Home › Corporations Law › 4 · Duties framework

Module 4 · Duties and liabilities of directors and officers: the framework

Every duties question begins by fixing who is bound, and the examiners test that threshold relentlessly: a characterisation issue, shadow director, de facto director or officer, has appeared in a Part A hypothetical in all seven papers 2018 to 2024. Nearly every year one person is planted to be mischaracterised. This module supplies the definitions and their tests, maps each duty to its addressees, and sets out the penalty, relief and accessory liability framework that every substantive duties module feeds into.

Cases at a glance

Case	In a line
Percival v Wright	Directors bought members' shares, hiding takeover negotiations. Duties are owed to the company, not individual shareholders
Brunninghausen v Glavanics	The sole active director bought out the only other shareholder, withholding a pending offer. Special facts generated a direct fiduciary duty
Coleman v Myers	A family company buyout with dependence and inside information grounded a duty to shareholders
Crawley v Short	Undertakings to a shareholder, relied on knowledge or partnership in disguise ground the duty
Buzzle Operations v Apple	Apple imposed supply conditions on a merged reseller. Conditions were not direction, causation and habitual compliance
Grimaldi	De facto and shadow categories overlap. The test is functional
Smithton v Naggar	De facto status is judged objectively on the whole conduct
DCT v Austin	Company size and internal practices frame the de facto inquiry
Re Holland	Participation in decision-making counts, not mere presence
Re Richborough Furniture	The failed or defective appointment is the classic de facto pattern
Mistmorn	Acting on after resignation, or a consultant who substantively directs, is de facto directorship
Forkserve	A consultant acting and held out as a director is one in substance
Re Lo-Line	Compliance by a governing majority of the board suffices
Secretary of State v Deverell	The definition captures real influence. Surrendered discretion suffices
Kuwait Asia Bank	A company can be a shadow director though never appointable
Standard Chartered v Antico	A lender or holding company can be a shadow director
Shafron v ASIC	James Hardie's general counsel shaped the board's asbestos foundation decisions. Participation without the final say makes an officer
ASIC v Adler	An investment committee outsider authorised the impugned transactions. Subcommittee power over a substantial part of the business suffices
ASIC v King	A parent's chief executive directed the subsidiary's affairs. The capacity limb looks to management involvement
ASIC v Citigroup	Capacity must be significant to the business overall. Mere employees are excluded
ASIC v Healey	Directors approved accounts that misclassified billions of current liabilities as non current and omitted major post balance date guarantees. They bear an irreducible core responsibility for the accounts
Yorke v Lucas	Involvement requires knowledge of the essential facts, not that they amounted to a breach

Attack plan. Every duties question begins by fixing who is bound. 1. Appointed director? A person validly appointed as a director or alternate (s 9AC(1)(a)). 2. De facto director? If not validly appointed, did they act in the position of a director (s 9AC(1)(b)(i))? 3. Shadow director? Are the directors accustomed to act in accordance with the person's instructions or wishes (s 9AC(1)(b)(ii))? 4. Officer instead or as well? Under s 9AD: a named position, participation in decisions affecting the whole or a substantial part of the business, capacity to affect financial standing significantly, or shadow-style influence. 5. Match and finish. Only then match each person to each duty, and finish with penalties, relief and accessory liability. Examiners plant one mischaracterised person nearly every year: argue the definition on the facts before applying any duty.

The duties and their targets

Duty	Source	Who is bound
Care, skill and diligence	general law + s 180(1)	directors and officers
Good faith in the best interests	general law + s 181(1)(a)	directors and officers
Proper purpose	general law + s 181(1)(b)	directors and officers
Use of position	s 182	directors, secretaries, officers, employees
Use of information	s 183	directors, officers, employees
Conflicts and profits	equity only (disclosure: ss 191, 195)	directors (and senior executives at general law)
Prevent insolvent trading	s 588G (+ s 588V holding companies)	directors only

RULE. arrowThe statutory duties operate in addition to the general law duties and do not displace them, so a defendant may be liable under both for the same conduct (s 185).

RULE. Directors are the focus of corporate governance because the quality of board oversight determines the quality of the company's compliance, as the courts emphasise when setting the standard expected (ASIC v Healey).

To whom are the duties owed

RULE. arrowDirectors owe their duties to the company as a whole and not to individual shareholders, so a shareholder cannot ordinarily sue a director for a wrong done to the company (Percival v Wright).

RULE. compassA director may nonetheless owe a fiduciary duty directly to a shareholder where the dealing's circumstances generate one, provided it does not conflict with the duty to the company. The typical generators are dependence on the director's information, a relationship of trust, vulnerability, and the director's positive promotion of the transaction (Brunninghausen v Glavanics; see also Coleman v Myers; Crawley v Short).

Indicators from the cases: a small closely held or family company, special knowledge the shareholder relies on, undertakings to act for the shareholder, a partnership in disguise (Crawley).

Who is a director

"Director": s 9AC. (1)(a) a person validly appointed as a director or alternate director, and (1)(b) a person not validly appointed if (i) they act in the position of a director (de facto) or (ii) the directors are accustomed to act in accordance with the person's instructions or wishes (shadow). The (b)(ii) limb does not capture advice given in the proper performance of functions attaching to a professional capacity or business relationship.

Trap. Renumbering. The director and officer definitions now live in ss 9AC and 9AD, but older papers, reports and notes cite the s 9 dictionary. Cite the current sections, and recognise the old ones in past-paper answers.

The same person may be both de facto and shadow director: the categories are not mutually exclusive (Buzzle Operations v Apple Computer; Grimaldi v Chameleon Mining (No 2)).

De facto directors: s 9AC(1)(b)(i)

RULE. compassA person is a de facto director where, judged objectively and regardless of their own belief or label, they act in the position of a director, performing functions only a director could properly perform in that company (Smithton Ltd v Naggar; Grimaldi).

The factors, argue several, never one:

the company's size and internal practices: larger companies leave more genuine discretion to executives (DCT v Austin)
participation in the decision-making process itself, not mere presence (Re Holland)
the duties expected and the duties actually performed, and whether at top-level management (Grimaldi; Austin)
whether insiders or outsiders consider the person a director, and whether the company or the person holds the person out as one (Smithton v Naggar; Forkserve)

Recurring fact patterns: the failed or defective appointment (Re Richborough Furniture), continuing to act after resignation or removal (the Mistmorn line), and the consultant who crosses from advising into directing (Mistmorn; Forkserve).

Shadow directors: s 9AC(1)(b)(ii)

RULE. checklistA shadow directorship requires identifying the actual directors, instruction or direction by the alleged shadow as to how they should act, action in accordance with those directions as a matter of causation, and habitual compliance over time such that the directors are accustomed so to act (Buzzle Operations v Apple Computer, 81 NSWLR 47 at 70 to 78).

Causation is the battleground: imposing conditions on commercial dealings is not direction, and if the board would have acted the same way anyway the influence is not causal (Buzzle: Apple's conditions as a major supplier did not make it a shadow director).
Compliance by a governing majority of the board suffices, and the shadow need not direct every board decision nor control at all times (Buzzle; Re Lo-Line Electric Motors).
The professional advice carve-out protects advisers acting within their retainer, and a board acting to avoid upsetting a powerful counterparty is not thereby accustomed to act on its instructions (Buzzle).
The point of the definition is to capture real influence: it is sufficient that the directors surrendered their discretion or acted subserviently (Secretary of State v Deverell).
A company (including a lender or holding company) can be a shadow director even though it could never be appointed a director (Kuwait Asia Bank; Standard Chartered Bank v Antico).

Who is an officer

"Officer": s 9AD. (a) a director or secretary, (b) a person (i) who makes, or participates in making, decisions that affect the whole or a substantial part of the business, (ii) who has the capacity to affect significantly the corporation's financial standing, or (iii) in accordance with whose instructions or wishes the directors are accustomed to act (excluding proper professional advice), and external administrators (receivers, administrators, restructuring practitioners, liquidators) and certain trustees.

RULE. arrowParticipation in making decisions does not require the final say. A general counsel and company secretary who shaped and presented the information on which the board decided participated in the relevant decisions (Shafron v ASIC).

RULE. Membership of a board subcommittee with real power over a substantial part of the business can make an outsider an officer, as with the investment committee member who authorised the transactions in question (ASIC v Adler, 168 FLR 253 at 275 to 280).

RULE. The capacity limb looks to involvement in the management of the corporation, so an outsider such as the chief executive of a parent who in fact directed the subsidiary's affairs is an officer of the subsidiary, but a mere third party or ordinary employee is not (ASIC v King; ASIC v Citigroup; Buzzle).

The capacity to affect financial standing must be significant to the business overall, not merely significant in isolation (Citigroup).
Consultants can be officers if they make or participate in making the relevant decisions (the Adler line).

	De facto director	Shadow director	Officer (b) limbs
Core question	Acts in the position	Board acts on their word	Participates in, or can significantly affect, management
Test	Objective, functional (Smithton)	Direction + causation + habit (Buzzle)	Participation (Shafron) or capacity (King)
Typical exam figure	The unappointed founder, the resigned director who keeps signing	The financier, the parent company, the patriarch	The GC or CFO, the subcommittee outsider, the parent's CEO
Bound by	all duties including s 588G	all duties including s 588G	ss 180 to 183 but not s 588G or s 191

Penalties, relief and accessory liability

Civil penalty pathway. Contravention of a civil penalty provision (the duties in ss 180(1), 181, 182 and 183, plus s 209(2) related party benefits, s 588G(2) and the others listed in s 1317E(3)) is enforced in a fixed sequence. ASIC applies (s 1317J) for a declaration of contravention (s 1317E), and the declaration then opens the pecuniary penalty (s 1317G), relinquishment (s 1317GAB) and disqualification (s 206C). The company may seek compensation (s 1317H) without a declaration (s 1317J(2)). The time limit is six years (s 1317K).

RULE. keyringA pecuniary penalty requires that the contravention materially prejudice the interests of the company or its members, materially prejudice the company's ability to pay its creditors, or be serious (s 1317G(1)).

RULE. A person involved in a contravention within s 79 contravenes the provision itself, and involvement requires knowledge of the essential facts of the contravention though not that they amounted to a breach (Yorke v Lucas).

RULE. Breach of ss 181 to 183 becomes criminal where the defendant was reckless or dishonest as to the relevant element, but there is no criminal counterpart for the duty of care in s 180 (s 184).

RULE. checklistThe court may relieve a defendant from civil liability where the person acted honestly and, having regard to all the circumstances, ought fairly to be excused (ss 1317S, 1318).

Disqualification routes: on contravention where justified (s 206C), repeated failed companies (s 206D), repeated contraventions (s 206E), ASIC show-cause (s 206F), and automatic disqualification on conviction or bankruptcy (s 206B).

Critical pitfalls and counter-arguments

Trap. The special facts fiduciary route is a live exam issue, not background. Where the wrong is to the company (diverted profits, wasted assets), the shareholder's routes are Module 9's derivative action or oppression, not a personal duty. Ask first: who suffered the loss?

Trap. No escape through invalidity. Some provisions exclude the (b) limbs by contrary intention (calling meetings, signing minutes), but the duties provisions do not: a de facto or shadow director cannot escape ss 180 to 183 or s 588G by pointing to the invalidity of their position.

Trap. The red herring officer. " Administrative execution of decisions is not participation in making them. Argue the definition, conclude no, and move on. The marks are in the correct negative.

Trap. Officer but not director. Match each provision to its precise addressee before applying it: s 191 binds directors only, ss 182 and 183 reach officers and employees, s 588G binds directors only.

Trap. Involvement liability is chronically missed. In 2023 "it was possible that each of Daisy and Linda were involved in the contravention of s 180... but hardly any students mentioned this". Where a question's exposed defendant fails a threshold definition, check accessory liability under s 79 before abandoning them.

Trap. Who applies matters. Only ASIC applies for declarations and penalties (s 1317J(1)), and the company's own route is compensation (s 1317H) or general law remedies, and if the board will not sue, Module 9's derivative action is the bridge. Signal this expressly, it is a favourite linking mark.

Exam calibration. Expect a threshold characterisation issue (shadow, de facto or officer) before the duties analysis begins. It is never the endpoint. It gates the duties that follow, so calibrate length: characterise in two or three sub-issues, then spend the words on the substantive duty.

Take it to the practice bank

This module is drilled in the Corporations Law practice bank. Every problem there carries a realistic Pass answer, an H1 model answer, and an examiner's comment explaining the decisive fact and where the marks are lost.

Practice prompts

Take any past paper's unappointed figure and write the characterisation in full: name the limb, argue several factors, never one, and conclude before touching a duty.
Write the shadow director paragraph for a major supplier or lender: direction, causation and habitual compliance under Buzzle, then the counter-argument that it was only protecting its own commercial interests.
List the seven duties and their addressees from the targets table, then run a non-director officer against each and say which duties do not reach them.
Draft the enforcement pathway from contravention to outcome: who applies under s 1317J, the declaration, the penalty options, and the company's compensation route.
Take a defendant who fails every threshold definition and run involvement under s 79, stating the knowledge Yorke v Lucas requires.

Check your understanding

Auto-marked drills. Answer, then see the authority in the feedback.