Litigating a Board Member’s Breach of Fiduciary Duty

Introduction

Serving as a board member for an organisation in Australia involves significant legal responsibilities, including key ACNC and ASIC duties, central to which are fiduciary duties. This fiduciary relationship is built on trust, requiring each board member to act honestly, with reasonable care, and always in the best interests of the organisation they serve. A breach of these core duties can undermine corporate governance and expose the individual to serious consequences, including personal liability and litigation.

When a board member is suspected of breaching fiduciary duties, understanding the path to accountability is critical for protecting the organisation’s interests. This guide provides an overview of the legal landscape governing these duties in Australia, discusses common examples of breaches, and explains the process to sue a board member for misconduct. Navigating the complexities of a breach of fiduciary duty claim underscores the importance of engaging experienced not-for-profit or charity lawyers to ensure the matter is handled correctly.

ACNC Governance Standard 5 & the Duties of Responsible People for Your Charity

The Duty to Act with Reasonable Care & Diligence

Under Australian Charities and Not-for-profits Commission (ACNC) Governance Standard 5, board members—referred to as “Responsible People”—must exercise their powers with the degree of care and diligence a reasonable person would in similar circumstances. This duty requires you to take your role seriously, giving sufficient time and thought to the decisions you make on behalf of the charity.

Fulfilling this duty involves several key actions, including:

• Becoming and remaining familiar with the charity’s purpose and operations.
• Staying informed about the organisation’s activities and financial health by reviewing board papers and financial statements.
• Actively participating in meetings, asking questions, and applying an inquiring mind to the information presented by management.
• Using any specific skills or experience you possess to benefit the organisation and guide its strategic direction.

A critical component of this duty is monitoring the charity’s financial position to ensure its affairs are managed responsibly. This includes having an informed opinion of the organisation’s solvency at all times.

Acting Honestly & Fairly in the Best Interests of the Charity

This fiduciary duty requires every board member to act honestly, fairly, and loyally when making decisions. Your primary obligation is to the charity itself, ensuring that all actions are taken to further its charitable purposes and serve the best interests of the organisation as a whole.

You must not base decisions on your own personal interests, preferences, or alliances. Even if you were appointed to the board to represent a specific group or region, your duty to the charity overrides any obligation to that particular constituency.

The focus must always remain on what is best for the charity’s current and future operations, not what might benefit a select group of members or stakeholders.

The Duty Not to Misuse Position or Information

Board members are prohibited from improperly using their position or any information gained through their role to secure an advantage for themselves or someone else. This duty also forbids using your position or information in a way that causes detriment to the charity.

This obligation of loyalty is ongoing and continues to apply even after you have resigned from the board.

Examples of a breach of this duty include:

Type of Breach	Example
Misuse of Confidential Information	Using client lists or details about a planned project to benefit a competing organisation you are involved with.
Improper Use of Influence	Leveraging your influence as a board member to intimidate employees or secure preferential treatment for friends or family.
Accepting Personal Benefits	Receiving “kick-backs” or other personal benefits from a business that is tendering for work with your charity.

This duty ensures that a board member’s actions are solely for the benefit of the organisation they serve.

Disclosing Conflicts of Interest & Managing Financial Affairs

Responsible People must disclose any actual or perceived conflicts of interest as soon as they become aware of them, which is a crucial part of managing conflicts of interest. A conflict arises when a board member’s personal interests, or their duties to another organisation, could potentially interfere with their duty to act in the best interests of the charity. For charities, even a situation that could appear to be a conflict to an outsider must be disclosed.

Once a conflict is disclosed, it must be managed appropriately. Best practice involves the conflicted board member:

Best Practice	Description
Abstain from Participation	The conflicted board member must abstain from any discussion or voting on the matter related to their conflict.
Leave the Room	The member should physically leave the room while the matter is being considered to ensure impartiality.
Record the Action	The disclosure of the conflict and the member’s absence from the discussion and vote must be formally recorded in the meeting minutes.

Furthermore, this duty includes the critical responsibility to ensure the charity’s financial affairs are managed responsibly and to prevent it from operating while insolvent. A charity is considered insolvent if it cannot pay its debts as they become due.

If you suspect your organisation is facing financial difficulty, it is crucial to take immediate action and seek professional advice from accountants and not-for-profit or charity lawyers to avoid a breach of fiduciary duty.

Examples of Breaches That Lead to Litigation & Financial Mismanagement in NFP Organisations

Misuse of Charity Funds & Undisclosed Conflicts of Interest

A conflict of interest arises when a board member’s personal interests have the potential to interfere with their obligation to act in the best interests of the charity. This breach of fiduciary duty is not limited to direct financial gain; it can also involve benefits for relatives, friends, or other organisations the board member is associated with.

For example, a conflict exists if a charity needs to sign a contract for office supplies and a board member’s partner owns the local stationery business. In this situation, the board member’s personal interest in their partner’s business success could conflict with the charity’s interest in securing the most competitive price.

The legal breach occurs not from the existence of the conflict, but from the failure to disclose and manage it appropriately. Proper management requires the board member to:

• Declare the nature and extent of their interest to the committee
• Refrain from being present for any discussion or vote on the matter

Misusing one’s position can also involve practices like “under-value sales,” where a director causes the charity to sell products at artificially low prices to another company owned by their family. This diverts funds and causes detriment to the charity.

The Duty to Prevent Insolvent Trading & Incurring Debts

A charity is considered insolvent when it is unable to pay all of its debts as and when they become due. Board members have a critical duty to prevent their organisation from trading or incurring new debts while in this state. This responsibility extends to all board members, not just the treasurer, and requires a constant and informed understanding of the charity’s financial health.

Failing to keep adequate financial records or ignoring warning signs of financial distress can lead to a serious breach of duty. Key indicators of potential insolvency include:

Indicator of Potential Insolvency	Description
Ongoing Financial Losses	A consistent history of operating at a loss.
Poor Cash Flow	An inability to pay suppliers and other debts within usual payment terms.
Disorganised Accounting	Financial records are incomplete or internal accounting procedures are poorly managed.
Overdue Tax Liabilities	Failure to meet obligations such as Pay As You Go (PAYG) withholding or superannuation payments.
Adverse Creditor Actions	Creditors are threatening legal action or have placed the charity on restrictive cash-on-delivery terms.

If a board member suspects their charity is facing insolvency, they must take immediate action. This includes:

• Thoroughly investigating the financial situation
• Seeking professional advice from an accountant, insolvency expert, or a not-for-profit or charity lawyer

Continuing to operate and incur debts in such circumstances can expose a board member to personal liability for those debts.

Improper Use of Information for Personal Gain

Board members must not improperly use information they gain through their position to secure an advantage for themselves or another person, or to cause harm to the charity. This duty of loyalty is one of the core fiduciary duties and continues to apply even after a board member has resigned.

Common examples of this type of breach often lead to litigation and significant financial mismanagement. For instance, a board member would be breaching their fiduciary duties if they used confidential details about the charity’s bid for a government tender to help another organisation they are involved with compete for the same project.

Other breaches include:

• Disclosing confidential client lists
• Taking a corporate opportunity for personal gain

To illustrate, if a board member discovers a prime real estate opportunity on behalf of the charity, they cannot then secretly pursue that opportunity for their own private business. As seen in the case of Sunnya Pty Ltd v He, former directors were found to have breached their duties by using their knowledge to establish a competing business after their resignation.

Who Has Standing to Sue a Board Member & Statutory Derivative Actions

The Charity Acting Through the Board

The authority to initiate legal proceedings on behalf of a company or charity ordinarily resides with its board of directors. This means the board is typically the body responsible for taking legal action against a director or former director to address misconduct or a breach of fiduciary duty.

When a board member’s actions cause harm, the standard process is for the remaining board members to start proceedings to recover any losses. This action is taken in the name of the charity itself, ensuring that any compensation or remedy benefits the organisation directly.

A Member’s Right to Bring a Statutory Derivative Action

When a company’s board fails or refuses to act against a wrongdoing director, a statutory derivative action provides an alternative path to accountability. This legal mechanism allows an eligible person, such as a member or officer, to bring proceedings on behalf of the company.

Under section 236 of the Corporations Act 2001 (Cth), a person can initiate or intervene in legal proceedings in the company’s name. However, this right is not automatic and is contingent upon first obtaining permission, or “leave,” from the court as required by section 237 of the Corporations Act 2001 (Cth).

Any benefit that arises from a successful derivative action accrues to the company, not the individual who brought the claim.

The Requirement for Good Faith & Best Interests

Before a court will grant leave for a statutory derivative action, the applicant must satisfy several strict criteria outlined in section 237(2) of the Corporations Act 2001 (Cth). The applicant bears the onus of proving each of these elements.

The key requirements the court considers include:

Requirement	Description
Probable Inaction by the Company	The applicant must demonstrate that the company is unlikely to initiate the legal proceedings itself.
Acting in Good Faith	The court must be satisfied the applicant genuinely believes a good cause of action exists and is not acting for a collateral or improper purpose.
Best Interests of the Company	Granting leave for the action must be in the best interests of the company as a whole, considering its business and the potential impact of litigation.
A Serious Question to be Tried	The applicant must show there is a serious legal or equitable issue to be determined, and the claim is not frivolous or vexatious.
Notice to the Company	The applicant is generally required to give the company 14 days’ written notice of their intention to apply for leave.

Given the complexity of meeting these legal thresholds, seeking guidance from experienced not-for-profit or charity lawyers is crucial for any member considering this course of action.

How Courts Assess if a Reasonable Director Had Acted Differently

The Objective Standard of Care & Diligence

When courts in Australia assess whether a board member has breached their fiduciary duties, they apply an objective standard. Under section 180 of the Corporations Act 2001 (Cth), directors must exercise their powers with the degree of care and diligence that a reasonable person would if they were in the same position and had the same responsibilities.

This means a court will balance the foreseeable risk of harm against the potential benefits that could have been expected from the conduct in question. Fulfilling this duty requires more than passive attendance at meetings. Each board member must actively engage with the organisation’s affairs.

In practice, this involves:

Practical Action	Description
Familiarity with Operations	Becoming and remaining familiar with the fundamental aspects of the organisation’s business and how it operates.
Stay Informed	Consistently staying informed about the charity’s activities and financial status by reviewing board papers and financial statements.
Apply an Enquiring Mind	Actively questioning and seeking clarification on information presented by management rather than passively accepting it.
Utilise Specific Skills	Applying any particular skills or experience you possess to help guide the organisation’s strategic direction.

The law recognises that boards often make difficult decisions and does not demand perfection. A decision that turns out poorly does not automatically mean a breach of duty has occurred.

The court’s assessment focuses on the decision-making process and whether the director acted reasonably with the information available at the time, not with the benefit of hindsight.

The Business Judgement Rule Defence

The business judgment rule, found in section 180(2) of the Corporations Act 2001 (Cth), provides a defence for a board member against an alleged breach of the duty of care and diligence. This rule is designed to protect directors who make rational and informed business decisions, even if those decisions do not lead to a favourable outcome for the company. It helps to avoid unnecessary restrictions on proper entrepreneurial activity.

To rely on this defence, a director must demonstrate that they met all of the following criteria when making the business judgment:

• They made the judgment in good faith and for a proper purpose.
• They did not have a material personal interest in the subject matter of the decision.
• They informed themselves about the subject matter to the extent they reasonably believed was appropriate.
• They rationally believed that the judgment was in the best interests of the corporation.

It is important to note that this defence is specifically for the duty of care and diligence. It cannot be used as a defence against allegations of breaching other duties, such as the duty to prevent insolvent trading.

Case Law Insights on Breach of Fiduciary Duty & Personal Liability

Fiduciary Duties After Resignation

A board member’s fiduciary duties do not necessarily end upon their resignation. The case of Sunnya Pty Ltd v He [2025] NSWCA 79 illustrates that the obligation of loyalty can persist, preventing former directors from exploiting opportunities that belong to the company they once served. This case is one of the common examples of commercial litigation arising from a breach of fiduciary duty.

In this matter, two former directors were found to have breached their fiduciary duties after resigning from Sunnya Pty Ltd. Specifically, after their departure, they:

• Registered a new trademark to continue selling a product identical to one sold by Sunnya.
• Sought to take advantage of corporate opportunities or information gained during their tenure.

The court determined that their actions constituted a breach. It made it clear that directors cannot simply resign to exploit such opportunities or information.

Misuse of Position & Personal Liability for Compensation

The Sunnya case also highlights the severe consequences of misusing one’s position while serving as a board member. The court found that the directors had engaged in a practice of “under-value sales,” which involved:

• Causing Sunnya to sell products at artificially low prices to another company owned by their families.
• Diverting financial benefits away from Sunnya through these sales.

Furthermore, one director attempted to transfer a valuable company trademark to his own entity without informing the other board members. The court found these actions to be a breach of their duties in Australia.

As a result of their misconduct, the former directors were ordered to pay compensation to Sunnya for the losses incurred due to their illicit acts. This demonstrates that a breach can lead to significant personal liability.

Potential Remedies a Court Can Order & Consequences of Breaching Fiduciary Duties

Seeking Financial Repayment & Compensation Orders

When a board member is found to have committed a breach of fiduciary duty, one of the primary remedies a court can order is financial compensation. This remedy requires the director to repay the organisation for any loss it suffered as a direct result of their misconduct.

The goal of such an order is to restore the charity to the financial position it would have been in had the breach not occurred. This principle is outlined in section 1317H of the Corporations Act 2001 (Cth), which allows courts to order directors to pay compensation to the company.

A clear example is the case of Sunnya Pty Ltd v He [2025] NSWCA 79, where the former directors were ordered to compensate the company for losses incurred from their illicit acts. This demonstrates that personal liability for financial repayment is a significant consequence of breaching fiduciary duties.

Voiding Transactions & Removing the Director

A serious consequence for a board member following a breach is disqualification from managing corporations. Both the courts and regulators like the Australian Securities and Investments Commission (ASIC) have the power to remove or disqualify a person from serving on a committee or board for a specified period.

This action is typically reserved for significant breaches that demonstrate a person is unfit to hold a governance position. The power to disqualify a director can be exercised in several ways, including:

Authority	Power of Disqualification
The Courts	A court may issue a disqualification order under section 206C of the Corporations Act 2001 (Cth).
ASIC	Can disqualify a director involved with two or more companies that entered liquidation within seven years and failed to pay creditors sufficiently.
ACNC	For registered charities, the ACNC has the power to suspend or remove a Responsible Person in serious circumstances.

Civil Penalties & Criminal Charges for Recklessness

For the most serious types of breaches, a board member can face severe civil and criminal penalties. If a director acts recklessly or with intentional dishonesty, their actions may constitute a criminal offence under section 184 of the Corporations Act 2001 (Cth).

Such a breach can lead to substantial fines and, in extreme cases, imprisonment for up to 15 years. In addition to criminal charges, a court can impose significant civil penalties. These are financial fines paid by the director personally, which can be as high as $1.05 million.

These severe consequences underscore the gravity of a director’s duties in Australia and the legal system’s commitment to holding those in positions of trust accountable for their actions.

Conclusion

Understanding the scope of fiduciary duties is essential for any board member in Australia, as a breach can result in significant personal liability and legal action. This article has detailed these core duties, common breaches that lead to litigation, and the consequences a director may face.

These legal challenges underscore the importance of seeking specialised advice when confronting a potential breach of fiduciary duty. For trusted expertise in navigating these complex matters, contact the dedicated not-for-profit and charity lawyers at LawBridge to ensure your organisation’s rights are protected.

Frequently Asked Questions