Directors Duties: What You Need to Know in 2025
As a company director, you’ve got a lot on your plate. It’s not just about making big decisions and leading the charge—many legal duties and responsibilities also come with the job. And let’s be real—it’s tough at the top—the daily grind, the monthly obligations, and last, but by no means least, the key directors duties. That’s where this article comes in.
This page breaks down the key things you need to know about your duties as a director so you can confidently tackle them and keep your company on the right track.
What are the key company directors’ duties?
As a company director, you’re in charge of guiding and monitoring the management of your business. And if you’re a director of a small proprietary company, chances are you’re knee-deep in the day-to-day management. Here are the key duties of company directors for the proper purpose of company operations and governance:
1. Act with care and diligence
As a director, you are expected to exercise reasonable care and diligence in your role. This means being knowledgeable about the company’s ins and outs and making sure you’re making informed decisions about crucial matters. You can’t just rely on others to do the heavy lifting. You must actively participate in company activities and ensure you’re across all the important stuff.
2. Avoid and disclose conflicts of interests
If you have material personal interests in a matter related to the company’s affairs, you must inform the other directors. This includes personal interests that affect your ability to make unbiased decisions. You must be transparent about your interests and ensure you do not put yourself in a position that could clash with the company’s.
For example, let’s say your company is considering a contract with a supplier owned by a family member. You have a clear material personal interest there. The right move? Disclose it and remove yourself from any discussions or decisions related to that contract.
3. Prevent insolvent trading
Under Australian law, you have a crucial duty to prevent your company from trading while insolvent. You must keep abreast of the business’s financial health. Once information is gathered, you have to take proactive steps to reorganise debts and contact the administration if you believe the business may be insolvent. If you don’t, you risk being held personally liable for debts, losing your directorship, and facing legal action. Recall that protecting the firm and its creditors is a top priority regarding appropriate financial management.
4. Not improperly use position and misuse confidential information
Your position as director comes with power and influence, but it’s not a free pass to further your own interests or agenda. Every business decision you make should be based on the company’s success. You can’t use your position as a director or any information like trade secrets you’ve obtained to gain an improper advantage for yourself or someone else. And you definitely can’t use it to cause detriment to the company. This means keeping confidential information on the down low and not using it for your gain.
Understanding the role of a director
As a director, you’ll oversee the company’s affairs and ensure its smooth operation. But before you sign on the dotted line, here are a few things you need to know:
- You need to ensure you’re eligible to be a director.
- You need to be at least 18 years old.
- You must provide your name, date of birth, and address to the company
- And don’t forget about the new director identification number requirement – you’ll need to apply for one, too.
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What is the role of a director?
As a director, you shoulder immense responsibility. This includes overseeing daily operations while ensuring they align seamlessly with the business’s strategic objectives.
Your role encompasses visionary leadership and adherence to legal standards. And not just envisioning the company’s future, you’re also responsible for making pivotal decisions and delegating tasks. Additionally, part of the key aspect of your role are to monitor the business’s financial health and establish a firm legal foundation.
Directors play a critical role beyond the boardroom. They wield considerable authority but must also meet high expectations and navigate complex legal responsibilities.
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Where do directors duties come from?
A director’s duties stem from a combination of sources. General duties apply to all directors under common law and the Corporations Act 2001. These include acting in good faith and the company’s best interests and exercising due care and diligence. Specific duties might also apply to you depending on the type of company you’re a director of and the industry in which it operates. For example, if you’re a company director providing financial services, you must comply with additional obligations under the Corporations Act.
Consequences of reaching director duties
With great power comes great responsibility. Directors who breach their duties may face consequences such as disqualification. This means you won’t be able to be a director or take part in the management of any company during that time. The length of the disqualification will depend on the severity of the breach and any previous breaches you might have committed in the past. You could sometimes be disqualified for up to 5 years or even permanently.
Penalties for breaching general duties
Breaching your general duties as a director is a criminal offence and can result in some hefty penalties. If you’re found guilty, you could face a fine of up to $200,000 or imprisonment for up to 5 years, or both. You could also be ordered to pay compensation to the company for any loss or damage it suffered as a result of your breach. This could include repaying any money or assets you misappropriated or paying for any legal costs the company incurred.
Relief for breach of duties
In some cases, you might get relief from the consequences of breaching your director’s duties. This is known as ‘relief from liability’ and can be granted by the court in certain circumstances. To be eligible for relief, you’ll need to show that you acted honestly and reasonably and that you ought to be excused for the breach. The court will consider things like the circumstances of the breach, your character and previous conduct, and any steps you took to rectify the breach. If you’re granted relief, you won’t be personally liable for the consequences of the breach. But it’s important to remember that relief is not guaranteed and will only be granted in limited circumstances.
Managing company assets, debts, employees, and investments
As a company director, it’s your job to make sure the company is running like a well-oiled machine. This means keeping a close eye on the company’s assets, debts, employees, and investments and making sure every subject matter is above board.
How directors should manage assets, debts, employees and investments
When managing company assets, you need to ensure they’re being used for legitimate business purposes. You can’t treat company property like your personal piggy bank. The same goes for company funds—they should only be used for proper company purposes, not for your own personal gain. And if the company is taking on debt, you must ensure it can afford to pay it back.
As for employees, you need to make sure they’re being treated fairly and paid what they’re owed. This includes things like wages, superannuation, and any other entitlements they might have. And when it comes to investments, you need to do your due diligence and make informed decisions based on the company’s best interests. Don’t just throw money at something because it sounds good – make sure it aligns with the company’s goals and has a solid chance of paying off.
One of the biggest no-nos for company directors is trading while insolvent. This is when the company continues to operate and take on debt even though it can’t pay its bills when they’re due. As a director, you must keep a close eye on the company’s financial position and ensure it’s not trading while insolvent. If you suspect the company might be insolvent, you must take action ASAP. This might mean putting the company into administration or liquidation, or developing a plan to turn things around. But whatever you do, don’t just stick your head in the sand and hope the problem goes away.
Director duties if a liquidator has been appointed
If things have gone really pear-shaped and a liquidator has been appointed to wind up the company, you’ve still got some duties as a director. You’ll need to provide the liquidator with a report about the company’s business, property, affairs, and financial circumstances. This is known as a Report on Company Activities and Property (ROCAP) and it’s a legal requirement.
You’ll also need to hand over any company books and records the liquidator asks for and give them any assistance they need to carry out their duties. This might include answering questions, providing documents, or attending meetings. It’s important to cooperate with the liquidator and not try to hide anything or hinder their investigation. If you do, you could face some serious consequences, including fines and even imprisonment.
Key Takeaway:
Being a company director means big responsibilities, like acting in the company’s best interests and managing its affairs wisely. You need to keep an eye on finances, avoid conflicts of interest, and ensure you’re not misusing your position. If things go south, facing disqualification or penalties is real. So take your role seriously to steer clear from trouble.
Relying on the business judgement rule
The business judgment rule can offer some protection for directors who make informed, good-faith decisions that end up going south. Essentially, it says that as long as you acted in good faith, in the company’s best interests, and took reasonable steps to inform yourself, you won’t be held liable for the outcome.
But here’s the thing: This rule isn’t a get-out-of-jail-free card. You can’t just throw up your hands and say, “I tried my best.” Be a reasonable person and put in the work and exercise sound judgment.
Seeking professional advice
Part of exercising care and diligence is knowing when to tap into outside expertise. No one expects you to have all the answers, especially when it comes to complex legal, financial, or technical matters.
Seeking out and relying on professional advice can actually help protect you under the business judgment rule. It shows that you took steps to make an informed decision in the company’s best interests. Just make sure you’re getting that advice from a reputable source and not just rubber-stamping whatever they tell you.
Responsibilities of shadow directors and officers
Not everyone who wields power and influence in a company holds an official director or officer title. In some cases, individuals who operate behind the scenes or exert control over the board can be considered “shadow directors” or “de facto officers.”
I’ve encountered this in companies where a major shareholder or investor throws their weight around without holding a formal position. It’s a tricky situation because these individuals may be subject to the same duties and liabilities as appointed directors, even if they don’t realize it.
Who is an ‘Officer’ of a company?
Under Australian law, an officer isn’t just someone with a fancy title like CEO or CFO. The definition also includes anyone who:
- Makes or participates in making decisions that affect the whole or a substantial part of the company’s business
- Has the capacity to significantly affect the company’s financial standing
- Gives instructions to the directors that they’re accustomed to acting on
So even if you don’t have “director” or “officer” printed on your business card, you could still be held to the same standards if you’re pulling the strings behind the scenes.
Do director duties only apply to directors?
The short answer? No. Many of the same duties that apply to appointed directors also extend to shadow directors and de facto officers.
This includes things like acting in good faith, avoiding conflicts of interest, and not misusing information or your position. Basically, if you’re acting like a director or wielding director-level influence, the law will likely treat you like one when it comes to duties and liabilities.
I know of a case where a major investor was found to be a shadow director and held liable for breaching their duties, even though they never officially served on the board. It’s a sobering reminder that you can’t skirt your responsibilities just by avoiding a formal title.
Obligations of directors in mutual companies
Mutual companies, like credit unions or building societies, have a unique structure where the customers are also the owners. This can create some interesting dynamics for directors, who have to balance the interests of member-owners with the long-term sustainability of the company.
I served on the board of a mutual early in my career, and it was an eye-opening experience. You quickly learn that every decision you make has a direct impact on the people you serve, not just faceless shareholders.
What is a mutual company?
A mutual company is owned by its members, who are also its customers or policyholders. Profits are often reinvested back into the company or distributed to members through lower fees, better rates, or dividends.
Some common examples of mutuals include:
- Credit unions
- Building societies
- Mutual insurance companies
- Cooperative businesses
The mutual structure can foster a strong sense of community and shared purpose, but it also comes with its own set of challenges for directors.
Minimum number of directors required
Mutual companies are still subject to the same basic requirements as other companies when it comes to the number of directors. For small proprietary companies, you need at least one director who ordinarily resides in Australia. For larger proprietary companies and public companies, it’s at least two.
But here’s the thing: Mutual companies often have larger boards than their for-profit counterparts. This is because they want to ensure broad representation of their member-owners and stakeholders. It’s not uncommon to see boards with 10, 12, or even more directors in a mutual.
Simplified duties for small proprietary companies
If your mutual company is a small proprietary company, you may be able to take advantage of some simplified reporting and compliance requirements. This includes things like not needing to prepare audited financial reports or hold an annual general meeting. But even if you’re playing by a slightly different set of rules, the core duties and responsibilities of directors still apply. You can’t cut corners when it comes to acting in good faith, avoiding conflicts of interest, and exercising due care and diligence.
I’ve seen small mutuals get into trouble because their directors thought they could be more lax about governance and oversight. The reality is, the stakes are often higher in a mutual because you’re directly accountable to your members. Skimping on your duties is a surefire way to lose their trust and confidence.
Key Takeaway:
Directors must always put the company first, avoiding personal gains that conflict with their role. This includes not misusing power or confidential info and acting with care and diligence. Remember, shadow directors face the same duties and liabilities as official ones.
Conclusion
Directors duties might seem like a daunting prospect, but with the right knowledge and approach, you’ve got this. Remember, it’s all about acting in the best interests of the company, avoiding conflicts of interest, and staying on top of your legal obligations. Don’t be afraid to seek advice when you need it, and where else would we suggest but our own team of experts at Sleek. With a clear understanding of your duties and a commitment to doing right by your company, you’ll be well on your way to being a rockstar director.
