Director Duties Australia: What First-Time Founders Get Wrong

The Four Statutory Duties

The Corporations Act 2001 imposes four core duties on every director of every Australian company, from single-shareholder Pty Ltds to ASX 100 boards.

1. Duty of Care and Diligence (s 180)

Act with the care and diligence a reasonable person would exercise if they were a director in the same circumstances. This is a mostly objective standard — your genuine but unreasonable belief that a decision was fine is not a defence.

Practical: read the board pack before the meeting. Ask questions. Don't rubber-stamp.

2. Duty of Good Faith (s 181)

Act in good faith in the best interests of the company and for a proper purpose. The company's interests — not yours as a shareholder, not your co-founder's, not your investor's.

3. Duty Not to Improperly Use Position (s 182)

Don't use your position as a director to gain an advantage for yourself or someone else, or to cause detriment to the company. Classic breach: routing a company opportunity to a side business you own.

4. Duty Not to Improperly Use Information (s 183)

Don't use information you obtained as a director for personal advantage. This is why insider trading laws also target directors.

The Insolvent Trading Trap (s 588G)

This is the duty that catches founders. A director must not allow the company to incur a debt if the company is insolvent, or if incurring the debt would make it insolvent, and there are reasonable grounds to suspect insolvency.

Consequences: personal liability for the debts, civil penalty, and in serious cases, criminal charges.

The safe-harbour defence (s 588GA) exists but is narrow — it requires you to be developing a course of action reasonably likely to lead to a better outcome than immediate administration, with proper professional advice, and to be paying employee entitlements and lodging tax on time.

Director Penalty Notices

The ATO can issue a Director Penalty Notice (DPN) making the director personally liable for the company's unpaid PAYG withholding, GST, and superannuation guarantee charge. There are two kinds:

• Non-lockdown DPN — issued when the company lodged BAS/SGC on time. You have 21 days to pay, appoint an administrator, or wind up.
• Lockdown DPN — issued when the company failed to lodge on time. Personal liability is automatic and cannot be avoided even by liquidation.

Lodge on time. Every time. It is the single most important operational discipline for a founder-director.

Director ID — Required Before Appointment

Since November 2022, every director of an Australian company must hold a Director Identification Number (DIN) before being appointed. Get yours through ABRS before signing your Consent to Act. Non-compliance carries penalties up to $16,500 (or more for civil breach).

What Founders Get Wrong

1. Confusing "the company" with "me"

You are a shareholder, an employee, and a director. Each role has different duties. As director, you owe duties to the company as a legal person — not to yourself as majority shareholder.

2. Trading through cash-flow trouble

The instinct to "just push through this month" is exactly the moment insolvent trading exposure starts. Get advice at the first sign — not the third.

3. Personal guarantees

Every landlord, bank, and supplier will ask for a personal guarantee. These sit outside limited liability entirely. Read every one; negotiate caps and release conditions.

4. Missing BAS or SGC lodgements

Even one late lodgement can convert an ordinary company tax debt into a personally-recoverable one via lockdown DPN.

5. Signing on behalf without s 127 execution

When you sign a contract for the company, do it under section 127 of the Corporations Act — director + director (or director + secretary) — or as sole director for a proprietary company. Otherwise the contract's binding effect on the company is arguable. See our s 127 execution guide.

6. Not documenting board decisions

For a two-person board, "decisions" happen over Slack. That is not a resolution. Circular resolutions or minuted board meetings are the evidence that you exercised your duties properly — the defence, in effect, to a s 180 claim.

Practical Checklist for a Founder-Director

• Hold a Director ID before appointment
• Lodge BAS, PAYG, and SGC on time — always
• Read every personal guarantee before signing
• Document material board decisions in writing
• Sign contracts under s 127
• Get advice at the first sign of insolvency, not later
• Consider D&O insurance once you have investors or employees
• Understand the difference between company debt and director debt

Related Reading

• Corporations Act 2001 Explained
• Section 127 Execution
• Founders' Agreement Australia

Frequently Asked Questions

Am I personally liable as a director of my startup?

Yes, for certain things — insolvent trading, unpaid PAYG and SGC, some tax debts under Director Penalty Notices, and breach of statutory duties. Limited liability protects you from ordinary company debts if you act properly; it does not protect you from your own misconduct.

When does a company become insolvent?

When it cannot pay its debts as and when they fall due. That test is based on cash flow, not the balance sheet. A company with $5m in assets but no cash to pay next week's payroll is insolvent for this purpose.

Do I need directors' and officers' insurance?

For a small pre-revenue startup, usually not. Once you have external investors, employees, and material contracts, D&O becomes standard — investors will often require it as a condition of the round.

Can I be a director if I have been bankrupt?

Not while an undischarged bankrupt (s 206B Corporations Act). Automatic disqualification also applies for certain convictions. You must also hold a Director ID before being appointed to any Australian company.

Next Step

See our Startup Legals service page, or book a 15-minute discovery call to talk through your director exposure.