Most directors understand the fundamental principle: a company is a separate legal entity. The company carries the risk, not you personally. Except when it doesn’t.
The gap between what directors believe protects them and what actually does is where we spend a significant amount of our time. These are not edge cases. They are the misconceptions we encounter in almost every director dispute matter — and they are dangerous because they sound so reasonable.
Here are ten of the most costly ones.
1. “My co-director made that decision, not me”
This is the most common defence a passive director raises — and one of the least effective.
Under section 180 of the Corporations Act 2001 (Cth), every director owes a duty to exercise their powers and discharge their duties with the care and diligence of a reasonable person in the same circumstances. That duty is personal. It does not evaporate because a co-director took the lead on a particular decision.
Directors who “leave it to” their co-directors are routinely found liable for decisions they claim they were not part of. If you are on the board, you are responsible for what the board does. Courts have consistently held that a director who fails to make reasonable enquiries about a significant transaction — even one they did not personally approve — may have breached their duty. Ignorance is not a defence where a diligent director would have known.
If you are a director in name only — attending no meetings, reviewing no financials, signing whatever is put in front of you — you are not protected. You are exposed.
2. “I resigned before the company collapsed”
Resignation does not operate as a retrospective shield.
Insolvent trading liability under section 588G of the Corporations Act attaches to the period during which you were a director and the company incurred debts while insolvent. If the company was already insolvent when you resigned, a liquidator can still pursue you personally for debts incurred during your tenure.
The timing of your resignation matters — but not in the way most directors assume. Resigning after insolvency has already commenced does not eliminate exposure for the period before resignation. And if a court or liquidator forms the view that your resignation was timed to avoid liability, that context will not assist you.
Resignation can be the right decision. But it needs to be made with advice, not assumed to be a solution.
3. “They were just my suggestions — I’m not actually a director”
Shadow director liability catches people who believe the title protects them — in either direction.
Under section 9 of the Corporations Act, a “director” includes a person who is not formally appointed but whose instructions the board is accustomed to acting on. This is the shadow director concept, and it has real teeth.
It catches silent controllers who run companies through relatives. It catches holding company executives who routinely direct subsidiary boards without formal appointment. It catches financiers who cross the line from lender to controller. And it catches family members who make all the actual decisions while a spouse or sibling holds the title.
If you act like a director — even without the title, even without the ASIC registration — you may be treated as one for liability purposes. The label does not determine the exposure. The conduct does.
4. “My accountant signed off on it”
Reliance on professional advice is a recognised defence to certain director duties claims — but it has conditions that many directors do not satisfy.
Section 189 of the Corporations Act provides that a director may rely on information, professional or expert advice, or reports from a professional if that reliance was made in good faith and was reasonable in the circumstances. On its face, that sounds like a broad protection. In practice, the defence frequently fails because:
- The accountant was not given complete or accurate information
- The advice was oral and not documented
- The director did not actually understand what they were approving
- The advice related to a matter outside the professional’s expertise
- The director ignored red flags that a reasonable person would have acted on
Professional advice that supports a significant decision needs to be in writing, specific to the situation, based on complete information, and genuinely understood by the director who relies on it. “My accountant said it was fine” — when that advice was given over a phone call with incomplete background — is not the shield many directors believe it to be.
5. “We’re 50/50 — my partner can’t do anything without me”
This is the most dangerous structural misconception in small company law.
Directors in equal-shareholding companies frequently believe that 50/50 ownership means equal and symmetrical power — that because neither party can outvote the other, the status quo is protected. In reality, equal shareholding creates a deadlock risk, not a protection mechanism.
Consider what the 50/50 structure does not automatically give you:
- A mechanism to break deadlock when the directors genuinely cannot agree
- Protection against your co-director convening a general meeting at which you are not present and passing resolutions
- A right to a buyout at a price you consider fair if you want to exit
- Any restriction on your co-director competing against the business after they leave
When a 50/50 relationship breaks down — and it does, more often than the parties ever expect when they start — the litigation that follows is typically expensive, protracted, and damaging to the business. Courts can resolve these disputes under section 232 of the Corporations Act (oppression) or order a winding up on just and equitable grounds, but neither outcome is quick or cheap.
The shareholders agreement that most 50/50 companies never get around to drafting is the document that would have resolved all of this before it became a dispute.
6. “I’m just a director on paper — the real decisions are made elsewhere”
Nominee directors, figurehead directors, and “on paper only” directors have no special immunity.
Courts have consistently held that if you accept appointment as a director, you accept the duties that come with the role. Signing documents without reading them, attending no board meetings, rubber-stamping decisions made by others, and having no real understanding of the company’s financial position do not protect you — they may actually worsen your position by demonstrating that you exercised no independent judgment whatsoever.
“I was just the director on paper” is not a legal defence. In many cases, it is an admission that a duty of care was systematically breached for the entire period of the appointment.
If you are asked to act as a director of a company, understand what you are taking on. If you cannot genuinely perform the role, you should not accept it.
7. “The company owes the debt, not me personally”
The corporate veil is real and important. It is also full of exceptions that directors routinely underestimate.
Personal guarantees are the most common path to personal liability, and directors sign them more often than they realise — on leases, trade accounts, equipment finance, and bank facilities. When the company cannot pay, the guarantee means you do.
Insolvent trading under section 588G creates personal liability for directors who allow a company to incur debts while it is insolvent. The liquidator can pursue directors directly for the loss suffered by creditors.
ATO Director Penalty Notices are one of the most aggressive mechanisms in the system. Under the Taxation Administration Act 1953 (Cth), directors can become personally liable for unpaid PAYG withholding and superannuation guarantee charge if the company fails to lodge and pay on time. The ATO issued over 84,000 director penalty notices in a recent 12-month period — a 136% increase. Many directors receive one without any prior warning.
The corporate structure does not protect you if you have signed a guarantee, allowed the company to trade while insolvent, or failed to meet PAYG and superannuation obligations.
8. “We all agreed to pay that dividend”
Unanimous board approval does not make an illegal dividend legal.
Under section 254T of the Corporations Act, a company must not pay a dividend unless its assets exceed its liabilities immediately before the declaration and the payment is fair and reasonable to shareholders as a whole. Directors who authorise a dividend that fails this test are personally liable to creditors for the amount distributed.
The fact that all directors agreed, that the company’s accountant prepared the financial statements, or that the business appeared profitable at the time does not provide a complete defence. The test is objective. If the dividend left the company unable to meet its debts as and when they fell due, the directors who approved it are exposed.
This is a particular risk for family companies that use dividend distributions as a primary mechanism for extracting profit, without rigorous solvency analysis before each declaration.
9. “I’ve paid the money back, so there’s nothing to worry about”
If a company enters liquidation, the liquidator’s role includes recovering assets that left the company in the period before insolvency. These are voidable transactions under Part 5.7B of the Corporations Act, and they can reach back years.
An unfair preference payment — a payment made to a creditor in preference to other creditors while the company was insolvent — can be recovered by the liquidator from the creditor who received it. The preference period is 6 months before the relation-back day (4 years if the creditor is a related party).
A director who repays their director’s loan shortly before the company collapses — even with genuinely good intentions — may find that repayment clawed back by the liquidator as an unfair preference. The fact that the money has already been used is not a defence. The obligation to repay it to the company’s creditors remains.
Directors facing company financial distress should obtain legal advice before repaying any related-party obligations. “Cleaning up the books” before insolvency can create new exposure rather than eliminating it.
10. “We don’t need a shareholders agreement — we trust each other”
This is not strictly a legal misconception. It is a structural one. But it produces more director disputes than almost anything else we encounter.
Without a shareholders agreement, a company — particularly a 50/50 company — has no contractual mechanism to:
- Resolve genuine deadlock between directors
- Value and transfer shares on exit, death, or disability
- Restrict a departing director from competing against the business
- Define which decisions require unanimous consent versus majority approval
- Provide a forced buyout mechanism if the relationship breaks down
When the relationship does break down — and in our experience, it breaks down more often than the parties ever anticipated when they shook hands and started the business — the parties are left to resolve their dispute under the replaceable rules of the Corporations Act. Those rules were not designed for closely held companies in dispute. The litigation that follows is expensive, slow, and damaging to the business both parties spent years building.
Trust is not a legal mechanism. A properly drafted shareholders agreement is. The time to get one is before you need it — ideally at the point of incorporating, and certainly before the relationship shows the first signs of strain.
The Common Thread
Every one of these misconceptions follows the same pattern: a director understands the general rule and assumes it applies to them completely — without understanding the exceptions, the conditions, and the specific circumstances where the protection dissolves.
Director liability law is precise. The exceptions matter as much as the rules. And the cost of being wrong is not a fine or a slap on the wrist — it is personal liability for company debts, ASIC disqualification, and in serious cases, criminal prosecution.
If any of the situations described above sound familiar, the right time to get advice is now — before the circumstances that trigger liability arise, not after.
Boss Lawyers acts for directors in disputes, regulatory investigations, and insolvency matters across Queensland. Call us on 1300 267 711 or contact us online.
This article is general information only and is not legal advice. You should obtain professional advice specific to your circumstances. Boss Lawyers Pty Ltd | ABN 38 143 136 645 | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000 | 1300 267 711
