Directors' duties 

Because a company can only act through natural persons, the Corporations Act 2001 (Cth) places a set of statutory duties on the directors who manage it. These duties exist to constrain the wide discretion directors hold over a company's affairs, and they operate alongside — not instead of — the equitable fiduciary duties directors have always owed at common law and in equity.

The duty of care and diligence

Directors must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise in the same position, in the same circumstances (s 180).² This is an objective standard: it does not excuse a director simply because they acted honestly or lacked business experience, but it is also sensitive to the director's actual role, the size and business of the company, and the distribution of responsibilities within it. A person who accepts appointment as a director takes on a genuine obligation to inform themselves, attend to the company's affairs, and exercise independent judgment — not merely to lend their name to the board. In Daniels v Anderson (1995) 37 NSWLR 438,¹ the NSW Court of Appeal found a director breached this duty by failing to read and understand the company's own accounts, deferring entirely to management instead — passive board membership is a breach, not a defence.

A business judgment rule operates alongside this duty: a director who makes a business judgment in good faith, for a proper purpose, without a material personal interest, informed to the extent reasonably appropriate, and rationally believing the judgment to be in the company's best interests, will be taken to have satisfied the duty of care in relation to that judgment. The rule protects considered decision-making, not carelessness dressed up as judgment.

Good faith and proper purpose

Directors must exercise their powers and discharge their duties in good faith in the best interests of the company, and for a proper purpose. These two ideas are related but distinct. Good faith asks whether the director honestly believed the company's interests were being served. Proper purpose asks a different question: even where a power is exercised honestly, was it exercised for the purpose for which the power was actually conferred? A power to issue shares, for example, is conferred to raise capital for the company — using it instead to entrench control of the board, even sincerely believed to be for the company's ultimate good, can still be an improper exercise of that power.

Avoiding conflicts of interest

Directors must not improperly use their position, or information obtained because of their position, to gain an advantage for themselves or someone else, or to cause detriment to the company. This duty overlaps closely with the equitable conflict rule and profit rule that apply to fiduciaries generally — a director is one of the clearest examples of an accepted fiduciary category. Statute reinforces the equitable position with disclosure obligations and, for serious contraventions, civil penalty and even criminal consequences.

The duty not to trade while insolvent

Directors must prevent the company from trading while insolvent — that is, from incurring new debts at a time when the company cannot pay its existing debts as and when they fall due, in circumstances where the director knew, or a reasonable director in the position would have known, of the company's insolvency or the risk of it. This duty exists to protect creditors, who cannot otherwise monitor a company's solvency in real time the way members or the company itself can. Contravention can expose a director to civil penalties and personal liability for the resulting debts, subject to defined defences — including safe-harbour protection for directors who take a genuine, informed course reasonably likely to lead to a better outcome than immediate administration or liquidation.

Statutory duties and equitable fiduciary duties coexist

It is important not to treat the statutory duties as a complete code that displaces equity. Directors remain fiduciaries in the general law sense, owing the equitable duties of loyalty described in the article on fiduciary obligations — most importantly, not to place themselves in a position of conflict and not to profit from their position without informed consent. The statutory duties cover overlapping ground, often in more detail and with clearer enforcement mechanisms (including ASIC's ability to bring civil penalty proceedings), but a plaintiff or regulator may still plead breach of fiduciary duty in equity in addition to, or instead of, a statutory contravention. Students should be comfortable moving between both frameworks in the one problem.

Applying this in a problem question

1. Identify which specific director's duty is engaged on the facts — care and diligence, good faith and proper purpose, conflict avoidance, or insolvent trading — rather than pleading "breach of duty" generally.
2. For a care and diligence issue, consider whether the business judgment rule is available on the facts before concluding the duty was breached.
3. For a proper purpose issue, separate the question of honest belief from the question of the purpose for which the power was actually conferred.
4. For an insolvent trading issue, pinpoint the moment insolvency arose or should have been apparent, and consider whether a safe-harbour-type defence might be available.
5. Ask whether the same facts also disclose a breach of equitable fiduciary duty, and address both the statutory and equitable claims where relevant.