Director Duties: Decisions, Evidence and Breach

Identify the Director and the Decision

A director of a company holds an office responsible for managing and overseeing that company’s affairs. A shareholder holds shares. One person can hold both roles, but share ownership alone does not make someone a director or entitle them to company money. ASIC’s explanation of the director’s role distinguishes the company from the people who run or own it.

Begin with appointment records, the company register and the person’s actual functions during the relevant period. Under section 9AC of the Corporations Act 2001, the definition also reaches certain people who act as directors without valid appointment. It can extend to someone whose instructions or wishes the directors habitually follow. Advice properly given in a professional capacity or business relationship is excluded from that latter limb.

Where the conduct raises a de facto director question, resolve that capacity before applying a director-specific duty. A job title or missing registration entry cannot answer the whole inquiry.

Identify the exact legal entity, especially where several companies share directors or bank accounts appear in one bundle. Record the alleged act or omission, the relevant period and the power being exercised. Was it a dividend, a related-party payment or a failure to investigate a liability? Each requires different evidence.

Separate the company’s alleged loss from a creditor’s unpaid debt or a shareholder’s fall in share value. Record who claims relief and the legal basis they assert. This prevents a transaction schedule from silently assuming that every disappointed stakeholder owns the same claim.

Map the Applicable Duties and Powers

The Corporations Act imposes several distinct duties, alongside general-law obligations. Identify the duty alleged before deciding what a payment or approval proves. ASIC’s officeholder guidance gives the practical starting point: understand the business, remain informed about its finances and put the company’s interests first.

Duty	Legal starting point	Evidence to examine
Care and diligence	Section 180(1) applies a reasonable-person standard in the company’s circumstances, with the director’s office and responsibilities	Financial information, warning signs, inquiries and the response reasonably available
Good faith and proper purpose	Section 181 requires good faith in the company’s best interests and exercise of powers for a proper purpose	Stated reasons, commercial purpose, alternatives and evidence of the actual objective
Use of position	Section 182 prohibits improper use to gain an advantage or cause company detriment	Authority used, benefit sought, recipient and the company’s position
Use of information	Section 183 restricts improper use of information obtained through the role, including after it ends	Information obtained, subsequent use and the advantage or detriment pursued

Read the company’s constitution and applicable replaceable rules beside the statutory provisions. A power to approve a transaction does not settle whether the director exercised it for a proper purpose. Record both the source of authority and the purpose supported by the evidence.

Section 185 preserves other legal duties. A fiduciary duty inquiry examines loyalty and conflicts within that wider framework. Negligent financial oversight does not automatically establish disloyalty, and a disclosed conflict does not answer every statutory issue.

Keep a separately alleged insolvent trading breach distinct. Its debt-incurrence inquiry has its own elements and defences. Financial distress can raise that issue without converting every commercial decision into an insolvent-trading claim.

Test Financial Oversight and Reliance

Financial oversight requires active attention to the information relevant to the director’s responsibilities. Assemble the accounts and cash-flow forecasts supplied before the decision. Add aged payables and receivables, tax liabilities, finance arrangements, guarantees and any contingent liabilities that affected the assessment.

Distinguish information the director received from information they reasonably needed to seek. Record the version, assumptions and author of each report. Compare the forecast with bank balances and known commitments. An unexplained difference between reported cash and the underlying statements identifies a question for inquiry.

In ASIC v Healey [2011] FCA 717, directors approved financial reports with errors involving short-term liabilities and guarantees. The Federal Court’s case summary explains their personal responsibility to read and understand the reports and investigate apparent deficiencies. Management and auditor involvement did not replace that responsibility. ASIC’s financial-reporting guidance applies the same practical expectation of informed involvement.

Section 189 makes qualifying reliance reasonable unless the contrary is proved. Its conditions include an appropriate source and the required basis for trusting that person’s competence or authority. The director must act in good faith and independently assess the information in light of their company knowledge and its complexity. A professional report bearing a signature is insufficient by itself.

For delegated powers, section 190 starts with responsibility for the delegate’s exercise of the power. Its exception requires the specified reasonable beliefs about compliant exercise and the delegate’s reliability and competence. Good faith and proper inquiry, where circumstances call for inquiry, also matter. Retain the delegation, scope of authority and evidence of monitoring.

The business judgment rule in section 180(2) concerns care and diligence and equivalent general-law duties. Its conditions require a business judgment made in good faith for a proper purpose, without a material personal interest. Appropriate information and a rational belief in the company’s best interests are also required. It does not excuse breaches of every other duty.

A favourable later outcome does not establish compliance with these conditions. Equally, a loss does not prove that an informed decision was negligent. Assess the choice against its circumstances and available information, with hindsight identified separately.

Check Conflicts and Benefits

A conflict inquiry identifies the director’s interest and how it affected the transaction. Obtain the counterparty’s ownership details, relevant relationships and the benefit proposed or received. Compare the contract and invoices with the company’s payments, then locate the disclosure and participation record.

Section 191 generally requires notice of a material personal interest to the other directors, subject to its exceptions. Required notice describes the interest’s nature and extent and its relation to the company’s affairs. The provision does not apply to a proprietary company with only one director. That exception does not remove the director’s other duties.

Permission to participate requires a separate inquiry. Section 194 is a replaceable rule for proprietary companies, so check whether it applies and how the constitution changes the position. For public companies, section 195 generally restricts an interested director’s presence and vote, subject to its statutory exceptions. Public-company related-party benefits can also engage Chapter 2E approval requirements.

Keep disclosure, voting permission and transaction approval as separate entries in the analysis. Section 193 preserves general-law conflict rules and constitutional restrictions. A notation that an interest was disclosed cannot, by itself, establish that the transaction complied with every applicable rule.

For example, a director’s interest in a supplier explains why payment to that supplier needs examination. The invoice, work performed and price evidence help assess the company’s benefit. The bank entry establishes the payment. The legal assessment decides whether the director’s conduct breached a duty.

Assess Dividends and Other Financial Decisions

Section 254T of the Corporations Act sets distinct conditions for paying a dividend. The current statutory text requires all of them, with assets and liabilities calculated under the accounting standards in force at the relevant time. Those standards apply for this purpose even where they would not otherwise apply to the company’s financial year.

1. Immediately before declaration, assets must exceed liabilities and that excess must be sufficient for the dividend.
2. Payment must be fair and reasonable to the company’s shareholders as a whole.
3. Payment must not materially prejudice the company’s ability to pay creditors.

Cash in an account answers none of these conditions on its own. Examine recognised liabilities, asset values and payment timing alongside shareholder rights. Section 254T expressly identifies resulting insolvency as an example of material creditor prejudice. Review the constitution and the authority to determine the dividend as well.

Fictional Dividend Decision and Financial Schedule

Consider a fictional proprietary company whose board considers a $100,000 dividend. The accountant’s schedule records assets of $900,000 and liabilities of $740,000 immediately before declaration. Assume those figures follow the applicable accounting standards. The resulting $160,000 excess covers the proposed amount, but the other conditions still require assessment.

The company has $140,000 cash and $90,000 of creditor payments due before its next expected receipt. Paying the dividend leaves $40,000, producing a $50,000 shortfall against those commitments. The board must examine the reliability of receipts and any available funding when assessing creditor prejudice.

Schedule item	Fictional amount	Supporting record and decision question
Assets less liabilities	$160,000	Accountant’s working papers and balance sheet support the $900,000 and $740,000 inputs
Cash before payment	$140,000	Bank statements and reconciliation establish available cash and restrictions
Proposed dividend	$100,000	Board papers and existing minutes identify amount, authority and proposed recipients
Near-term creditor payments	$90,000	Aged payables, tax records and finance terms establish amounts and due points
Cash after dividend	$40,000	$140,000 less $100,000, before further receipts or outgoings
Unfunded commitments	$50,000	$90,000 less $40,000, subject to evidenced receipts or available funding

The schedule links each amount to a document that the matter file must contain. In an actual review, add the source filename and page or ledger reference to each row. The arithmetic exposes the funding question. It does not settle asset measurement or shareholder fairness.

Incorrect assessment: the director sees $140,000 in the bank and assumes the company can distribute $100,000. Correct assessment: the board tests each section 254T condition and reconciles the proposed payment with the financial evidence and shareholder position.

Reconcile any payment described as a dividend to the existing approval and accounting entries. A director loan, expense reimbursement or capital reduction follows a different legal basis. Share ownership does not create an automatic right to withdraw company funds.

Build the Conduct and Accountability Record

Build a chronology that lets the legal adviser connect each alleged breach to the evidence. Use the existing approvals as records of the decision, alongside contemporaneous correspondence and financial documents. Keep later explanations identifiable as later explanations.

For each disputed decision, record the duty alleged and the director’s capacity. Identify the information available, alternatives considered, advice obtained and questions raised. Add the approval outcome and subsequent transactions, with a source reference for each entry. Record a missing document as a gap in the record, without treating its absence as proof of misconduct.

For a large statement bundle, FinTrace saves lawyers and forensic accountants hours of conversion and transaction review. Its forensic bank-statement analysis service produces a searchable Excel ledger and a written findings report, with suspicious transactions flagged. Every finding cites its source PDF filename and page, keeping the supporting evidence at hand while you examine the decision history.

Identify who can bring the proposed claim and what remedy the evidence supports. A company claim, an ASIC regulatory proceeding and a creditor’s recovery route have different requirements. For distinct grounds of personal exposure, assess director liability for company debts separately. Company failure alone cannot establish all the elements of any one route.

The record is ready for legal assessment when each alleged act or omission has a stated duty and traceable evidence. Show how the alleged breach caused the claimed loss where that remedy requires it. Put unresolved factual questions beside the relevant transaction so the instructing lawyer can decide what further evidence or advice the claim needs.