Many people accept appointment as a company director believing they will hold the title without the responsibility. A spouse may be appointed to satisfy company requirements, a parent added as part of a family business structure or another family member listed as a director with the understanding that someone else will make the decisions.
Whether a director is actively involved or merely holds the title makes little difference under Australian law. Once a person accepts appointment as a director, they assume the same legal duties and potential personal liability as every other director, regardless of how involved they are in the everyday operation of the business.
If a company later faces insolvency, tax debts, regulatory action or workplace safety issues, claiming to have been a "name only" director is unlikely to provide any protection. The answer lies in the legal duties that arise from accepting the role.
What the law requires of every director
The Corporations Act 2001 (Cth) imposes statutory duties on every company director from the moment they are appointed. Section 180 requires directors to exercise care and diligence when carrying out their role. In practical terms, this means taking reasonable steps to understand how the company operates, asking questions where necessary and participating in important decisions affecting the business.
A director cannot simply sign documents without understanding them, ignore warning signs or leave every significant decision to a spouse or co-director. Conduct of that kind may amount to a breach of section 180 because the law requires directors to take an active role in overseeing the company. The Courts have consistently made it clear that passivity is not a defence.
Section 588G imposes a further duty by requiring directors to prevent a company from incurring debts where there are reasonable grounds to suspect it is insolvent. If a company continues trading while insolvent, a liquidator may seek to recover those debts personally from its directors. Whether a director was actively involved in managing the business is not the determining factor. What matters is whether they were a director when the debts were incurred and whether the circumstances should have alerted them to the company's insolvency.
The expectation of director accountability has only strengthened in recent years with the introduction of Australia's Director Identification Number (DIN) regime in 2021. Every director is now required to verify their identity and obtain a unique identifier before being appointed to a company. One of the key objectives of the reforms was to prevent the use of fictitious or "straw" directors (where an individual is appointed in name only while another person is the true decision-maker behind the company). The reforms reinforce that a company directorship carries genuine legal responsibilities and cannot be treated as a title held merely for convenience.
De facto and shadow directors
The law also recognises that not everyone who controls a company is officially appointed as a director. For that reason, section 9 of the Corporations Act extends the definition of "director" to include people who effectively fulfil that role, regardless of their formal title.
A de facto director is someone who acts as though they are a director, despite never having been formally appointed. A shadow director is someone who remains behind the scenes but whose instructions or wishes are routinely followed by the company's appointed directors. In both situations, the law may treat that person as a director and impose the same legal duties and personal responsibility that apply to any other director.
The practical effect is that responsibility cannot always be avoided by placing someone else's name on the company register. Courts will look beyond the company's records to determine who was actually directing the company's affairs. In an insolvency or regulatory investigation, both may find themselves personally exposed.
When directors become personally liable
A number of regulatory regimes can result in personal liability for directors who fail to comply with their legal obligations. The ATO's Director Penalty Notice (DPN) regime is one of the clearest examples.
If a company fails to remit PAYG withholding, net GST or superannuation guarantee charges, the ATO may issue a Director Penalty Notice requiring the directors to pay those debts personally. It is no defence that they were unaware the debts existed or had left the company's financial management to someone else. Simply accepting appointment as a director is enough to expose them to that risk.
ASIC also has the power to pursue civil penalties against directors who fail to comply with their statutory duties. Following the penalty unit increase from 1 July 2026, those penalties can include fines of up to $1.82 million per breach. In serious cases, ASIC may also seek a lifetime ban from managing corporations. These consequences apply equally to directors who were actively involved in the business and those who remained passive.
Workplace health and safety laws create another area of personal exposure. Where a serious injury or fatality occurs and systemic safety failures are identified, directors may face criminal prosecution. A lack of involvement in workplace operations will not necessarily protect a director where they have failed to meet their legal obligations.
What the Courts have decided
In Deputy Commissioner of Taxation v Clark [2003], Mrs Clark was a director of a vehicle manufacturing business operated by her husband. She had no involvement in the company's affairs, did not attend meetings and signed documents presented to her without reviewing them. After the company accumulated substantial tax debts, the ATO sought to recover those debts from her personally.
The NSW Court of Appeal held that she remained subject to the duties imposed on directors despite leaving the operation of the business entirely to her husband. The decision reinforces that directors are expected to remain informed about how the company is being managed, even where responsibility has been delegated. Mrs Clark was therefore held personally liable for the company's tax debt.
In Brown v Etna Developments Pty Ltd [2025], excavation works carried out by a building company caused significant damage to a neighbouring property, resulting in substantial compensation orders. When determining who should bear responsibility, the New South Wales Supreme Court looked beyond the company's records and examined who was actually involved in its management. The registered director was found to be a "puppet director" with little knowledge of the company's affairs, while two individuals who had never been formally appointed as directors were found to have been running the business as de facto directors. Together, the individuals were ordered to pay more than $2 million personally, with the overall judgment exceeding $4.4 million.
What families and business owners should do
For many family businesses, the first step is reviewing who has been appointed as a director and whether the people listed are still the people responsible for running the business. It is not uncommon for family members to remain listed as directors long after they have stopped participating in the business or to have accepted the role without fully appreciating the legal responsibilities involved.
Where a person has no intention of taking an active role in the business, resignation may be the most appropriate way to limit future exposure. However, resigning as a director does not erase legal responsibility for what occurred during the period of appointment. A director may still be held liable for debts incurred or breaches of duty that arose before the resignation took effect. For that reason, a resignation cannot simply be backdated once problems arise, making it important to address these issues before a dispute or insolvency occurs.
For family members who wish to remain involved in the business without assuming the responsibilities of a director, there may be other options depending on the circumstances, including:
- Holding shares in the company;
- Being employed by the business in a non-director role; or
- Acting as a consultant or adviser without participating in the management of the company.
Many of these issues only come to light when a business encounters financial or legal difficulties. Reviewing directorship arrangements before that happens gives business owners the opportunity to identify potential risks and make any necessary changes while they still have a choice.
Whether you are restructuring your business, considering resigning as a director or simply want to better understand your legal obligations, our commercial law team can help you assess your current arrangements and plan ahead.
Contact our team on 02 4350 3333 or visit aubreybrown.com.au.
