Good morning everyone,
What you need to know when being a director of a company
The concept of a company arose out of the need of directors to be shielded from the activities of the company and to not be personally liable in the event of its failure.
This shielding which was referred to as “the Corporate Veil” led to some directors to cause companies to act irresponsibly which caused losses to shareholders and customers. As a consequence, over the past decades, both Australian legislation and court decisions have increasingly moved toward a regime of personal accountability. Whilst the veil has not completely disappeared, directors are now put on notice if a company acts fraudulently or unlawfully, and you hold a position of control or influence over a company, you will be held responsible for its conduct, particularly in relation to financial oversight, compliance, and fair dealings with staff, creditors, and regulators.
As such a director in Australia can be held personally liable for a range of company failings. This includes formally appointed directors, but also extends to those acting as de facto or shadow directors, individuals who may not have a formal title but still exercise significant influence or make key decisions. If you’re involved in the running of a company, you could be exposed to the same legal duties and risks, even without your name on appearing on the company records as recorded by the Australian Securities and Investment Commission (“ASIC”) records.
Under the Corporations Act 2001 (Cth), company directors are bound by several key duties. These include:
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They have the duty to exercise care and diligence;
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They must stay informed about the company’s operations to ensure that the company acts in a responsible manner;
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They are required to act in good faith and in the best interests of the company;
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They cannot use their position or company information to gain personal advantage or cause harm; and
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Crucially, directors must prevent the company from trading while insolvent. Failing to meet this obligation can result in directors being held personally liable for the company’s debts.
There are several specific areas where directors face personal exposure. Insolvent trading is one of the most serious. If a director allows a company to continue incurring debts while insolvent, or where insolvency is reasonably suspected, they may be held personally responsible for those debts.
Another major area of risk involves the Australian Taxation Office (ATO). Under the Director Penalty Notice (DPN) regime, directors can be personally liable for unpaid PAYG withholding tax, superannuation guarantee charge (SGC), and GST. If these liabilities aren’t paid within the required timeframes, the ATO has the power to recover the amounts directly from directors' personal assets. Additionally, directors can be held liable for breaches of workplace laws, including the underpayment of wages or entitlements. There have been increasing enforcement actions under the Fair Work Act, particularly where directors have ignored warnings or failed to correct unlawful practices.
Directors also need to be aware of their exposure under Australian Consumer Law. If a company engages in misleading or deceptive conduct, and a director was involved in that conduct or decision-making, they can be held personally liable, regardless of whether they intended to mislead or not. Importantly, none of these risks are limited to officially appointed directors. Courts will look at substance over form. If someone is making decisions, issuing instructions, or representing the company to others, they may well be treated as a director in the eyes of the law.
To minimise risk, directors must be actively engaged in the company’s operations. You cannot simply rely upon others to manage the company, a director must be have full knowledge regarding the actions and directions a company is proceeding as ignorance is not a valid defence. A director is required and should always ensure they are regularly reviewing financial reports, asking questions, and critically assessing risks. It is also important to formalise roles and decision-making processes, avoid informal arrangements that can blur legal responsibilities, and ensure the company has strong internal systems in place. Regular governance reviews, supported by legal and financial advice, are key to promptly identifying and resolving any red flags that may arise.
At JCL Legal, we work closely with business owners, directors, and senior management teams to ensure they understand their obligations and are well protected. Whether you’re formally appointed or simply acting in a leadership role, we can assist with governance audits, legal compliance strategies, advice on personal liability, and representation in regulatory investigations or disputes. If you're unsure about your legal exposure, now is the time to act, not when an issue has already arisen.
Please feel free to contact us for a confidential discussion about your situation. We’re here to help you navigate the complexities of corporate governance and safeguard your personal and professional future.
Wishing you a wonderful day,
Jeffrey Choy
JCL Legal
0419 233 670
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Legal Disclaimer: This guide is for informational purposes only and does not constitute legal advice.