Director Duties in Australia: Practical Guidance for Founder-Directors

Founders who serve as directors of their own company carry a particular kind of responsibility. They have skin in the game as shareholders, day-to-day operational responsibility as managers, and fiduciary duties as directors, all in the same person. The lines between these roles can blur, but the law treats them separately. Understanding director duties from a founder-director's perspective is critical to making the right decisions, particularly in difficult moments.

What the law requires

Australian directors owe duties under the Corporations Act 2001 (Cth) and at common law. The key duties include:

Duty to act in good faith and in the best interests of the company. Decisions must be made in the company's interests, not the founder's personal interests, even where the founder is the majority shareholder.

Duty of care and diligence. Directors must inform themselves before making decisions, understand the company's affairs, and act with the care a reasonable person would apply.

Duty to avoid conflicts. Where a director's personal interest may conflict with the company's interest, the conflict must be disclosed and managed.

Duty not to improperly use position or information. Position and inside information cannot be used for personal advantage.

Duty to prevent insolvent trading. Directors who allow the company to incur debts when it is insolvent (or likely to become insolvent) face personal liability.

These duties apply regardless of the size or stage of the company.

The founder-director paradox

For a founder-director, the duties create some unusual tensions:

• Decisions about your own remuneration require careful conflict management
• Investments by yourself or related parties involve related-party rules
• The dual role of major shareholder and director can blur where you are wearing each hat
• Decisions to dilute (e.g. capital raises) need to be assessed from the company's perspective, not yours

The general rule is: when in doubt, treat the company as a separate person whose interests you are obliged to advance.

Specific high-risk areas

Capital raising. Decisions about timing, pricing and structure of capital raises must be made in the company's interests, not the founders'. Conflicts arise when founders are participating in (or excluded from) the raise.

Related-party transactions. Transactions with founders, family members or associated entities trigger related-party rules. For listed companies, these typically require shareholder approval (with conflicted parties excluded from voting).

Financial difficulty. This is where personal liability for directors most often arises. The duty to prevent insolvent trading is broad and unforgiving. Where a company is in financial trouble, directors must obtain advice promptly and may need to consider safe harbour relief or external restructuring.

Termination of employees, including co-founders. Decisions to terminate employment can involve overlapping employment, governance and shareholder considerations. They must be managed carefully.

Strategic decisions affecting different shareholder groups differently. For example, a sale that benefits some shareholders disproportionately, or a recapitalisation that dilutes some shareholders heavily.

Practical safeguards

Document the rationale for decisions. Detailed minutes capturing the reasons for a decision are the best evidence of careful, good-faith decision-making.

Obtain professional advice. Reliance on professional advice is a powerful defence to claims of breach of duty, provided the advice is properly considered.

Disclose conflicts early. Disclosure is the basis on which conflicts are managed. Failing to disclose is itself a breach.

Use the corporate veil correctly. Founder-directors should treat company assets as company assets, with proper separation from personal assets and dealings.

Stay informed. Directors are responsible for understanding the company. Delegation does not relieve the duty to be informed.

Defences and protections

Directors have access to a number of protections:

The business judgment rule. Decisions made in good faith, with proper information, free of conflicts and rationally believed to be in the company's interests, are generally protected from second-guessing.

Reliance on advice. Directors can rely on advice from competent advisers (lawyers, accountants, experts).

Director and officer (D&O) insurance. Available to most directors. Important to review the policy carefully.

Indemnities from the company. Company indemnities are common, subject to certain restrictions in the Corporations Act.

Safe harbour. Where a company is in financial difficulty, the safe harbour provisions can protect directors from insolvent trading claims, provided certain conditions are met.

Common pitfalls

• Treating the company's bank account as a personal one
• Making decisions without proper board process (or any board process)
• Failing to disclose conflicts because they "feel obvious"
• Continuing to trade in financial distress without taking advice
• Forgetting that duties apply even when you are the sole shareholder
• Inadequate or backdated minutes

How Luma Legal can help

We advise founder-directors on their duties, the management of conflicts, decisions in financial distress, and the structuring of related-party transactions. Our role is to help you make sound decisions, document them properly, and protect your position throughout your time as a director.