Director Duties Under Australian Law

When you’re building a startup or running a small business, being a director can feel like you’re wearing ten hats at once. You’re making decisions quickly, juggling cash flow, hiring people, negotiating deals, and trying to grow.

But here’s the part many founders only find out later: director duties aren’t “nice to have” governance rules - they are legal duties that can create personal liability if you get them wrong.

Note: This article is general information only and isn’t legal, financial, accounting or tax advice. Director duty issues can be highly fact-specific (especially around insolvency). If you’re unsure about your position, get tailored advice early.

The good news is that most director duty issues are avoidable with the right habits, documents, and decision-making process. In this guide, we’ll break down what director duties mean in Australia, what they look like in real life for startups and small businesses, and what you can do to stay compliant while still moving fast.

What Are Director Duties (And Why Do They Matter For Your Business)?

In Australia, director duties are the legal obligations that apply to people who manage a company. These duties are mainly set out in the Corporations Act 2001 (Cth) (including sections 180–184 and 588G) and also exist under general law (which comes from court decisions).

If your business runs through a company (for example, a Pty Ltd), the directors are responsible for steering the company properly - not just for growth, but also for lawful, careful, and honest management.

Director duties matter because:

• They can involve personal liability (meaning it can affect you personally, not just the company).
• They influence how you document decisions (board minutes, written resolutions, approvals).
• They shape risk management (especially around cash flow and insolvency).
• They come up in fundraising and exits (investors and buyers care that directors have been acting properly).

If you’re setting up a company or scaling one, it’s also worth making sure your internal governance documents are up to date - for example, a Company Constitution can help clarify how decisions are made and what powers directors have.

Who Actually Owes Director’s Duties?

This part catches a lot of startups off guard. Director duties apply to appointed directors (the people formally listed as directors with ASIC), but they can also apply to people who act like directors behind the scenes.

Appointed Directors

If you are formally appointed as a director of a company, you owe director duties from the time of your appointment (and some responsibilities can continue even after you resign).

De Facto Directors

A de facto director is someone who acts in the role of a director, even if they haven’t been formally appointed. For example, if you regularly make high-level decisions and present yourself as a director to third parties, you may be treated as one.

Shadow Directors

A shadow director is someone whose instructions the directors are accustomed to following. This can sometimes come up where a major shareholder, lender, or founder who “isn’t a director anymore” is still effectively calling the shots.

For founders, it’s also important to understand the difference between governance roles. A shareholder owns the company, while a director manages it day-to-day at the strategic level. If you want a clearer breakdown, the distinction between a director and shareholder is explained here: director vs shareholder.

In other words: you might be taking on director duty risk even if your title doesn’t say “Director” on LinkedIn.

The Core Duties Of Directors Australia Requires (In Plain English)

There are several key duties that come up again and again for startups and small businesses. Below is a practical overview of the main duties of directors you should understand.

1. Duty To Act With Care And Diligence

Directors must act with the degree of care and diligence that a reasonable person would exercise in the same position (see section 180 of the Corporations Act).

In practical terms, this means you should:

• understand the company’s business model and key risks (at least at a working level);
• ask questions when something doesn’t make sense;
• read financial reports and cash flow updates (not just rely on someone else); and
• make informed decisions, especially for big commitments (leases, major hires, loans, acquisitions).

For startups moving quickly, “care and diligence” doesn’t mean you need to be perfect. It means you need a process that shows you turned your mind to the decision and acted reasonably.

2. Duty To Act In Good Faith And For A Proper Purpose

Directors must act:

• in good faith in the best interests of the company, and
• for a proper purpose (see section 181 of the Corporations Act).

This duty often becomes relevant where there’s conflict between:

• the interests of the company vs the interests of a particular founder;
• different shareholder groups (for example, founders vs investors); or
• what’s best now vs what’s best long-term.

For example, if your company is deciding whether to raise capital, your role as a director is to consider what’s best for the company - not just what gives one shareholder more control.

This is also where having clear founder/investor rules in a Shareholders Agreement can make decision-making cleaner and reduce disputes about what “best interests” means in practice.

3. Duty Not To Improperly Use Your Position

Directors can’t misuse their role to gain a personal advantage or cause harm to the company (see section 182 of the Corporations Act).

This can cover situations like:

• steering company opportunities to another business you own;
• approving “director benefits” without proper approvals; or
• using your authority to pressure the company into arrangements that benefit you personally.

4. Duty Not To Improperly Use Information

As a director, you will access confidential and commercially sensitive information (pricing, IP plans, customer lists, fundraising details). You can’t use that information improperly to benefit yourself or someone else, or to harm the company (see section 183 of the Corporations Act).

This duty can be particularly important if a director leaves the company and starts something new in a similar space.

5. Duty To Avoid Conflicts (And Disclose Interests)

Startups regularly deal with conflicts, because founders often have other projects, side businesses, or personal relationships that intersect with the company.

Common examples include:

• the company hiring a supplier owned by a director’s family member;
• a director also being an employee (or contractor) and negotiating their own remuneration;
• the company leasing a property owned by a director (directly or indirectly).

Having a conflict isn’t automatically unlawful - but failing to manage it properly can create serious problems.

In many cases, the right approach involves disclosure, documenting the decision, and ensuring approvals happen properly (for example, a director stepping out of discussions where appropriate). Depending on the circumstances, there may also be specific disclosure and approval requirements (including under the Corporations Act and your constitution/shareholders agreement).

6. Duty To Prevent Insolvent Trading

This is the director duty that creates the most personal risk for small businesses: directors have a duty to prevent the company from incurring debts when it is insolvent (or would become insolvent by incurring that debt) (see section 588G of the Corporations Act).

In plain English, a company is generally insolvent if it can’t pay its debts as and when they fall due.

For startups, insolvent trading risk can come up when:

• cash runway is tight and you keep ordering stock or signing new contracts;
• you’re relying on “future funding” that isn’t locked in yet;
• you’re delaying BAS, superannuation, wages, or supplier payments to “buy time”.

Reminder: The examples above are general only and aren’t financial or tax advice. If you’re having trouble meeting tax or super obligations, or you think the company may be insolvent, get advice urgently - timing can be critical.

A practical habit that helps is scheduling regular solvency checks and documenting them. Depending on your company’s situation, you may also use a solvency resolution to record the directors’ view (based on reasonable grounds) about the company’s ability to pay its debts.

If you’re worried your business may be close to insolvency, it’s worth getting advice early. Timing really matters here.

How Do You Comply With Duties Of Directors Without Slowing Down Your Startup?

Director duties are legal rules, but compliance is mostly about building a simple and repeatable decision-making system.

Here are practical steps many startups and small businesses use to manage director duty risk while still moving fast.

1. Keep Key Company Decisions Documented

“We agreed on a call” is common in startups - but it can be a problem when you later need evidence that the directors considered the risks and made a proper decision.

Consider documenting major decisions using:

• board minutes (for director meetings), or
• written resolutions (when directors agree without a meeting).

If you need a starting point for recording decisions properly, a Directors Resolution Template can help you capture approvals in a clear, repeatable format.

2. Be Clear On Who Can Sign What (And How)

Signing contracts is a common risk area for startups - especially where multiple people are closing deals quickly, or where you’re using e-signing platforms and changing signatories as you grow.

From a director duties perspective, you want to ensure:

• the person signing has authority (actual authority under internal approvals, or apparent authority to third parties), and
• you’re executing documents correctly for a company when required.

For example, companies can execute certain documents under specific signing rules, and it’s helpful to understand how section 127 signing works when you want the extra certainty of statutory assumptions.

3. Get Comfortable With Financial Oversight (Even If You’re Not The “Finance Person”)

Many directors think, “Our accountant handles that” or “Our CFO has it covered.” But director duties still require directors to take an active interest in the company’s financial position.

Practical habits include:

• reviewing cash flow forecasts regularly (weekly or fortnightly if runway is short);
• tracking outstanding liabilities (tax, superannuation, suppliers);
• making sure the company’s record keeping is up to date; and
• being careful about taking on new debts when cash is tight.

This doesn’t mean directors must do the bookkeeping themselves. It means directors should be able to understand the company’s financial position well enough to make responsible decisions.

4. Manage Conflicts Before They Become Disputes

A conflict of interest becomes dangerous when it’s hidden, undocumented, or handled informally. A simple approach is:

• disclose the conflict early (to the other directors);
• document the disclosure (minutes or written resolution);
• consider whether the conflicted director should abstain from voting; and
• ensure the deal is on commercial terms (and can be justified later).

This is especially relevant where a founder has multiple ventures, or where you’re doing “friendly” transactions early on that later investors will scrutinise.

5. Set Up A Governance Rhythm That Fits Your Stage

One of the easiest ways to comply with director duties is to make governance routine rather than reactive.

For example:

• Early stage (pre-revenue): monthly directors meeting, cash runway check, major contract approvals.
• Growth stage (hiring + revenue): fortnightly cash and KPI review, delegated authority policy, and regular review of major risks.
• Investor-backed stage: formal board packs, regular reporting, proper written approvals for fundraising and key hires.

Done well, this doesn’t slow you down - it actually makes decision-making faster because everyone knows the process.

Common Director Duty Risk Areas For Startups And Small Businesses

Director duties apply across the board, but certain “real world” scenarios create repeat risks for small businesses. If you can spot these early, you can usually prevent problems before they escalate.

Founder Disputes And Decision Deadlocks

Two-founder companies often start with high trust and fast decisions. But as pressure grows (cash, performance, investor expectations), disagreements can become operationally and legally messy.

Problems often arise around:

• issuing new shares or bringing in an investor;
• founder roles and remuneration;
• removing a founder as director;
• what happens if someone stops contributing.

This is one reason early-stage companies often put in place a clear Shareholders Agreement and constitution framework - it reduces ambiguity when the stakes are higher.

Related Party Transactions (Including Director Loans)

It’s common for directors to inject funds into a startup to keep it moving - or to pay expenses personally and get reimbursed later. These arrangements can still create legal and tax issues if they’re not documented properly.

Note: The right structure and documentation can depend on your specific circumstances. Consider getting legal and accounting/tax advice before relying on a particular approach.

For example, a director loan arrangement should be recorded and handled carefully, particularly as your company grows and you bring in other shareholders.

Hiring Quickly Without Clear Employment Documents

As you scale, hiring becomes a legal risk zone. Unclear job terms can lead to disputes, underpayment issues, or confusion about IP ownership and confidentiality.

From a director duties perspective, this matters because directors have a responsibility to ensure the company complies with the law and manages risk appropriately.

Having a fit-for-purpose Employment Contract is often a practical step to reduce people-related risk (and make expectations clear from day one).

Big Commitments Signed Too Early

Startups sometimes sign:

• long-term leases,
• large minimum-order supplier agreements,
• exclusive distribution deals, or
• long-term software commitments

…before revenue is stable.

There’s nothing wrong with being ambitious - but directors should ensure the company can actually meet the commitments, and that key risks are understood and documented.

Marketing Claims And Customer Promises

Even early-stage companies need to comply with the Australian Consumer Law (ACL). If your website or sales team makes claims you can’t back up, or your refund and warranty approach doesn’t align with ACL requirements, the business can face complaints, enforcement action, and reputation damage.

This area often intersects with director duties because directors are expected to ensure the company is run lawfully and responsibly.

Key Takeaways

• Director duties are legal obligations that apply to directors of Australian companies, and they can create personal liability if mishandled.
• The core duties include acting with care and diligence, acting in good faith in the company’s best interests, avoiding misuse of position or information, managing conflicts, and preventing insolvent trading.
• Many director duty issues are preventable by building simple governance habits like documenting decisions, monitoring cash flow, and managing conflicts early.
• Startups often face higher risk around fundraising decisions, founder disputes, related party transactions, fast hiring, and signing major contracts too early.
• Strong governance documents and clear signing/approval processes make it easier to scale confidently and show investors (and buyers) that the company has been run properly.

If you’d like help setting up your company’s governance or getting advice on director duties for your startup or small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.