Australia is often viewed as one of the most heavily regulated jurisdictions in the area of corporate governance.
On the one hand, it reflects a strong commitment to transparency, accountability and the protection of stakeholders’ interest, but on the other hand it poses a challenge for those looking to navigate the corporate regulatory landscape – all the more so for those not familiar with the Australian framework.
When an offshore investor sets up shop in Australia or acquires a local company, often the first step taken is the appointment of a new director. Their role is not merely symbolic or perfunctory – the law imposes extensive duties on company directors, many of which are codified in the Corporations Act 2001 (Cth) (the Act). Directors owe a fiduciary duty to their company, meaning that they are required to act in good faith in the best interests of the company, exercise due care and diligence, and not misuse their position or information obtained by reason of their position.
Recent judicial decisions, such as the New South Wales Court of Appeal’s ruling in Sunnya Pty Ltd v He [2025] NSWCA 79 (Sunnya decision), have further cemented the expansiveness of the scope of these obligations.
Below, we discuss some of the issues canvassed in the Sunnya decision, following which we go over some of directors’ key duties in greater detail.
Enduring nature of a director’s fiduciary duty
In the recent Sunnya decision, the Court was asked to consider the temporal reach of a director’s fiduciary duty, and whether they bind a director even after their resignation from office.
In the Sunnya decision, two former directors, Mr He and Ms Lu, were found to be in contravention of their fiduciary duties to Sunnya Pty Ltd (Sunnya). Sunnya’s business involved the export and sale of Australian and New Zealand manufactured milk powder products under the brand ‘Neurio’ to the Chinese market through distribution companies GABT and GNT, both owned by the former directors or their family members. Notably, Sunnya owned the Neurio trademark in Australia whilst GABT owned the trademark in China. After selling a majority stake in Sunnya to a third-party investor, Mr He allegedly attempted to transfer the Australian Neurio trademark from Sunnya to GABT without informing the other directors. After this effort failed, Mr He and Ms Lu resigned before registering a new trademark, NRIO, under GABT to continue selling the same product without interference from Sunnya.
The Court found that the former directors had breached their fiduciary duties to Sunnya in attempting to transfer the trademarks and selling identical products, despite this occurring after their resignation. The two former directors were ordered to pay compensation to Sunnya in an amount to be determined for the loss suffered by the company or the benefit gained from their illicit act. Overall, the Court’s ruling made evident the fact that directors cannot evade their obligations by simply resigning.
Care and diligence (section 180)
Section 180 of the Act imposes a duty on directors to exercise their powers and discharge their duties with a reasonable degree of care and diligence. This is assessed on an objective standard, and courts will consider what a reasonable person would have done in the director’s position.
A recent example of a judicial ruling on this provision can be found in ASIC v Holista Colltech Ltd [2024] FCA 244. In this case, the Federal Court found that the managing director and CEO of Holista Colltech Ltd (Holista), Dr Marnickavasagar, breached this s180 duty. In 2020, Dr Marnickavasagar authorised Holista to provide misleading representations and false information to ASIC regarding the sales figures of a sanitiser product, Natshield, that the company claimed to be effective against COVID-19. In these representations, Holista claimed that a third-party buyer had placed an order for 415,000 bottles of sanitiser with a projected revenue of $3.8 million, which had the effect of inflating the company’s share price. In reality, no such order had been made, and the company subsequently issued an announcement stating (again, falsely) that quarantine measures had disrupted supply networks, with projected sales having to be scaled back.
Holista had a $1.8 million penalty imposed on them for breach of their continuous disclosure obligations and for engaging in misleading and deceptive conduct.
Separately, the Court found Dr Marnickavasagar to be personally liable, on account of his contravention of s180 by causing or permitting Holista to breach the Act. The Court imposed a penalty of $150,000 and disqualified him from managing corporations for four years. Not only that, he had a costs order for $200,000 against him on account of ASIC’s legal costs in the proceedings. The case highlights how directors can be held personally liable for failing to exercise appropriate care and diligence, particularly where their actions result in regulatory breaches by and/or harm to the company.
Non-Financial Risk and Emerging Obligations
Some recent high-profile cases alleging failure to comply with s180 have included allegations about oversight of a company's non-financial risks. This trend is expected to continue, with increasing obligations on companies in key ESG (environmental, social, and governance) aspects such as climate emissions disclosure and transition management, cyber security risk management, and modern slavery reporting.
Directors would do well to be cognisant that their duty of care and diligence necessarily evolves with the times, and will increasingly extend to the oversight of these non-financial risks, with regulatory scrutiny in these areas only set to intensify.
Good Faith and Proper Purpose (section 181)
Section 181 requires directors to act in good faith in the best interests of the company and for a proper purpose. In the Sunnya decision, it was found that the directors’ practice was to cause Sunnya to issue fraudulent invoices to evade import duties. The Court determined this practice was in breach of s181.
The Court further held that a contravention would have occurred even if no improper purpose was actually achieved or if the improper conduct was intended to benefit the company – unlawful conduct could never be in the company’s best interests. This is the case even if a director honestly believes their conduct is in the best interests of the company – such belief must first be rational.
Misuse of Position (section 182)
Section 182 prohibits directors from improperly using their position to gain an advantage for themselves or someone else, or to cause detriment to the company.
In the Sunnya decision, Mr He and Ms Lu was found to have adopted the practice of “under-value sales” during their tenure as directors. The practice involved Sunnya being made to sell Neurio products to GNT at low “export prices” for GNT to on-sell to other distributors.
The Court found that both the under-value sales practice and the fraudulent commercial invoicing practice described above amounted to contraventions of s182. Specifically, the under-value sales practice was found to be in breach of the s182 as it was immediately financially disadvantageous to Sunnya and diverted financial benefits to another company owned by the former directors’ families.
Directors ought to think twice before using their positions for illegitimate or self-serving purposes.
Misuse of Information (section 183)
Section 183 prohibits the misuse of information obtained as a director or other officer of a company. Directors must not use confidential or sensitive information acquired through their position to gain an advantage or cause detriment to the company, even after they have left office.
Recently, the Western Australia Court of Appeal upheld the Supreme Court’s finding in Chaffey Services Pty Ltd v Doble (No 4) [2023] WASC 361 that related to a breach of s183. In this case, Mr Doble was employed as a supervising officer by Chafco Pty Ltd to oversee the maintenance of a mine site. During his employment, he used confidential information regarding the site to secure early finances for his own company, Kirahnley Pty Ltd, and to later acquire a contract for rehabilitation of the site from the landowner. The Court ordered the recovery of profits made from the misuse, emphasising that the information need not be inherently valuable for damages to be awarded.
Although the case at hand involves a supervising officer, the provision of the Act equally extends to directors.
Director’s Personal Liability
As we have demonstrated above, directors who breach their duties under sections 180 to 183 will be personally liable for their contraventions, often in the form of compensation orders and/or civil penalties, as well as disqualification from managing corporations.
In more serious cases, s184 will elevate breaches of sections 181 to 183 into criminal offences, potentially exposing directors to criminal prosecution with a maximum penalty of 15 years imprisonment.
Beyond the general duties, directors must also be mindful of their more specific obligations, such as the duty to prevent insolvent trading under section 588G, as well as ensuring that the company is attending to its tax affairs in a timely manner.
Directors should be mindful that the Australian Taxation Office may issue a Director Penalty Notice (DPN) to company directors concerning unpaid company tax debts, namely Pay As You Go (PAYG) withholding, Superannuation Guarantee Charge (SGC), and Goods and Services Tax (GST) liabilities, where a company fails to meet those tax obligations. Upon valid service of a DPN, directors then have a limited period (usually 21 days) to take specific actions, such as paying the debt, appointing an administrator, or beginning the process of winding up the company, or else end up being personally liable for such debts.
Some takeaways
Directors play a central role in the governance and success of Australian companies. Their responsibilities are both legal and practical, requiring a proactive and informed approach. With the privilege of heading up a company comes many responsibilities, and directors will serve themselves well by:
• Understanding their duties: Directors must be familiar with their common law duties and statutory duties under the Act and what those duties entail.
• Staying informed: Directors should keep abreast of changes in the law and regulatory environment, particularly in emerging areas such as ESG issues, climate risk, and cyber security.
• Exercising care and diligence: Directors are expected to make informed decisions by reviewing all relevant information, asking questions, and challenging management where appropriate. Regularly reviewing and updating risk management frameworks is essential to ensure the company is prepared for potential threats.
• Maintaining good governance: Effective governance requires clear policies and procedures for managing conflicts of interest, maintaining confidentiality, and ensuring that board decisions are made transparently and in accordance with the company’s constitution and policies.
• Documenting actions and decisions: Keeping comprehensive records of board meetings, decisions, and the rationale behind them is vital. This documentation demonstrates that directors have fulfilled their duties and provides protection if decisions are later scrutinised.
• Seeking guidance when needed: In situations involving complex legal, financial, or operational risks, directors should not hesitate to seek independent professional advice. This helps ensure that decisions are well-informed and defensible.
By taking these steps, directors can not only comply with their legal obligations but also contribute to the effective management and long-term sustainability of their organisations.
