Comply with the law

Meet your legal obligations as a director. Understand the key duties that apply to you, the risks of getting it wrong, and how to respond if financial difficulties arise.

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Understand and meet your legal obligations

Follow company rules and the law

To run your company properly, you need to understand the rules that apply and make sure they are followed in practice.

This includes:

the Corporations Act 2001
the company’s replaceable rules or constitution
other laws that apply to the company’s business.

These rules affect how the company makes decisions, keeps records, deals with shareholders and meets its legal obligations.

Understand your duties as a director

Being a company director comes with legal responsibilities.

These apply from the moment you take on the role. They apply even if:

the company is small
you are the only director
you are also the only shareholder
you rely on advisers such as accountants, bookkeepers or lawyers.

In simple terms, you are responsible for making sure the company:

operates according to the law, and
makes decisions in its own best interests.

As a director, your key duties include:

acting with care and diligence
acting in good faith and for a proper purpose
avoiding conflicts of interest
not misusing your position or company information
making sure the company keeps proper financial records
making sure the company does not trade while insolvent.

You are responsible for overseeing the company and understanding its position. You do not need to do everything yourself, but you must stay informed and make sure the company is complying with its obligations.

Act with care and diligence

As a director, you’re expected to take an active role in overseeing the company.

In practice, this means:

staying informed about how the company is performing
regularly reviewing financial information (such as cash flow, income and expenses)
reading and understanding important documents
asking questions if something doesn’t seem right
making decisions based on a clear understanding of the company’s position.

This also includes understanding the broader obligations that apply to your company (for example, tax, employment and safety laws) and putting systems in place to manage them.

Acting early when something looks off – especially financially – is a key part of acting with care and diligence.

Act in good faith and managing conflicts

When making decisions, you must focus on what is best for the company – not what is easiest or most beneficial for you personally.

This means:

putting the company’s interests ahead of your own
being careful with decisions that involve you, your family or associates
properly managing and disclosing conflicts of interest
making sure any arrangements with people or businesses connected to you are fair and in the company’s best interests.

Do not misuse your position or information

As a director, you must not use your position or access to information to benefit yourself or someone else at the company’s expense.

In practice, this means:

using company information only for company purposes
not diverting business opportunities, customers or income to yourself or another entity
keeping company information confidential
maintaining clear boundaries between personal interests and company business.

Company information and opportunities belong to the company. They should be used for company purposes.

Keep proper financial records

As a director, you must make sure your company keeps accurate, complete and up to date financial records.

These records must clearly show the company’s income, expenses, bills, debts and overall financial position.

Even if you use an accountant or bookkeeper, you are still responsible for ensuring the records comply with legal requirements and accurately reflect the company’s financial position.

The company’s records should:

clearly record all money coming in and going out
show the company’s bills, debts and true financial position – not just bank balances or high level figures that can mask underlying debts
make it possible to prepare accurate financial reports if needed.

Prevent insolvent trading

As a director, you must not allow the company to incur further debts (e.g., by continuing to trade) when it is insolvent. ‘Insolvent’ means it is unable to pay its existing debts as they become due and payable.

Warning signs of financial difficulty and potential insolvency can include:

overdue supplier or tax payments
relying on credit or new income to cover old debts
difficulty paying bills on time
constant cash flow pressure.

If you notice these signs, you should act early. This may include:

reviewing the company’s financial position more closely
reducing spending or commitments
speaking with creditors
seeking professional advice.

If you allow the company to incur further debts when it is insolvent, you may become personally liable for the company’s debts.

Understand the consequences of not meeting your obligations

If you don’t meet your obligations as a director, there can be serious consequences – even in a small company.

These may include:

fines or civil penalties
personal liability for company debts in certain situations
disqualification from managing companies
court action, and in serious cases, criminal charges.

You can reduce the risk of not meeting your directors’ duties if you:

stay informed about your company’s financial position
keep records accurate and up to date
act early when something doesn’t look right
seek advice when needed.

Even where you are the only director and shareholder, these obligations still apply.

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Respond to financial difficulty early

Act early if your company is in financial difficulty

Financial difficulty does not necessarily mean your company is insolvent or cannot recover. However, it is a sign that you need to pay close attention to the company’s financial position and act early.

The earlier you understand what is happening and take appropriate action, the more options you may have to stabilise the company, reduce risk and avoid more serious financial or legal consequences.

If your company is experiencing financial difficulty, you should:

check whether the company can pay its debts when they fall due
monitor cash flow and upcoming liabilities closely
be cautious about taking on new debts or commitments
speak with creditors early and honestly
seek independent professional advice from an accountant, lawyer or registered liquidator
keep records of the advice you received, the options you considered and the steps you took.

If your company is unable to pay its debts as they become due and payable, this may mean the company is insolvent. If your company is insolvent, you must prevent the company from incurring any further debts.

You can face personal financial consequences if you allow the company to trade while it is insolvent.

Understand signs of financial difficulty

Financial difficulty can develop gradually or quickly. Warning signs do not always mean the company is insolvent, but they should prompt you to review the company’s position, seek advice where needed and act early.

Warning signs may include:

overdue tax, superannuation, wages, supplier payments or loan repayments
dishonoured payments or overdrawn accounts
maxed-out credit cards or overdrafts
regularly juggling which bills to pay first
creditor demands, legal notices or pressure from suppliers
difficulty collecting customer payments
relying on personal funds, director loans or customer deposits to keep operating
taking on work the company may not be able to complete
debts building up while waiting for future income
incomplete or out-of-date financial records
relying on the next large job, sale or payment to solve underlying cash flow problems.

Experiencing financial difficulty
For businesses facing financial difficulties
Insolvency for directors
Warning signs your business is in financial trouble | business.gov.au
Regulatory Guide RG 217 Duty to prevent insolvent trading: Guide for directors (RG 217).

Take action when warning signs arise

If your company is under financial pressure, you should act quickly and responsibly.

This may include:

reviewing the company’s cash flow, debts and upcoming liabilities
identifying what is causing the financial pressure
reducing costs or commitments where appropriate
avoiding new debts
talking to creditors about payment arrangements or revised terms
documenting the decisions you make and the reasons for them.

Before taking action, you should consider seeking independent professional advice.

Be wary of quick fixes

If your company is experiencing financial difficulty, you may be approached by people offering quick fixes, informal restructuring services, new funding arrangements or ways to avoid creditors.

Be cautious. These services can often make your situation worse. In some cases, following their advice may result in you breaching your legal obligations as a director or breaking the law.

You should be especially cautious about anyone who contacts you out of the blue. Do not feel pressured to act quickly or use someone because they approached you first.

If you need help, find your own independent professional adviser through your own research. This may include an accountant, lawyer or registered liquidator. Make sure they are appropriately qualified and independent of the person or business offering the quick fix.

Be particularly cautious about any proposal that requires you to:

act urgently without obtaining advice
accept new finance (especially if personal guarantees or other personal security is required)
transfer company assets
hide or destroy records
favour certain creditors over others
sign documents you do not understand.

Do not engage in illegal activity

You must not allow the company to transfer or dispose of assets to avoid paying debts.

Illegal phoenix activity occurs where:

assets are moved to another company for little or no value
the business continues under a new company
debts, including employee entitlements or tax, are left behind.

This is a serious breach of director duties.

As a director, you must ensure that:

company assets are dealt with properly
transactions are at fair value
creditors are not disadvantaged.

This is particularly important in small companies, where:

the director often controls financial decisions directly
business and personal interests may overlap.

If your company is under financial pressure, you should be especially careful about:

transferring assets
restructuring arrangements
transactions involving related parties.

Phoenix activity can result in:

significant civil penalties
disqualification from managing companies
criminal charges in serious cases.

Recognise insolvency risk and know your obligations

Understand insolvency and insolvent trading

A company is insolvent if it cannot pay its debts when they fall due.

As a director, you must not allow the company to incur new or further debts while insolvent.

To meet this obligation, you must:

stay informed about the company’s financial position
regularly review cash flow and debts
act promptly when problems arise.

There are serious consequences for allowing your company to incur new debts while it is unable to pay its existing debts. This includes personal liability for the company’s debts.

Experiencing financial difficulty
For businesses facing financial difficulties
Insolvency for directors
Regulatory Guide RG 217 Duty to prevent insolvent trading: Guide for directors (RG 217)

Take action if insolvency is likely

If your company may be insolvent, you should seek professional advice as soon as possible. The earlier you act, the more options may be available to you and your company.

The appropriate option will depend on your company's circumstances. A registered liquidator, lawyer or accountant can help you understand what may be suitable.

The options that you may have available include:

Safe harbour - If your company is insolvent, or may become insolvent, you may be able to protect yourself from personal liability for insolvent trading. This may be available if, after you suspect the company may be insolvent, you start developing a course of action that is reasonably likely to lead to a better outcome than immediately appointing an administrator or liquidator. You must seek professional advice (for example, from a registered liquidator, accountant or lawyer) to rely on safe harbour protection.
Small business restructuring - Some eligible small business companies can work with a registered liquidator to make a plan with creditors and try to get back on track. Directors stay in control of the business during this process. Creditors decide whether to accept the plan.
Voluntary administration - An independent registered liquidator takes control of the company to assess its position and options. The aim is to determine whether the company or its business can be saved and, if not, achieve the best possible outcome for creditors.
Liquidation - If the company can’t be saved, an independent registered liquidator takes control of the company so its affairs can be wound up in an orderly way for the benefit of creditors. A registered liquidator can advise you about the options available and the steps involved.

Insolvency for directors
Regulatory Guide RG 217 Duty to prevent insolvent trading: Guide for directors (RG 217)

Assist an external administrator

If an external administrator or receiver is appointed, you must assist them fully.

This is a legal obligation and applies even in small companies or where you are the sole director.

Once an external administrator is appointed, they take control of the company’s affairs.
As a director, your role shifts from managing the company to supporting the administration process.

You must:

provide access to company books and records
tell them where company assets are located and, where required, deliver those assets
give access to financial and business information
provide a report on company activities and property (ROCAP), where required
respond to reasonable requests and attend meetings if asked.

You must not obstruct or delay their work.

In practice, this means you should:

keep records organised and accessible
be open and accurate about the company’s affairs
respond promptly to requests
cooperate throughout the process.

The external administrator relies on this information to:

understand what has happened in the company
manage assets and liabilities
achieve the best possible outcome for creditors.

Failing to assist an external administrator can lead to regulatory action, penalties or other enforcement action.

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Understand other obligations that may apply under the Corporations Act

Understand shareholder rights

As your company grows, you may take on additional shareholders.

Shareholders can contribute to decisions about the company by voting on resolutions (for example, on the election of directors).

Shareholders have a right to access key company information, such as:

the company’s share register
the company constitution
records of meetings and decisions.

Learn about your obligations to whistleblowers

People connected to your company may raise concerns about misconduct or breaches of the law.

This may include employees, contractors, suppliers or others connected with the business.

People who raise concerns may be protected as whistleblowers.

As a director, you must:

protect their identity and any information that could identify them
not cause, or threaten to cause, harm or disadvantage because they made a report.

In a small company, these situations can feel personal or difficult to manage. However, it’s important to handle them carefully and professionally.

The whistleblower protections include criminal offences and civil penalties for a person causing or threatening to cause detriment to a whistleblower or breaching a whistleblower's confidentiality, including during an investigation into the whistleblower's concerns.

Whistleblowing
Information sheet 239 How ASIC handles whistleblower reports (INFO 239)
Information sheet 247 Company officer obligations under the whistleblower protection provisions (INFO 247)
Regulatory Guide 270 Whistleblower policies (RG 270)

Understand whether financial reporting obligations apply

Most small proprietary companies do not need to lodge financial reports with ASIC.

However, some companies may need to prepare, have audited, lodge or provide financial reports in particular circumstances.

This may apply where:

the company is structured as a public company
the company is a large proprietary company
the company is controlled by a foreign company
ASIC directs the company to prepare financial reports
the company has crowd-sourced funding shareholders.

If you are unsure whether financial reporting obligations apply to your company, you should check early and consider getting professional advice.

Be aware of sustainability reporting

Sustainability reporting requirements mainly apply to larger companies.

For most small business companies, these requirements will not apply directly.

However, your company may still be asked for information about environmental, social or governance matters. For example, this may happen if you supply goods or services to larger businesses.

It is useful to have a basic understanding of sustainability reporting developments, even if the requirements do not directly apply to your company.

ASIC has developed educational materials to help explain these concepts and how they work in practice.

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Get help when you need it

Sources of assistance

If you are unsure about your obligations as a director, it is important to seek help early.

This is especially important in small companies, where directors often make decisions quickly and may not have formal systems or advisers in place.

There can be serious personal financial and legal consequences if you act without understanding your obligations as a director.

You can seek help by:

using ASIC’s guidance and tools to understand your obligations
speaking to a professional adviser such as an accountant or lawyer for information and advice specific to your circumstances.

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