-to-day terms, care and diligence means attending to the company's affairs rather than leaving them to others, asking questions before significant decisions, monitoring the company's financial position, taking advice where the matter is outside your expertise, and not signing documents you have not read. When things go wrong, the question is whether the decisions were informed and considered, and the company's records are usually the evidence of that.

Duty 2: good faith and proper purpose

s 181(1) of the Corporations Act 2001 (Cth) requires a director to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose. It is a civil penalty provision.

The practical effect is that decisions must benefit the company, not the director personally or some related interest. Powers given to directors are powers held for the company, so using them to favour one shareholder over the company as a whole, or to advance a personal agenda, can breach the duty even where the director believed they were acting fairly. Where a director has a material personal interest in a matter, the interest should be disclosed and the decision made through the proper process, rather than informally.

Duty 3: no improper use of position or information

Directors and officers must not use their position, or information obtained through their role, to gain an advantage for themselves or someone else, or to cause detriment to the company. s 184 of the Corporations Act 2001 (Cth) makes the dishonest or reckless versions of this conduct criminal offences, carrying fines and imprisonment.

The everyday examples are familiar in SMEs: a director diverting a company opportunity to a related entity, using customer lists or pricing information for personal gain, or negotiating a contract with a family member without disclosing the connection. None of these require a finding of dishonesty to be a problem, because the civil versions of the duty are broader than the criminal ones. The protection is process: disclose the interest, record it, and have the decision made by someone independent of it.

Duty 4: prevent insolvent trading

s 588G of the Corporations Act 2001 (Cth) imposes a duty on directors to prevent the company incurring a debt if the company is insolvent at the time, becomes insolvent by incurring it, and there are reasonable grounds for suspecting that was the case. A director who contravenes can be personally liable to compensate the company, and liquidators regularly pursue this head of claim.

The safe harbour in s 588GA is the important qualification. A director is protected from liability if, after starting to suspect the company may become or be insolvent, they begin developing one or more courses of action that are reasonably likely to lead to a better outcome for the company, and the debt is incurred in connection with that course of action. The protection is not automatic: it depends on the director actually taking steps, and the safe harbour ceases to apply if the course of action is abandoned or stops being reasonably likely to succeed.

For directors, the practical implication is to watch for the warning signs: debts falling due that cannot be paid, reliance on informal extensions from suppliers, juggling payments between creditors, and a lack of current financial reports. Acting early, on the basis of proper financial information and with advice, is what both the duty and the safe harbour reward.

The administration side: records, registers and ASIC

Corporate administration is where these duties meet daily practice. The Corporations Act requires companies to keep a defined set of records, and those records are the evidence that directors' decisions were properly made.

Financial records: s 286 requires a company to keep written financial records that correctly record and explain its transactions and financial position, and to retain them for 7 years after the transactions are completed.
Minutes: s 251A requires a company to keep minute books recording the proceedings and resolutions of members' and directors' meetings, and resolutions passed without meetings, within 1 month. Signed minutes are evidence of what was decided.
Registers: s 168 requires a company to maintain a register of members, and a register of option holders or debenture holders if the company has issued them.
ASIC notices: s 205B requires the company to notify ASIC within 28 days of a director or secretary being appointed, their details changing, or them ceasing to hold office.
Annual review: under s 345A, each company has a review date, generally the anniversary of its registration, around which it must confirm its details with ASIC and pay the annual review fee.

The common failure pattern in SMEs is informal decision-making: founders agreeing on things in messages, shares being issued or transferred without paperwork, and directors changing without ASIC being told. These gaps rarely matter while the business is running well. They matter a great deal when there is a dispute, an ATO issue, or a liquidator reviewing what happened.

What happens if a director breaches

The consequences of breaching these duties are personal and can be severe.

Civil penalties: under s 1317G of the Corporations Act 2001 (Cth), the maximum pecuniary penalty for an individual is the greater of 5,000 penalty units and three times any benefit obtained from the contravention. For a body corporate it is the greatest of 50,000 penalty units, three times the benefit, and 10% of annual turnover.
Disqualification: under s 206C, a court can disqualify a person from managing corporations on ASIC's application after a civil penalty declaration.
Criminal offences: reckless or dishonest breaches of the good faith, position and information duties under s 184 are criminal, with fines and imprisonment available.
Insolvent trading liability: a director who contravenes s 588G can be ordered to compensate the company, and the compensation regime is designed to put the loss back on the director personally.

The obligations beyond the company

Directors' duties are not the whole compliance picture. The same administration systems that support those duties also carry the business's other legal obligations.

Consumer law: s 18 of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)) prohibits misleading or deceptive conduct in trade or commerce. It applies to marketing, quotes, terms and refunds, and it applies regardless of business size. The ACL also attaches consumer guarantees to goods and services sold to consumers, which cannot simply be contracted out of.
Privacy: if the business has an annual turnover above $3 million, or falls within one of the exceptions, the Privacy Act 1988 (Cth) applies, bringing with it the Australian Privacy Principles and obligations to handle personal information openly, securely and for the purposes collected. Even below the threshold, some obligations such as credit reporting can still apply.
Employment records: if the business employs staff, accurate time and wage records are required under the Fair Work system, and employment administration is often where disputes with workers begin.

A practical compliance checklist

Corporate administration does not need to be a heavy process. A light, consistent rhythm is enough to keep the company decision-ready.

Monthly: review cash flow, outstanding debtors and creditors, and upcoming liabilities; check contract renewal dates and termination windows; note any disputes, complaints or late payments in a risk log.
Quarterly: document significant decisions in minutes or resolutions, recording what was decided, who approved it, what information was considered and how any conflicts were managed.
Annually: complete the ASIC annual review and pay the fee on time; confirm director, secretary and shareholder details are current; review whether the constitution and registers are still fit for purpose; refresh customer-facing terms and privacy policies.

When to get legal help

A lawyer's role in this area is as much preventive as reactive. Practitioners can review existing governance records and identify gaps before they become problems, draft constitutions and shareholder agreements, prepare resolutions and minutes in the right form, and advise on whether a proposed decision creates a conflict or a duty issue.

Legal help becomes essential at three points in particular: before issuing shares, entering major contracts or restructuring; when solvency is in doubt, because advice taken before further debts are incurred is what the safe harbour depends on; and as soon as ASIC, the ATO or a liquidator becomes involved, because the response to those processes is time-sensitive and the records will be scrutinised.

The decision record that protects you

The pattern that costs SME directors most is not a dramatic breach of duty. It is informal decisions: agreements reached in messages, approvals given verbally, and nothing written down. When a dispute, an audit or a liquidator arrives, the company's records are the evidence of whether you acted with care, in good faith and for a proper purpose, and an empty minute book is hard to explain.

The single most useful thing a director can do this year is check the company's review date with ASIC, confirm the recorded directors and shareholders are current, and start documenting significant decisions in signed minutes. A few minutes per decision, recorded properly, is what turns a defensible decision into documented evidence that the duty was met.