GP directors owe five duties under the Corporations Act 2001: act in good faith for a proper purpose, avoid conflicts of interest, not misuse position or information, act with reasonable care and diligence, and prevent insolvent trading. The business judgment rule in section 180(2) protects directors who prepare, disclose interests and document their reasoning.
When you join a board, you take on legal duties that exist independently of whatever value you bring as a clinician. The Corporations Act 2001 and current Corporations Legislation set out what directors must do and what happens when they fail. For a GP moving into governance, understanding these obligations is not optional background reading. It is the framework within which every board decision sits.
Duties owed to the company
This catches many new directors off guard. The duties you owe as a director are owed to the company and, through it, to the shareholders or members as a whole. You do not owe duties to individual employees. In fact, the law requires that you put the company's interests ahead of your own.
In a not-for-profit context, the members may be stakeholders other than shareholders. If you join a Primary Health Network board or a medical college board, identify the members and determine what the constitution says about their rights. The duties remain the same.
The five duties under the Corporations Act
The Corporations Act imposes five duties on directors. They apply from the moment you are appointed.
1. Act in good faith and in the best interests of the company for a proper purpose. You must not gain a personal advantage from your position, allow one group of shareholders to benefit at the expense of others, or cause the company to act outside its constitution.
2. Avoid conflicts of interest. This covers contracts with the company, making a personal profit from your position, misusing confidential information and working for a competitor. If you have a material personal interest in a matter, you must disclose it and, in most cases, abstain from voting.
3. Not misuse your position or the information you gain through it. You cannot use what you learn as a director to benefit yourself or someone else, or to cause detriment to the company.
4. Act with reasonable care and diligence. The standard is what a reasonable person would do in the same position and with the same responsibilities.
5. Prevent insolvent trading. You must not allow the company to incur debts it cannot pay as they fall due.
The business judgment rule
The business judgment rule protects directors who make decisions that turn out badly. Section 180(2) of the Corporations Act says a director meets the care and diligence standard if, at the time of making a business judgment, they acted in good faith for a proper purpose, had no material personal interest in the subject matter, informed themselves to the extent they reasonably believed appropriate, and rationally believed the judgment was in the best interests of the company.
The rule rewards preparation. It protects directors who read the papers, ask questions, disclose interests and act without self-interest. It does not protect directors who fail to inquire, ignore obvious risks or act for personal gain.
Contemporaneous records of this deliberation, ideally in the minutes or your own notes, are essential evidence if a decision is later challenged.
For a GP, this parallels clinical expectations. You gather information and investigate before acting. You document your reasoning. You seek advice when you reach the limits of your expertise. The same discipline applies in the boardroom.
Insolvent trading
Insolvent trading is the area where directors may face the most significant personal exposure. A company is insolvent if it cannot pay its debts as and when they fall due. A director breaches the duty where the company incurs a debt while insolvent, or where incurring the debt causes insolvency, and where the director had reasonable grounds to suspect this, or where a reasonable person in that position would have had such grounds.
The defences require action. A director may argue they had reasonable grounds to expect solvency, or that a competent person was monitoring solvency and their information supported the belief that the company was solvent, or that the director was not involved in management due to illness, or that all reasonable steps were taken to prevent the debt being incurred. None of these defences is available to a director who simply wasn't paying attention.
Several indicators should prompt questions. Financial reports that arrive late, are incomplete or are not presented at all. Increasing debt relative to equity. Declining profitability. Sales of significant assets. Delays in paying creditors, particularly tax instalments, superannuation or workers' compensation premiums. Extended payment terms with suppliers. All suggest a breakdown in internal controls.
Many businesses use exception reports to ensure directors are aware of gaps. When signs appear, raise them formally and ensure your questions are recorded in the minutes. The standard is what a reasonable director would do in the circumstances.
Protecting yourself
Directors can reduce personal risk through access deeds and indemnities, which should be in place before appointment. Directors and officers insurance should run on a claims incurred basis rather than claims made, and should continue for at least seven years after you leave the board. Keep records of board papers, your questions and the responses you received. If a dispute arises later, contemporaneous records are your best evidence.
If you believe the company is heading for insolvency and cannot influence management to address it, your options are limited. If you are in a position to do so, prevent the company from incurring any further debt. Seek legal advice, but resignation may be the only option. Remaining on the board while the company trades insolvently exposes you to personal liability.
Practical steps
Read the board papers before every meeting. The duty of care requires informed participation, not attendance.
Ask questions when you do not understand the financials. You are not expected to be an accountant, but you are expected to seek clarification on material matters.
Disclose any interest that could create a conflict. This includes commercial relationships, personal relationships and any arrangement that could be perceived as affecting your judgment.
Do not agree to decisions you believe are against the company's interests simply to avoid conflict at the table.
Monitor the company's solvency. If reports are late or show deteriorating performance, ask why.
The business judgment rule exists to protect directors who take their role seriously. It offers nothing to those who do not. Document your dissent in the board minutes when you disagree.