In many family companies, being a director is treated as a family role rather than a legal one. A spouse is appointed because the company needed a second director. Adult children are added to the board to “learn the business”. The founder, now in his eighties, remains a director even though he rarely reads the accounts.
The law does not make allowances for family. Every director, whatever their age, title or involvement, owes the same duties and can face personal liability if things go wrong. Parents who have formally retired but still give the instructions can be treated as directors too.
The core duties of every director
The Corporations Act 2001 (Cth) sets out general duties that apply to directors and other officers:
- Care and diligence (section 180): act with the degree of care and diligence that a reasonable person would exercise in the director’s position. The business judgment rule in section 180(2) can protect a director who makes an informed decision in good faith, for a proper purpose, without a material personal interest, and rationally believing it is in the company’s best interests.
- Good faith and proper purpose (section 181): act in good faith in the best interests of the company and for a proper purpose.
- Improper use of position (section 182): do not improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to the company.
- Improper use of information (section 183): do not improperly use information obtained as a director for the same purposes.
Breaches can lead to civil penalties, compensation orders and disqualification, and dishonest or reckless conduct can be a criminal offence. Directors also must prevent insolvent trading.
A “passive” director is not excused. A spouse or child who signs whatever is put in front of them, without reading financial statements or asking questions, may still be found to have failed in the duty of care and diligence.
Conflicts when a director is also family
The duty is owed to the company, not to the family or a parent. Common conflicts include:
- approving a salary, loan or lease for yourself, your spouse or your child;
- the company buying from or selling to another business owned by a relative;
- a director who is also a beneficiary of the family trust that owns the shares, voting in a way that favours the trust over other shareholders;
- pressure from a parent to make a decision that is good for the family but not for the company.
A director with a material personal interest in a matter generally must disclose it to the other directors (section 191), although in a proprietary company notice is not needed if the other directors already know about it. Good practice is to declare conflicts at every board meeting, record them in the minutes, and step out of the discussion when appropriate. A related-party policy adopted by the board helps.
Elderly founder directors and capacity
Founders often stay on the board long after they stop running the business. If a founder director loses capacity, decisions they sign may be challenged.
An enduring power of attorney does not usually give the attorney the right to act as a director, because the office of director is personal. Some constitutions provide for a director’s office to become vacant on mental incapacity. Families should check what their constitution says, and plan for a respectful transition, for example the founder becoming a non-voting chair emeritus or adviser while new directors take formal responsibility.
If a sole director and shareholder becomes incapacitated, the company may have no one able to act, so plan for this in advance.
Shadow and de facto directors: when parents still run things
The definition of “director” in section 9 of the Corporations Act extends beyond people validly appointed. It can include a person who acts in the position of a director (a de facto director), and a person in accordance with whose instructions or wishes the directors are accustomed to act (a shadow director).
If a parent has resigned but the children on the board still do what the parent says, that parent may be treated as a director and owe directors’ duties. The children cannot excuse a poor decision by saying they followed instructions. A handover should be real and documented.
Director identification numbers
Every director must have a director identification number (director ID) issued through the Australian Business Registry Services before being appointed. A director ID is a unique number that a person keeps permanently, even if they change companies or move overseas.
Protection: D&O insurance and access deeds
Directors and officers liability insurance can cover defence costs and some liabilities arising from a director’s role, subject to the policy terms and exclusions. The Corporations Act limits the liabilities a company can indemnify or insure a director against, so not every risk can be covered.
A deed of access, indemnity and insurance between the company and each director typically:
- indemnifies the director to the extent the law permits;
- requires the company to maintain D&O insurance for a period after the director leaves;
- gives the director access to board papers and company records for a period after they cease to hold office, so they can defend any later claim.
Former directors have some limited statutory inspection rights, but a deed gives clearer contractual rights, which matters for a family member who leaves after a dispute.
Resigning or removing a family director
Resigning
A director can usually resign by written notice to the company, subject to the constitution. The company must notify ASIC of the change within 28 days. A sole director cannot simply resign leaving the company without a director, so a replacement must be appointed first.
Removing a director
Under the replaceable rule in section 203C, the shareholders of a proprietary company may remove a director by resolution and appoint a replacement. The constitution may set different rules, and some allow the other directors to remove a director. Any shareholders’ agreement may also give particular shareholders the right to appoint and remove their own nominee. If the director is also an employee, employment law and their contract must be considered separately from their board seat.
Removing a parent or sibling is rarely only a legal question. A facilitated conversation or mediation can often achieve a dignified transition and avoid a contested meeting.
Checklist for family boards
- Confirm every director has a director ID and understands their duties.
- Hold proper board meetings, circulate accounts and keep minutes.
- Adopt a conflicts and related-party policy, and declare interests at each meeting.
- Check the constitution’s rules on appointment, removal and incapacity.
- Plan the founder’s transition, and make sure retired parents are not acting as shadow directors.
- Put deeds of access, indemnity and insurance in place and review D&O cover.
Frequently asked questions
What are the duties of a director in a family business?
The same as any company director: care and diligence, good faith in the company’s best interests, proper purpose, and not improperly using their position or information. Being a family member or an unpaid director does not reduce these duties.
How do you remove a director from a family company?
For a proprietary company, the shareholders can generally remove a director by resolution under the replaceable rules, unless the constitution provides otherwise. Check the constitution and any shareholders’ agreement first, follow the correct procedure, and notify ASIC within 28 days.
Can my father still be liable if he is no longer a director?
Yes, in some circumstances. If the directors are accustomed to act on his instructions, he may be treated as a shadow director and owe directors’ duties. He also remains responsible for his conduct while he was a director.
How Chua Tan Associates can help
We advise family directors on their duties, prepare constitutions, conflicts policies and deeds of access, indemnity and insurance, and help families manage board changes, including the respectful transition of founders and, where needed, the removal of a director. Justin Chua is a Nationally Accredited Mediator and an Accredited Family Business Advisor who trained in accounting, and we work alongside the family’s accountant. We act for families across Australia and overseas, have a notary public for documents signed abroad, and advise in English, Mandarin and Cantonese.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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