5 Director Duties You Should Know

Becoming a company or board director in Australia comes with legal responsibilities. Which means directors hold positions of power and trust, making decisions that affect employees, shareholders, and the financial future of the organisation. However, those decisions are governed by law.

Under the Corporations Act 2001 (Cth), all company directors in Australia have statutory duties that apply whether the role is voluntary or paid. Breaching those duties can carry serious personal consequences: civil penalties, criminal charges, disqualification from managing corporations, and personal liability for company debts.

Here are five director duties every Australian director should understand, and why having the right insurance program matters alongside them.

Five director duties Under Australia’s Corporations Act

1. Act with Care, Skill and Dilligence

Section 180 of the Corporations Act requires directors to exercise their powers with the degree of care and diligence that a reasonable person in the same position would exercise. This is an objective standard: it is not lowered because a director is inexperienced, unpaid, or part-time.

In practice, this means:

• Staying informed about the organisation’s operations, financial position, and key risks
• Attending board meetings and engaging meaningfully with board papers
• Seeking professional advice when needed, and genuinely understanding that advice before acting on it
• Asking questions when financial reports are unclear or incomplete
• Maintaining independent scrutiny even when decisions are delegated to management

Directors who simply rubber-stamp management decisions (without questioning, understanding, or pushing back where warranted) are exposed under this duty.

A Directors and Officers (D&O) policy can respond to claims alleging a director failed to act with the requisite care, skill, or diligence, including class actions and regulatory proceedings brought by ASIC. Cover may apply to the defence costs and any damages awarded, subject to the policy terms.

2. Act in Good Faith in the Best Interests of the Company

Section 181 requires directors to act in good faith in the best interests of the corporation and for a proper purpose. The duty is owed to the company as a separate legal entity. However, acting in the company’s interests generally aligns with the collective interests of shareholders as a whole, not as individuals.

Common situations that test this duty can include:

• Conflicts of interest: If you have a personal interest in a matter before the board (for example, a family member’s business is tendering for a contract) you must disclose that interest to the other directors under section 191. What happens next depends on your company type and the requirements set out in the Act.
• Related party transactions: Arrangements between the company and people or businesses connected to a director must be on arm’s length terms, meaning the same terms you would negotiate with an unrelated third party in an open market. Member approval may be required.
• Competing interests: A director must not put their own interests, or the interests of a parent company or major shareholder, ahead of the company they are directing. The company comes first.

D&O policies can cover allegations that a director acted improperly or in their own interest rather than the company’s, including the cost of defending those allegations before any finding is made.

3. Proper Use of Your position and information 

Sections 182 and 183 of the Corporations Act prohibit directors from improperly using their position, or information obtained through their role, to gain a personal advantage or to cause detriment to the company.

Examples of conduct that can breach these duties:

• Using confidential company information to set up or assist a competing business
• Directing company contracts or opportunities to personally connected parties for personal gain
• Selling assets to the company at above-market prices, or purchasing company assets at below-market prices, for personal benefit

Importantly, these duties survive your time as a director. Information obtained while you were serving cannot be misused after you resign.

D&O policies can cover the cost of defending allegations of improper use of position or information. However, section 199B of the Corporations Act prohibits companies from paying insurance premiums covering actual wilful breaches or conduct involving improper use of position or information. The distinction matters: the policy defends the allegation; it does not pay if deliberate wrongdoing is ultimately proven.

4. Prevent Insolvent Trading

Section 588G of the Corporations Act is one of the most serious duties in Australian corporate law. It prohibits a director from allowing the company to incur a debt when the company is already insolvent, or when taking on that debt would cause insolvency.

A company is insolvent when it cannot pay its debts as and when they fall due. Directors must:

• Monitor the company’s financial position on an ongoing basis, not just at year-end
• Understand the company’s cashflow, working capital position, and upcoming obligations
• Act immediately if there are reasonable grounds to suspect the company may be insolvent or heading that way
• Seek independent advice from an accountant or insolvency practitioner early, not after the position has deteriorated further

Standard D&O policies do not cover the personal liability arising from insolvent trading itself, as this is a pecuniary penalty or compensation order. However, D&O may cover the costs of defending insolvent trading proceedings, which can be substantial even when a director ultimately avoids a finding of liability.

5. Maintain Accurate Financial Records

Directors are personally responsible for taking all reasonable steps to ensure the company keeps the accurate financial records. This is not an obligation you can simply delegate and forget about.

Records that must be maintained include:

• Financial statements prepared in accordance with accounting standards
• Source documents including invoices, receipts, contracts, and bank statements
• Minutes of board meetings and resolutions
• Registers of members, options, and charges

Directors should satisfy themselves that the company has appropriate accounting policies, internal controls, and approval processes in place. If financial reports are unclear, ask management or the auditor to explain them; do not simply sign off.

Poor record-keeping is a contributing factor in many D&O claims. Well-documented decisions, board minutes, and financial oversight processes are both a legal requirement and a practical defence.

 

Insurance Protection for Australian Directors

Even directors who observe every one of these duties can face claims. Allegations of mismanagement or breach of duty are costly to defend, regardless of outcome. The personal financial exposure is real, and it does not disappear because you acted in good faith.

What D&O Insurance Covers

A Directors and Officers (D&O) policy covers claims alleging wrongful acts in a director’s management capacity. Australian policies typically provide three layers of cover:

• Side A: Covers individual directors directly when the company cannot or will not indemnify them, which is the most important protection for personal assets, especially if the company becomes insolvent.
• Side B: Reimburses the company when it has indemnified a director or officer for a covered claim.
• Side C: Covers the company itself for securities claims. More common in listed company policies.

D&O policies operate on a claims-made-and-notified basis: the policy in force when a claim is first made is the relevant policy, not the policy in force when the alleged act occurred. Maintaining continuous cover and notifying your insurer promptly are both critical.

The Limits of Company Indemnification

The Corporations Act restricts what a company can do to protect its directors financially. For example, under section 199A, a company cannot indemnify a director against:

• Liabilities owed to the company or a related body corporate
• Pecuniary penalty orders or compensation orders under the Corporations Act
• Liabilities to third parties that arose from conduct not in good faith

Under section 199B, a company cannot pay insurance premiums covering a director’s liability for wilful breaches of duty (except legal costs), or improper use of position or information.

That means, D&O insurance does not shield you if you deliberately act dishonestly or wilfully breach your duties. It can fund the defence of allegations, which is where most of the value lies.

Reviewing Your Director Protection Program

Clear Insurance advises on insurance programs that protect both the business and the individuals who run it. Contact us on 1300 721 132 or submit our enquiry form. Our risk and insurance review is a no-obligation way to check whether your current program reflects the risks your directors face.