Being a director of an Australian company carries significant legal responsibilities. The Corporations Act 2001 (Cth) imposes a range of duties on directors — including duties of care and diligence, good faith, proper purpose, and the duty not to trade while insolvent. When things go wrong, directors can face personal liability, disqualification, and even criminal sanctions.
But the law also recognises that directors must make decisions under uncertainty, that not every business decision will succeed, and that directors are entitled to rely on others within the organisation. The Corporations Act provides several statutory defences that can protect directors who have acted reasonably and in good faith.
At Boss Lawyers, we regularly defend directors facing breach of duty claims. This article examines the key defences available under the Act.
Overview of Director Duties
Before examining defences, it is helpful to understand the duties themselves. The principal statutory duties are:
- Section 180: Duty of care and diligence — a director must exercise their powers with the degree of care and diligence that a reasonable person would exercise in the same position
- Section 181: Duty of good faith — a director must act in good faith in the best interests of the corporation and for a proper purpose
- Section 182: Duty not to improperly use position — a director must not use their position to gain an advantage for themselves or someone else, or to cause detriment to the corporation
- Section 183: Duty not to improperly use information — a director must not use information obtained through their position to gain an advantage or cause detriment
- Section 588G: Duty to prevent insolvent trading
These duties are owed to the company (not to individual shareholders), although shareholders may enforce them through derivative actions or oppression proceedings.
The Business Judgment Rule: Section 180(2)
The business judgment rule is the most important statutory defence for directors facing a claim for breach of the duty of care and diligence. Section 180(2) provides that a director who makes a business judgment is taken to meet the requirements of section 180(1) if they:
- Make the judgment in good faith for a proper purpose
- Do not have a material personal interest in the subject matter of the judgment
- Inform themselves about the subject matter to the extent they reasonably believe to be appropriate
- Rationally believe the judgment is in the best interests of the corporation
The concept of “rational belief” is deliberately a low threshold. The court does not assess whether the decision was the best decision, or even a good decision — only whether the director could rationally have believed it was in the company’s best interests. This reflects the policy that courts should not second-guess commercial decisions made by directors with relevant information.
What Is a “Business Judgment”?
Section 180(3) defines a business judgment as any decision to take or not take action in respect of a matter relevant to the business operations of the corporation. This is broad — it covers operational decisions, strategic decisions, financial decisions, and decisions about personnel, transactions, and corporate opportunities.
However, the business judgment rule does not apply to:
- Failures to act (as opposed to decisions not to act)
- Duties of good faith and proper purpose under section 181
- Duties not to improperly use position (s 182) or information (s 183)
- Insolvent trading under section 588G
The distinction between a “decision not to act” and a “failure to act” can be critical. A conscious, informed decision not to pursue a particular course of action can attract the protection of the business judgment rule; an unconscious failure to turn your mind to a relevant matter cannot.
Practical Application
To rely on the business judgment rule, a director should ensure:
- Decisions are properly considered at board level and recorded in minutes
- Relevant information is obtained and considered before the decision is made
- Conflicts of interest are declared and managed
- The reasoning for the decision is documented
Reliance on Information and Advice: Section 189
Section 189 provides that a director’s reliance on information or advice is taken to be reasonable if:
- The reliance was made in good faith
- The director made an independent assessment of the information having regard to their knowledge of the corporation and the complexity of the matter
- The information or advice was given by:
- An employee of the corporation whom the director reasonably believes to be reliable and competent in relation to the matters concerned
- A professional adviser or expert in relation to matters within that person’s professional or expert competence
- Another director or officer in relation to matters within that person’s authority
- A committee of directors on which the director did not serve, in relation to matters within the committee’s authority
This defence is particularly important for non-executive directors and directors of large companies who necessarily rely on management, professional advisers, and board committees for information.
Limitations
The protection under section 189 is not absolute:
- The director must still make an independent assessment. Blind reliance on advice without any critical evaluation is not protected.
- The adviser must be competent. Relying on advice from someone who is clearly unqualified or conflicted will not be reasonable.
- Red flags must be heeded. If a director is aware of information that contradicts or calls into question the advice received, they cannot simply rely on the advice and ignore the warning signs.
Delegation: Section 190
Section 190 provides that a director who delegates their powers is responsible for the exercise of those powers by the delegate as if the director had exercised them personally — unless the director:
- Believed on reasonable grounds at all times that the delegate would exercise the power in conformity with the duties imposed on directors
- Believed on reasonable grounds and in good faith that the delegate was reliable and competent in relation to the power delegated
This provision recognises the practical reality that directors of companies — particularly larger companies — cannot personally oversee every aspect of the company’s operations. Effective delegation is not just permitted but expected.
Effective Delegation in Practice
To rely on section 190, directors should:
- Choose delegates carefully: Consider qualifications, experience, and track record
- Define the scope of delegation: Clearly document what powers are being delegated and any limitations
- Implement reporting obligations: Require the delegate to report back at regular intervals
- Monitor performance: Maintain oversight and be prepared to intervene if concerns arise
- Document everything: Keep records of the delegation, the basis for selecting the delegate, and ongoing monitoring
Other Defences
Section 1318 — Court’s Power to Grant Relief
Section 1318 gives the court a discretion to relieve a director from liability if the court finds that the director acted honestly and, having regard to all the circumstances, ought fairly to be excused. This is a residual, equitable defence that the court can apply even where the specific statutory defences do not apply.
The factors the court considers include the nature of the breach, the director’s state of mind, their experience and role, the consequences of the breach, and whether the director has benefited from the conduct.
Section 1317S — Similar Court Relief Power
Section 1317S provides a similar power to grant relief in the context of civil penalty proceedings. Where ASIC or a liquidator brings a civil penalty proceeding against a director, the court may relieve the director from liability if they acted honestly and ought fairly to be excused.
Building a Strong Defence
If you are a director facing allegations of breach of duty, the strength of your defence will largely depend on what you can demonstrate about your decision-making process. Key principles include:
- Documentation is everything. Board minutes, file notes, emails, and records of professional advice all serve as evidence of proper process.
- Process matters as much as outcome. The courts assess whether you followed a reasonable process, not whether the outcome was good.
- Seek advice early and often. Demonstrating that you sought and considered professional advice is one of the strongest indicators of reasonable conduct.
- Manage conflicts transparently. Declare any personal interests and recuse yourself from decisions where appropriate.
- Act promptly on concerns. If you become aware of problems, document your response and the steps you took to address them.
Frequently Asked Questions
What is the business judgment rule in Australia?
Under s180(2), a director meets their duty of care if they made a business judgment in good faith, without a material personal interest, after informing themselves, and with a rational belief it was in the company’s best interests.
Can a director rely on their accountant’s advice?
Yes. Section 189 permits reliance on professional advisers, provided the reliance is in good faith and the director makes an independent assessment.
Does the business judgment rule protect against insolvent trading?
No. It applies only to the s180(1) duty of care. The safe harbour under s588GA provides a separate defence for insolvent trading.
What penalties apply for breach of director duties?
Consequences include personal liability, civil penalties up to $1.11 million per contravention, compensation orders, disqualification, and in serious cases, criminal penalties.
Speak to a Director Disputes Lawyer
If you are a director facing a claim for breach of duties, or if you want to ensure your governance practices are robust, contact our director disputes or corporate advisory team at Boss Lawyers on 1300 267 711.
About the Author
Mark Harley is the Principal of Boss Lawyers, a Brisbane CBD commercial law firm. Mark regularly advises and acts for directors in duty of care proceedings, ASIC investigations, and corporate governance matters.
Disclaimer: This article provides general information only and does not constitute legal advice. The law in this area is complex and fact-specific. You should obtain specific legal advice about your particular circumstances before acting on any of the matters discussed in this article.
