If you run a startup or small business in Australia, there’s a good chance you wear multiple hats. You might be the founder, the main salesperson, the product lead, the finance person - and also a company director.
That last hat matters more than many business owners realise. Directors have legal duties under Australian law, and breaching directors’ duties can create serious risk for your business (and sometimes for you personally).
The tricky part is that many directors’ duties issues don’t come from “bad actors”. They come from fast growth, cashflow pressure, informal decision-making, co-founder tension, or simply not having the right governance in place.
Below, we’ll walk you through what directors’ duties are, what a breach can look like in practice, common risk areas for startups and SMEs, and practical steps you can take to reduce the chances of issues escalating.
What Are Directors’ Duties In Australia (And Why Do They Matter)?
In Australia, directors’ duties mostly come from the Corporations Act 2001 (Cth) and general law (including fiduciary duties). These duties are designed to make sure directors run the company responsibly, in the company’s best interests, and with proper care.
For startups and SMEs, this is especially important because:
- decisions are often made quickly and informally
- directors are commonly also shareholders, employees, and founders
- cashflow pressure can push businesses into “shortcuts”
- related-party dealings (like director loans) are common early on
Even if your company is small, the duties still apply. In many cases, “we’re just a small business” won’t be a defence if things go wrong.
Key Duties You Should Know
While the details can get technical, most director duties come down to a few core ideas.
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Duty of care and diligence: You must take reasonable care in your role and make informed decisions (not reckless or “hands-off” decisions).
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Duty to act in good faith in the best interests of the company: This generally means you act for the company’s benefit, not to advance a personal agenda.
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Proper purpose: You must use your powers for the purposes they were given - not, for example, to entrench control or punish a co-founder.
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Don’t improperly use your position: You can’t misuse your role as director to gain an advantage for yourself (or someone else) or cause harm to the company.
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Don’t improperly use information: You can’t take information you learned as a director and use it for personal gain or to damage the company.
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Avoid insolvent trading: Directors can be personally exposed if the company incurs debts while insolvent (or when it becomes insolvent as a result).
In day-to-day terms: directors need to stay on top of the business, identify conflicts early, make decisions based on evidence (not assumptions), and keep an eye on whether the company can pay its debts as and when they fall due.
What Is A “Breach Of Directors Duties” In Practice?
A breach of directors’ duties happens when a director fails to meet their legal obligations - whether intentionally or not.
Importantly, breaches aren’t limited to dramatic fraud scenarios. In startups and SMEs, breaches often appear as patterns of behaviour, poor governance, or rushed decision-making without proper documentation.
Common Examples Of Breaches
- Failing to properly consider financial information before signing a major contract or taking on debt
- Approving payments to a director or related party without proper authorisation or disclosure
- Using company opportunities personally (for example, taking a contract intended for the company and doing it privately)
- Not managing conflicts of interest (such as voting on a decision where you have a personal interest)
- Allowing the company to trade while insolvent (often due to cashflow stress)
- Making decisions for an improper purpose (such as issuing shares to dilute a co-founder for control reasons)
“But I Didn’t Mean To” - Does Intent Matter?
Sometimes it does, sometimes it doesn’t.
Some director duties focus on what is “reasonable” in the circumstances - meaning a director can breach duties by being careless, not just dishonest. Other breaches (especially involving misuse of position or information) may involve more serious conduct.
This is why good governance matters. If your decision-making process is solid, documented, and based on proper information, you’re in a much stronger position if your actions are later questioned.
Why Startups And SMEs Are At Higher Risk Of Director Duty Breaches
Startups and SMEs often have lean teams, limited budgets, and founders doing everything at once. That’s normal - but it can also create legal risk.
Here are some of the biggest “pressure points” we see for small businesses.
1. Cashflow Pressure And Insolvent Trading Risk
Insolvent trading risk tends to increase when businesses:
- fall behind on tax debts, wages, or supplier invoices
- rely on credit to “bridge” ongoing losses
- take on new contracts without sufficient working capital
- assume the next funding round will close “soon”
If you’re unsure whether your company can pay its debts as and when they fall due, it’s worth taking the issue seriously early. Directors should be able to demonstrate they were actively monitoring solvency and making decisions accordingly (for example, reviewing cashflow forecasts and updating budgets). For some businesses, it may also be sensible to involve an accountant and, where insolvency is a real possibility, an insolvency professional.
In practice, properly documented governance can also help - for example, recording key decisions and financial status in board minutes and resolutions. Some companies also record a formal statement about solvency as part of their regular governance and compliance approach, and you can read more about that here: solvency resolution.
It’s common for directors to put money into the business early, or for the business to pay personal expenses as things get messy during growth.
But when money moves between the company and a director (or someone close to them), it can raise conflict and compliance issues. For example, a director loan might be perfectly legitimate - but it should still be properly documented, approved, and treated carefully in the company’s records (and you’ll often want tax/accounting input on the structure and treatment).
Related-party issues also come up when:
- a director is also a supplier or contractor to the company
- the company hires a director’s family member
- the company “leases” assets from a director
- IP is owned personally by a founder but used by the company without clear terms
The legal risk often isn’t the transaction itself - it’s the lack of disclosure, lack of approval, and lack of a clear paper trail.
3. Co-Founder Conflict And Control Decisions
When relationships between founders break down, director duty issues can escalate quickly.
Common flashpoints include:
- blocking access to company accounts or key systems
- issuing shares to change control
- removing a director without following proper process
- using company funds to “fight” internal disputes
This is where your governance documents matter. A clear Company Constitution and a well-drafted Shareholders Agreement can reduce ambiguity around decision-making, director appointment/removal, reserved matters, and dispute pathways.
Many directors’ duties disputes are hard to defend because there’s no written record showing:
- what was decided
- who made the decision
- what information was considered
- why the decision was reasonable at the time
This doesn’t mean you need to run your startup like a huge corporate. But you do want a simple, consistent process for documenting major decisions.
Even a straightforward directors resolution template approach can be a practical starting point for smaller companies.
What Can Happen If There’s A Breach Of Director Duties?
If a director breaches their duties, consequences can range from costly to business-ending, depending on what happened.
Potential outcomes may include:
- civil penalties (financial penalties under the Corporations Act)
- compensation orders (repaying losses suffered by the company)
- disqualification (being banned from managing corporations)
- criminal liability (in more serious cases involving dishonesty or intentional misconduct)
- shareholder disputes and claims (especially where value has been harmed)
- insolvency and external administration complications (including scrutiny from liquidators)
Separately, even if the situation doesn’t end up in court, the operational damage can be significant: loss of investor confidence, banking issues, key staff leaving, and reputational fallout.
For many startups, governance issues don’t just create “legal risk” - they can derail fundraising and growth at the worst possible time.
How To Reduce The Risk Of A Breach (Practical Steps For Business Owners)
The goal isn’t perfection. It’s building a business where directors can confidently show they acted responsibly and in the company’s best interests.
Here are practical ways to reduce the risk of directors’ duties breaches in your startup or SME.
1. Make Sure Your Governance Documents Match Reality
If you’re growing, taking investment, or adding/removing directors, your legal foundation needs to keep up.
As a starting point, it’s worth checking whether your Company Constitution reflects how decisions are actually made (and how you want them to be made). For companies with multiple founders or investors, your Shareholders Agreement is also critical for clarifying control and decision-making rules.
2. Create A Simple “Decision-Making Checklist” For Major Calls
For bigger decisions (like raising capital, signing long-term contracts, buying/selling assets, hiring senior staff, or taking on debt), try to standardise how you decide.
A workable checklist might include:
- What problem are we solving?
- What are the realistic options?
- What are the financial impacts and risks?
- Is there a conflict of interest?
- Do we need shareholder approval?
- Have we documented the decision and the reasons?
Then document the outcome properly - using board minutes or a directors resolution template for straightforward decisions.
3. Stay On Top Of Solvency (Not Just Sales)
Growing revenue is great, but directors also need visibility on solvency. That means you should understand:
- your cash position and runway
- the timing of major liabilities (wages, GST, PAYG, rent, supplier payments)
- what happens if sales slow or a customer pays late
Where it makes sense, consider recording key solvency checks and decisions in a consistent way (for example, as part of board minutes). Some businesses also record a solvency resolution as part of their governance cycle where appropriate to their circumstances and advice.
Even before you have external investors, it helps to behave like you already do.
If a director is lending money, charging fees, supplying services, or being reimbursed, you’ll want:
- clear written terms (what is being paid and why)
- disclosure of the director’s interest
- proper approvals
- good bookkeeping and records
This is particularly important for things like a director loan, where the “informal” version can cause tax, insolvency, and dispute problems later.
5. Be Careful With Contracts And Commitments
Director duty issues often start with a contract that was signed too quickly or without understanding the risk.
For example, signing a high-value supply agreement without checking cashflow or delivery capacity can quickly become a care and diligence issue (and it may snowball into solvency risk).
If you’re unsure whether a deal is binding - or what conduct can accidentally create legal obligations - it’s worth understanding what makes a contract legally binding so your team doesn’t unintentionally commit the company to something you can’t support.
6. Get A Regular “Legal And Governance Tune-Up”
Many directors’ duties risks are avoidable if you catch them early - before there’s a dispute, an investor issue, or a cashflow crisis.
As your business evolves, a periodic legal health check can help you spot gaps in governance, contracts, approvals, and compliance - particularly if you’re scaling, raising funds, or changing your cap table.
What Should You Do If You Think There’s Been A Breach?
If you suspect there’s been a breach (or a decision that could be challenged later), the most important thing is to respond calmly and methodically.
Here are some practical steps that can help you manage the situation without making it worse.
1. Identify The Issue Clearly
Try to clarify:
- Which duty might be involved? (Care and diligence? Conflict? Solvency?)
- What decision or conduct is being questioned?
- Who was involved, and what approvals were (or weren’t) obtained?
Vague concerns tend to spiral. Getting specific helps you get control over next steps.
2. Preserve Documents And Records
In a dispute, the paper trail matters. Preserve board minutes, emails, financial reports, contracts, and messages relevant to the decision.
Avoid “cleaning up” records after the fact. If documents need updating, do it transparently and with advice.
If the issue involves a conflict of interest (for example, payments to a director, or a director’s competing business), it’s usually important that the conflicted director:
- discloses the conflict
- does not participate in decisions where required by the Corporations Act and/or your company’s governing documents
- follows any relevant constitution/shareholder agreement processes
Director duty issues can escalate quickly, especially if there are multiple founders or investors.
Early legal advice can help you:
- understand your risk exposure
- choose the right process (board meeting, shareholder approval, negotiation)
- fix governance gaps going forward
- avoid admissions or communications that increase liability
5. Focus On The Company’s Best Interests
When tensions rise, it’s easy for directors to start acting defensively or personally. That’s often where conduct drifts into “best interests” and “proper purpose” problems.
A useful discipline is to ask: “If an independent person looked at this later, would they say we were acting for the company - or for ourselves?”
Key Takeaways
- Directors’ duties breaches can happen in startups and SMEs even without bad intent - often through rushed decisions, poor records, conflicts, or solvency pressure.
- Directors must act with care and diligence, in good faith for the company’s best interests, for proper purposes, and avoid misuse of position or information.
- High-risk areas include cashflow and insolvent trading, related-party transactions (including director loans), co-founder disputes, and informal decision-making with no documentation.
- Good governance doesn’t need to be complicated - clear documents, consistent approvals, and simple written resolutions can go a long way.
- If you suspect a breach, act early: define the issue, preserve records, manage conflicts, and get advice before the situation escalates.
This article is general information only and doesn’t constitute legal (or financial) advice. If you’re dealing with solvency concerns, tax issues, or potential insolvency, it’s often important to get tailored advice from a lawyer and, where appropriate, an accountant or insolvency practitioner.
If you’d like help setting up (or tightening) your governance to reduce the risk of directors’ duties breaches, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
