Directors’ duties in Australia: a guide for foreign business owners

If you are establishing or acquiring an Australian company, understanding directors’ duties is essential. In Australia, all directors, even silent directors, are expected to take an active role in governance, stay informed about the company’s affairs and act in the company’s best interests. These obligations are not just formalities. In some cases, a breach exposes a director to personal liability.  Being informed about the risk of personal liability for Australian directors is particularly important for foreign business owners who may be used to different governance practices in their home jurisdiction.

Most of the directors’ duties are set out in the Corporations Act 2001 (Cth). These sit alongside duties developed under Australia’s case or common law. Australian courts and regulators also expect directors to understand the substance of the decisions they are approving, rather than simply relying on others. Being a ‘rubber stamp’ is not enough. We provided a practical overview below of the key directors’ duties that foreign-owned companies looking to operate in Australia should keep in mind.

Duty of care and diligence for directors in Australia

Directors owe a duty of care and diligence to the company.

This requires a director to exercise the degree of care in their role as a director that a reasonable person would exercise in the same position. In practice, that means directors should attend meetings, read board papers, understand the company’s financial position, ask questions when something is unclear and take reasonable steps to inform themselves before making decisions. Australian law never treats directors as passive figureheads, even where a parent company is heavily involved in day-to-day operations and the director is seen as a ‘silent’ director.

Understanding this obligation is especially important for foreign directors of Australian companies or directors based overseas who may not be operating in their native language.  In the Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (prov liq apptd) case, the Court emphasised that a director cannot approve important English-language documents without properly understanding them. Where there is a language barrier, Australian law expects that key documents are translated so the director can genuinely understand what they are signing and approving.

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.

This means a director’s powers must be exercised to benefit the Australian company itself, not to advance a director’s personal interests or achieve an ulterior objective. For foreign-owned businesses, that distinction is important because the interests of an Australian subsidiary will not always be identical to the interests of its overseas parent or wider corporate group – even though this is often the way in which group companies operate.

A common risk area is intercompany transactions, such as loans, guarantees, management charges or transfers of assets. Even where a transaction makes commercial sense for the broader group, Australian directors still need to consider whether it is in the best interests of the local company and whether the decision is properly documented. This is one of the areas where tailored advice can be particularly valuable for foreign business owners.  For more information see our article on Intercompany loans: what Australian directors need to know before transferring funds to a parent company

Proper use of position or information

Directors must not improperly use their position or information obtained through their role to gain an advantage for themselves or someone else, or to cause detriment to the company.

This can extend to using confidential information for personal benefit, diverting a business opportunity, assisting a related entity at the company’s expense or using inside knowledge after leaving their appointment as director. These duties are particularly important where the same individuals are involved in management across multiple entities in an international group.

Insolvent trading and directors’ liability in Australia

Australian directors also have a duty to prevent insolvent trading.

Broadly, this means a company must not incur debts when it is unable to pay its debts as and when they fall due.  For foreign-owned companies, this is a critical area because funding assumptions, delayed capital injections or reliance on informal support from an overseas parent may not be enough to satisfy this obligation.  Directors need to actively monitor cash flow, the company’s creditor position and solvency indicators.  Where there are warning signed a director should seek advice early to ensure they do not expose themselves to personal liability.

Disclosure of personal interests and conflicts of interest

Directors who have a material personal interest in a matter relating to the company’s affairs generally need to disclose that interest to the other directors.

In practical terms, conflicts can arise in related-party dealings, personal investments, side arrangements, family interests or where a director holds roles across different group entities. Identifying and managing these issues early is important, particularly for foreign-owned structures where overlap between group personnel is common. If there is any doubt about whether a conflict exists, it is worth obtaining advice.  A short review of the proposed arrangement and the board process often prevents more serious governance issues later and can protect the director from future risk.

For a practical explanation of when a conflict may arise, see our article on how to know when you have a conflict of interest as a director.

What are the penalties for a breach of directors’ duties?

A breach of directors’ duties can result in serious consequences, including civil penalty proceedings, compensation orders, disqualification from managing corporations and, in some cases, criminal liability.

The risk of penalties is not only faced by the company. Depending on the nature of the breach, directors can face significant personal exposure, particularly in areas such as insolvent trading, misuse of position or dishonest conduct.

For foreign business owners, the key takeaway is that Australian directorships should never be treated as purely ornamental or administrative  ‘tick-a’box’ appointments.

Directors need the time, information and support required to perform the role properly.  With the right governance framework, directors duties are manageable, but it is important to ensure transparency and access to information from the outset, rather than only after a problem has emerged.  It’s also important to ensure that correct decision making processes are followed.

If you are setting up or operating an Australian subsidiary, Argyll Law can help you put the right governance settings in place from the outset.  We regularly advise foreign-owned businesses on director appointments, board processes, related-party arrangements, governance documents and risk management so that their Australian operations are set up with confidence and comply with local requirements.