Owner director duties in Australia and your obligations as a director of a small company

If you own and run a small Australian company, "director" and "owner" probably feel like the same job. In law, they are not. The moment you are appointed a director, you take on a set of personal obligations under the Corporations Act 2001 (Cth) (the Act), and those obligations exist separately from your shareholding and apply even when you are the only director, the only shareholder, or both.

Most owner directors are not trying to do the wrong thing. Problems arise when a business grows quickly, decisions are made informally, and paperwork falls behind. This article sets out who owes director duties, the core duties themselves, what happens if they are breached, and the practical steps that keep a small company director on the right side of the law.

Who owes director duties?

An owner director is usually a shareholder who is also a director. The duties in the Act attach to the office of director, not to owning shares, so the first question is whether you count as a director for the purposes of the Act.

The Act defines "director" broadly. Under s 9AC of the Corporations Act 2001 (Cth), a director includes anyone appointed to the position, whatever the role is called, plus two groups of people who may never have been formally appointed:

De facto directors: people who act in the position of a director without being validly appointed.
Shadow directors: people whose instructions or wishes the board is accustomed to follow, excluding professional advice given in a proper professional capacity.

In practice, this means that if you are making the decisions and the formally appointed directors simply do what you say, you can owe the same duties as someone whose name is on the ASIC record. For an owner director, the safe approach is to assume the duties apply and run the company accordingly.

The size of the company does not change the analysis. A proprietary company must have at least one director, who must ordinarily reside in Australia (s 201A(1) of the Act). A director must be a natural person aged at least 18, and must consent in writing to the appointment. A shareholder who is not a director does not owe these duties merely because they hold shares, but that protection disappears if they step into a de facto or shadow role. Even a sole director who is also the sole shareholder owes the full set of duties, subject to the one relaxation for conflicts noted below.

Act with care and diligence

Section 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 if they were a director of a corporation in the company's circumstances, occupying the same office with the same responsibilities.

The standard is assessed by reference to your company's actual circumstances, so the expectations for a two-person trade business differ from those for a listed company. For an owner director it usually means:

Finances: being genuinely across the company's cash position, debts and tax obligations, rather than leaving everything to the accountant or bookkeeper.
Contracts: understanding the significant contracts the company signs, not just signing what is put in front of you.
Process: setting up basic approval processes for large expenses, hires and commitments, and making considered rather than rushed decisions.
Records: being able to show how and why a decision was made, even with simple internal notes.

The business judgment rule in s 180(2) gives directors room to make commercial calls. A director who makes a judgment in good faith for a proper purpose, without a material personal interest, having informed themselves to the extent they reasonably believe appropriate, and rationally believing the judgment is in the company's best interests, is taken to meet the standard of care. The rule protects considered decisions, not uninformed ones.

Act in good faith, in the company's best interests and for a proper purpose

Section 181(1) of the Act requires a director to exercise their powers and discharge their duties in good faith in the best interests of the company, and for a proper purpose. It is a civil penalty provision.

The company is a separate legal entity, so "best interests of the company" is not the same as "best interests of you". Even a 100 per cent owner can breach this duty by using the company for personal advantage. The clearest example in a small business is taking money out informally: an unrecorded loan, a personal expense paid from the company account, or a dividend paid when the company cannot afford it. When the company is under financial pressure, those payments can also feed into the insolvent trading problem discussed below.

The proper purpose limb is about why a power is exercised. Powers such as issuing shares, entering contracts, hiring staff and paying dividends exist for legitimate company purposes. Issuing shares to dilute a co-founder's holding, or signing a contract that benefits you personally without a genuine company benefit, can breach the duty.

Do not misuse your position or your information

Section 182 of the Act prohibits a director from improperly using their position to gain an advantage for themselves or someone else, or to cause detriment to the company. Section 183 does the same for information obtained because of the position. Both are civil penalty provisions, and the information duty continues to apply after you stop being a director.

For owner directors, the common scenarios are:

Side ventures: running a separate business that competes with the company, or diverting leads, customers or suppliers to it.
Confidential information: using customer lists, pricing or supplier terms obtained as a director for personal gain.
Sales and disputes: taking information or opportunities for yourself while preparing to sell the business, or during a falling out with co-founders.

The question is whether the use was improper. Using company information for an unrelated personal project, or to harm the company, is squarely within the prohibition.

Disclose conflicts of interest

Owner directors routinely have interests that overlap with the company's affairs. You might own premises or equipment the company uses, be a director of two companies that deal with each other, or receive wages, director fees, dividends or loan repayments from the company. Conflicts are not automatically unlawful. The law's response is disclosure and process.

Under s 191(1) of the Act, a director who has a material personal interest in a matter relating to the company's affairs must give the other directors notice of the interest at a directors' meeting, as soon as practicable after becoming aware of it, with the details recorded in the minutes. There are exceptions, including interests held in common with other members, remuneration as a director, guarantees given for company loans, and contracts subject to member approval. A standing notice under s 192 can be given in advance to cover an ongoing interest.

Section 191(5) exempts a proprietary company with only one director from the disclosure duty, because there is no one to notify. That does not mean the conflict disappears. The general duties still apply, and dealings between you and the company should still be documented, on fair terms, and approved through the company's records.

Related-party dealings also attract two other regimes worth knowing about:

Tax: loans and other benefits from a private company to its shareholders and their associates can be treated as dividends under the tax rules known as Division 7A unless the loan is documented and meets the repayment and interest conditions. The ATO's guidance on loans by private companies sets out how the rules work.
Member approval: for public companies, Chapter 2E of the Act requires member approval for financial benefits given to related parties such as directors, unless an exception applies (s 208). Most owner director companies are proprietary, where the operative constraints are the general duties and the tax rules above.

Keep proper financial records

The record-keeping obligation is often overlooked by owner directors, but it underpins almost everything else. Section 286(1) of the Act requires a company to keep written financial records that correctly record and explain its transactions and financial position and performance, and that would enable true and fair financial statements to be prepared and audited. The records must be kept for seven years after the transactions are completed (s 286(2)), and failing to keep them is an offence.

For an owner director this is not compliance furniture. Records are the evidence you rely on to show you understood the company's position, and they are the starting point for any solvency assessment.

Prevent the company trading while insolvent

The duty to prevent insolvent trading is the one most likely to turn a business failure into a personal liability. The law treats a company as insolvent when it cannot pay its debts as and when they become due and payable.

Section 588G(1) of the Act applies where a person is a director at the time the company incurs a debt, the company is insolvent at that time or becomes insolvent by incurring the debt, and there are reasonable grounds for suspecting that the company is insolvent or would become so. Where the section applies, s 588G(2) imposes a duty on the director to prevent the company from incurring the debt.

What counts as incurring a debt is broad. It includes ordering stock on credit, signing a lease, taking customer prepayments you cannot fulfil, and hiring staff you cannot pay, as well as the situations listed in s 588G(1A), such as paying a dividend, buying back shares and making capital reductions.

The consequences of breach are serious:

Compensation: the court can order a director to compensate the company for the loss caused by the debt (s 588J), and if the company is wound up, creditors can recover directly from the director (s 588M).
Civil penalties: insolvent trading is a civil penalty provision, so the penalty regime in the next section applies.
Criminal exposure: dishonest involvement in insolvent trading can be a criminal offence.

There are defences. Under s 588H, it is a defence if the director had reasonable grounds to expect, and did expect, that the company was solvent; relied on adequate information from a competent and reliable person; did not take part in the management because of illness or another good reason; or took all reasonable steps to prevent the company incurring the debt.

There is also a safe harbour. Under s 588GA, a director who, after suspecting the company may be or become insolvent, starts developing a course of action reasonably likely to lead to a better outcome for the company is protected from liability for debts incurred in connection with that course of action, or in the ordinary course of business, while it is being pursued. The safe harbour rewards early, documented action. It does not protect a director who keeps trading and hopes for the best.

What happens if you breach a duty?

The main duties in this article are civil penalty provisions, and the consequences are set out in Part 9.4B of the Act:

Pecuniary penalty: the court can order a declaration of contravention and then a pecuniary penalty. Under s 1317G, the maximum pecuniary penalty for an individual is the greater of 5,000 penalty units and three times the benefit derived from the contravention. The penalty unit is currently $330 under s 4AA of the Crimes Act 1914 (Cth), so the maximum is about $1.65 million.
Compensation orders: the court can order a director to compensate the company for loss or damage caused by the contravention.
Disqualification: on ASIC's application, the court can disqualify a director from managing corporations (s 206C of the Act), which can end a business career.
Criminal offences: where a breach is dishonest or reckless, s 184 of the Act creates criminal offences covering failures of good faith, misuse of position and misuse of information, with fines and imprisonment available.
Insolvent trading: as set out above, personal liability to compensate the company and its creditors.

ASIC is the regulator that investigates and takes proceedings for breaches. For insolvent trading, liquidators commonly pursue directors for compensation on behalf of creditors after a company fails.

A compliance checklist for owner directors

The duties do not demand elaborate governance. They demand habits. A practical checklist for an owner director:

Financial oversight: review cash flow and upcoming liabilities (tax, payroll, rent, loan repayments) monthly, and aged receivables regularly.
Separate the money: keep personal and company funds separate, and document every loan, drawing, dividend and reimbursement. Check the Division 7A rules before treating a company loan as a personal one.
Document decisions: record major decisions in minutes or written resolutions, especially contracts, loans, share issues, dividends and related-party dealings.
Disclose conflicts: notify other directors of material personal interests and record the notice in minutes, or use a standing notice for ongoing interests.
Monitor solvency: if the company cannot pay its debts as they fall due, or you suspect it cannot, stop incurring new debts and get advice. The safe harbour only helps directors who act early.
Keep records: maintain financial records that correctly explain the company's transactions, and keep them for seven years.
Stay current with ASIC: directors must consent in writing to their appointment, and company records must be kept up to date.

When professional help is needed

Most owner directors can run the compliance side themselves once the right habits are in place, but some situations genuinely need a professional:

Financial distress: if the company is or may be insolvent, the decision of whether and how to keep trading, and how to use the safe harbour, should be made with legal advice. This is the highest-stakes decision an owner director faces, and it is time-sensitive.
Related-party dealings: documenting loans, rent, asset sales or fees between you and the company, and structuring them consistently with the tax rules, needs both a lawyer and an accountant.
Disputes and investigations: if a co-founder dispute, an ASIC inquiry or a liquidator's claim is in play, advice should come before documents are prepared or statements made.
Setting up governance: a constitution, a shareholders agreement and board meeting practice tailored to the business are cheap compared with the cost of a breach.

A lawyer can review the company's structure and records, draft the governance documents, and advise on duties and defences. An accountant or tax adviser handles the Division 7A analysis, tax structuring and the cash-flow modelling that underpins a solvency assessment.

Start with solvency: the check that protects owner directors

Of all the duties in this article, insolvent trading is the one most likely to turn a business setback into a personal loss. The other duties are enforced through ASIC proceedings that are relatively rare for small companies. Insolvent trading is enforced through liquidators and creditors, who have a direct incentive to pursue directors personally whenever a company fails with unpaid debts. You do not need to intend any harm. Continuing to order stock or pay wages while the company cannot pay its debts is enough to expose you.

The first action to take this week is cheap. Pull together a current picture of what the company owes and when, what it is owed and when it will be paid, and check that the company can pay its debts as they fall due. If it cannot, or you are not sure, stop incurring new debts and take advice before you act. Acting early, and documenting what you do, is both the legal defence and the safe harbour. Acting late is where owner directors lose.