Breach Of Fiduciary Duty: What Directors And Business Owners Must Know

If you run a company in Australia (or you’re thinking about setting one up), you’ve probably heard that directors have “fiduciary duties”. It can sound like legal jargon - but in practice, fiduciary duties are all about trust, loyalty and acting for the company’s benefit.

When people talk about a breach of fiduciary duty, they’re usually describing a situation where a director, founder or other trusted decision-maker has put their own interests first, misused company information or assets, or otherwise failed to act in the best interests of the company.

For small businesses, these issues can be especially painful because directors and founders often wear multiple hats: shareholder, employee, manager, key salesperson and decision-maker. That overlap can make it easier to accidentally cross a line - or to miss early warning signs that something isn’t right.

Below, we break down what a breach of fiduciary duty is, how it shows up in real businesses, what the consequences can be, and what you can do now to protect your company (and yourself) with the right structures, documents and decision-making processes.

What Is A Breach Of Fiduciary Duty?

A fiduciary duty is a duty to act with loyalty and good faith for someone else’s benefit. In a company context, directors are fiduciaries of the company (meaning the duty is owed to the company itself, not to individual shareholders).

A breach of fiduciary duty generally happens when a director (or someone in a fiduciary role) fails to:

• act in the best interests of the company (not themselves),
• avoid conflicts between personal interests and company interests,
• use their position or company information properly, or
• account to the company for benefits they obtained because of their role.

It’s worth noting: a breach isn’t limited to obvious “bad behaviour” like stealing money. It can also include more subtle conduct - like taking an opportunity for yourself that should have been offered to the company, or making decisions while conflicted and not properly managing that conflict.

Fiduciary Duties vs Directors’ Statutory Duties

In Australia, directors’ obligations come from two main places:

• General law (fiduciary and common law duties): these are developed through court decisions over time.
• Statute (mainly the Corporations Act): these are specific legal duties written into legislation.

In real disputes, these concepts often overlap. For example, “misusing your position” can be both a breach of fiduciary obligations under general law and a breach of statutory directors’ duties.

If you’re a founder/director, the key takeaway is practical: the law expects you to be loyal to the company and to make decisions in the company’s best interests - especially when money, opportunity or control is on the line.

Who Owes Fiduciary Duties In A Small Business?

Most commonly, fiduciary duties are owed by:

• Company directors (including non-executive directors and, in some cases, “shadow” or de facto directors),
• Other people who act in a fiduciary capacity (this can include certain officers or senior managers where, on the facts, they’ve assumed a position of trust and are exercising power or discretion on the company’s behalf), and
• Business partners (in partnerships, partners often owe fiduciary obligations to each other and to the partnership).

For many small businesses, the biggest risk area is when a founder is both a director and a shareholder, and they also control day-to-day operations. When relationships are good, this is efficient. When relationships break down, it can become a legal minefield.

What About Shareholders?

Shareholders don’t automatically owe fiduciary duties just because they own shares. Generally, fiduciary duties arise because of a person’s role (like being a director) or because they’ve taken on a position of trust and control in relation to the company.

However, if a shareholder is also a director - or they effectively control the company’s decisions in a way that means they may be treated as a “shadow director” - fiduciary duties may apply.

This is one reason it’s important to be clear on roles early, and to set expectations in writing - especially when co-founders have different levels of involvement in the business.

Common Examples Of Breach Of Fiduciary Duty (In Plain English)

Most breach of fiduciary duty claims are built around a handful of themes. Here are common scenarios we see in founder and director disputes.

1. Conflicts Of Interest That Aren’t Properly Managed

A conflict of interest is where your personal interests could influence (or appear to influence) your decision-making as a director.

Examples include:

• a director approving a contract with their own separate business,
• a director causing the company to employ a family member on inflated pay,
• a director using company funds to pay for personal expenses (even if they “plan to pay it back”).

Conflicts aren’t always prohibited - but they usually must be identified, disclosed and managed properly. If conflicts are hidden or handled casually, that’s where legal risk escalates quickly.

2. Using Company Information For Personal Benefit

Directors often have access to sensitive information: pricing, customer lists, supplier margins, pipeline deals and expansion plans.

A breach of fiduciary duty can occur if a director uses that information to:

• start a competing business,
• poach clients,
• undercut the company, or
• help a friend, relative or new employer win a deal that should have gone to the company.

This can become even more serious if there are confidentiality obligations in place and the information is commercially valuable.

3. Diverting A Business Opportunity

This is one of the most common founder dispute flashpoints.

Let’s say your company has been negotiating with a major supplier or client. A director then quietly takes that same deal in their personal capacity (or via another company they own), cutting the company out.

Even if the director thinks “the company wasn’t going to do it anyway”, this can still be risky. The core question is whether the opportunity belonged to the company - and whether the director acted loyally.

4. Misuse Of Company Assets (Including Money)

Company assets aren’t just cash. They can include:

• equipment, stock and vehicles,
• intellectual property (logos, software, content),
• company staff time,
• marketing accounts and ad spend, and
• company credit cards.

Using company assets for personal purposes can be a breach, even if the amounts are relatively small - particularly if it’s repeated or concealed.

5. Failing To Act In The Company’s Best Interests During Disputes

When co-founders fall out, it can be tempting to treat the company like a battleground.

Common risky moves include:

• locking another director out of accounts without proper process,
• withholding financial information,
• rushing through decisions without proper board consideration, or
• using company funds to “fight” the other founder rather than protect the business.

Even if you feel justified, directors must still act in the company’s interests and follow proper governance processes.

Why Breach Of Fiduciary Duty Matters For Your Business (Not Just The Individuals)

It’s easy to think of fiduciary duty disputes as personal conflicts between founders. But the real damage often hits the business first.

If someone breaches their fiduciary duties, the consequences can include:

• financial loss (missed opportunities, diverted revenue, misuse of funds),
• operational disruption (access disputes, key staff leaving, suppliers losing confidence),
• reputational harm (customers and investors don’t like instability), and
• costly legal action (often funded by the company unless controlled early).

For small businesses, this can stall growth at exactly the moment you need momentum. That’s why it’s worth building guardrails early - even if everyone is currently on great terms.

It’s Also About Protecting Your Personal Position As A Director

If you’re a director, allegations of breach of fiduciary duty can become personal quickly. Depending on the facts, claims may seek compensation, injunctions (court orders to stop certain conduct), or other remedies.

That’s why clear decision-making processes and good documentation aren’t “corporate fluff” - they’re practical protection.

What Are The Consequences Of A Breach Of Fiduciary Duty?

The legal consequences depend on what happened, how serious it is, and whether the conduct also breaches statutory duties.

Common outcomes can include:

• Compensation or damages: paying back losses suffered by the company.
• Account of profits: handing over profits made from the breach (for example, profits from a diverted opportunity).
• Injunctions: orders preventing use of confidential information, preventing dealings with clients, or freezing assets.
• Termination/removal consequences: removal as director, employment termination issues, and negotiation of exit terms.
• Regulatory risk: in more serious cases, regulators may be involved depending on the conduct.

In many cases, the most urgent issue isn’t the final result - it’s how quickly the dispute escalates and how much it distracts the business from operating.

Can You “Contract Out” Of Fiduciary Duties?

Generally, you can’t simply write “no fiduciary duties apply” and assume that removes the risk. Many duties are imposed by law, and attempts to exclude them may be ineffective - particularly where there hasn’t been proper disclosure and genuinely informed consent, or where statutory directors’ duties are involved (which cannot be contracted out of).

What you can do is reduce risk by being clear about:

• what happens if a director has a conflict,
• how decisions are approved (including what needs board vs shareholder approval),
• what approvals are needed for related-party transactions, and
• what information is confidential and how it must be handled.

This is where properly drafted governance documents are invaluable.

How Do You Prevent Fiduciary Duty Problems In Your Company?

Most fiduciary disputes are easier to prevent than to fix. The good news is you don’t need a huge legal budget to put sensible foundations in place - you just need to get the basics right and keep your processes consistent.

1. Clarify The Rules Early (Especially Between Founders)

When you have multiple founders, it’s worth documenting expectations while everyone is aligned. A tailored Shareholders Agreement can set clear rules around:

• ownership and equity splits,
• decision-making and voting,
• how new shareholders come in,
• what happens if a founder leaves, and
• deadlock and dispute resolution pathways.

This won’t eliminate conflict entirely, but it gives you a roadmap when things get tense - and can stop disagreements from turning into fiduciary duty allegations.

2. Get Your Governance Documents Right

Your company’s internal rules matter. A well-drafted Company Constitution can help clarify how directors’ meetings run, how decisions are made, and what the company can and can’t do.

If you’re raising capital, bringing in co-founders, or planning a more complex structure, getting this right early can save you from painful (and expensive) clean-up later.

3. Use Practical Conflict Management Processes

In a small business, you can keep this simple. For example:

• maintain a conflict of interest register,
• require directors to disclose conflicts before voting,
• record decisions in writing (board minutes or resolutions), and
• where needed, have the non-conflicted directors approve the arrangement (and consider whether shareholder approval is also required).

Even a straightforward documented process can make a big difference if someone later claims a decision was made for improper reasons.

4. Put Confidentiality And IP Ownership Beyond Doubt

Many fiduciary disputes involve confidential information, customer relationships, or intellectual property created during the business journey.

When dealing with contractors, collaborators, or potential investors, a Non-Disclosure Agreement can help protect sensitive information and set expectations before anything is shared.

If your business involves software, branding, creative work or content, it’s also important to ensure the company (not an individual founder) owns what it should own - and that those rights are assigned properly.

5. Tighten Up Employment And Contractor Arrangements

If you have staff (or even just one key hire), make sure your agreements match the reality of the relationship and cover confidentiality, conflicts and duties properly.

An Employment Contract is a practical way to set boundaries around confidential information, outside work, and behaviour that could harm the business.

This becomes especially important when an employee is senior enough to influence clients or access commercial information (even if they’re not technically a director).

6. Don’t Ignore The “Small Stuff” (That Later Becomes The Big Stuff)

A lot of fiduciary disputes start with informal arrangements:

• a director “borrows” company funds,
• a founder uses company contractors for personal work,
• a side project begins using the company’s customer list,
• expenses get approved casually without records.

These habits can create a pattern that looks improper later - even if nobody intended wrongdoing at the time.

As your business grows, taking a more disciplined approach to approvals, documentation and boundaries is a form of insurance.

Key Takeaways

• A breach of fiduciary duty usually involves a director (or another person acting in a fiduciary position) putting personal interests first, misusing company information/assets, or diverting opportunities that belong to the company.
• Fiduciary duty issues can arise in everyday small business situations - especially where founders wear multiple hats and decisions are made informally.
• Consequences can include paying compensation, handing over profits made from the breach, and urgent court orders to stop certain conduct.
• You can reduce risk by documenting roles and decision-making rules early, particularly through a Shareholders Agreement and a clear Company Constitution.
• Practical processes (conflict disclosure, written approvals, confidentiality protections) can prevent disputes - and strengthen your position if a dispute does happen.

If you’d like help setting up the right legal foundations for your company, or you’re dealing with a potential breach of fiduciary duty issue now, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.