Most founders become directors the day the company is incorporated and never think about it again. The title feels administrative — a box ticked on an ASIC form between choosing a company name and opening a bank account. But the director hat is legally distinct from the founder, shareholder and employee hats you wear alongside it, and it is the one that attracts the full directors’ duties regime enforceable by ASIC, with civil penalties that now run to $1.82 million per contravention. Those duties live in sections 180 to 184 of the Corporations Act 2001 (Cth), and they apply to a two-person pre-seed company exactly as they apply to BHP.
Who the Duties Are Owed To
The threshold point founders most often get wrong: directors’ duties are owed to the company — not to you as founder, not to the shareholders who appointed you, and not to your investors. In a startup where the directors and the shareholders are substantially the same people, that distinction feels academic. It stops being academic the moment interests diverge: a down round, a founder departure, a related party deal, or a looming cash crunch (where the courts have long recognised that the interests of creditors come into focus as a company approaches insolvency). It also means a VC’s nominee director cannot lawfully run the fund’s playbook at the expense of the company — a tension we’ve covered from the investor side in our piece on shadow and de facto directors.
Section 180: Care and Diligence
Section 180(1) requires a director to exercise the care and diligence that a reasonable person would exercise in the same office and circumstances. The standard is objective. “I’m a technical founder, my co-founder handles the finances” is not a defence: in ASIC v Healey [2011] FCA 717 — the Centro case — the Federal Court held that directors must apply their own minds to the company’s financial statements and cannot simply outsource that understanding to management or auditors. Nor does it matter that nobody outside the company is hurt: in ASIC v Cassimatis (No 8) [2016] FCA 1023, the founders of Storm Financial were the company’s only shareholders, and the court still found they breached section 180.
The counterweight is the business judgment rule in section 180(2). A director who makes a business judgment in good faith for a proper purpose, without a material personal interest, having informed themselves to a reasonable extent, and rationally believing the judgment is in the company’s best interests, is taken to have met the duty of care for that decision. This is why boards that decide things deliberately — with a paper trail showing what was considered — are so much better protected than boards that drift. The rule protects decisions, not neglect: it has nothing to say about the director who never read the management accounts.
Sections 189 and 190 help here too: directors can reasonably rely on information and advice from employees, advisers and fellow directors, and boards can delegate their powers (section 198D) — provided the reliance is made in good faith after an independent assessment, and section 190 keeps a director responsible for a delegate unless they reasonably believed, after proper inquiry where needed, that the delegate was reliable and competent.
Section 181: Good Faith and Proper Purpose
Section 181 requires directors to act in good faith in the best interests of the company, and for a proper purpose. The classic improper-purpose case is issuing shares to dilute an unwanted shareholder or entrench control — the principle from Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 — which should make any founder pause before using the share-issue power as a weapon in a co-founder dispute. A capital raise genuinely needed to fund the company is fine; the same raise timed and structured primarily to crush a departing founder’s stake is not, however commercially satisfying it might feel.
Sections 182 and 183: Position and Information
Section 182 prohibits directors, secretaries, other officers and employees from improperly using their position to gain an advantage for themselves or someone else, or to cause detriment to the company. Section 183 does the same for information obtained in the role — and it expressly continues to apply after you leave. The startup fact patterns are predictable: diverting a customer opportunity to a side venture, using the company’s pipeline data to negotiate your own deal, or walking out with the product roadmap to found a competitor. A director who leaves on bad terms is still bound by section 183 in respect of everything learned in the boardroom.
Section 184: When It Turns Criminal
Sections 180 to 183 are civil penalty provisions. Section 184 converts the conduct in sections 181 to 183 into a criminal offence where the director is reckless or dishonest — and since the 2019 penalty reforms, dishonesty is judged objectively, by the standards of ordinary people, with a maximum of 15 years’ imprisonment. The practical line: an honest board that makes a bad call faces, at worst, civil exposure softened by the business judgment rule; a director who dishonestly uses the company’s money or information as their own is in criminal territory.
The Fifth Duty: Insolvent Trading
Strictly, the duty to prevent insolvent trading sits in section 588G rather than sections 180–184, but no practical guide for startup directors can leave it out — for early-stage companies it is the duty most likely to produce personal liability. A director contravenes section 588G by failing to prevent the company incurring a debt when there are reasonable grounds to suspect it is insolvent, and the liability is personal: a liquidator can pursue directors to compensate for the debts incurred. Startups live close to this line by design, which is why the safe harbour in section 588GA — protection for directors developing a course of action reasonably likely to lead to a better outcome than immediate administration — matters so much, and why it must be engaged deliberately, not claimed retrospectively.
What Breach Actually Costs
For a civil penalty contravention, the court can order an individual to pay up to the greater of $1.82 million or three times the benefit derived and detriment avoided, order compensation for the company’s loss, and disqualify the director from managing corporations under section 206C. ASIC pursues directors of small proprietary companies, not just listed boards — and separately from ASIC, the ATO has its own direct route to directors’ personal assets through director penalty notices for unpaid PAYG, GST and super.
The Founder-Director’s Baseline
The compliance burden is lighter than this list suggests, because the same few habits answer almost all of it: hold real board meetings and minute actual decisions; read the management accounts monthly and query what you don’t understand; declare conflicts and keep related party dealings at arm’s length (section 195 adds a voting restriction for directors of public companies — see our guide to conflicted director voting); and treat any doubt about solvency as a drop-everything issue. We build these governance foundations as part of our business setup and structuring work, and as startup lawyers in Sydney we spend a surprising amount of time retrofitting them for companies raising their first priced round — it is far cheaper to run a clean board from day one.
This article is general information only, not legal advice — how the duties apply depends on your company’s circumstances, and directors facing a specific decision or a solvency question should get advice before acting. If that’s you, get in touch.