Last Updated on 26/02/2026 by Damin Murdock

Directors of Australian companies owe strict duties to their company, both under the Corporations Act 2001 (Cth) (the Act) and at common law. When a director misuses the company’s funds, they trigger a series of statutory and financial liabilities that can lead to personal ruin and professional disqualification.

1. Statutory Duties Under the Act

In a commercial context, the unauthorized taking of company money is primarily prosecuted as a breach of civil penalty provisions. These provisions ensure that directors act with integrity and prioritize the company’s interests over personal gain.

  • Section 181: Directors must act in good faith and for a proper purpose. Misappropriating funds for personal use is inherently inconsistent with this duty.

  • Section 182: This prohibits the improper use of a position to gain an advantage or cause detriment to the company.

The Australian courts take an absolute view of these provisions. In Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd [2016] NSWCA 347, the Court of Appeal affirmed that a breach occurs the moment a director uses their position for unauthorized personal advantage, regardless of whether they intended the company to suffer a loss.

2. Fiduciary Duties and the “No Profit Rule”

Beyond the Act, the relationship between a director and a company is one of trust and confidence. This gives rise to fiduciary duties, including the “no profit rule.” This rule prevents a director from obtaining unauthorized benefits from their position. When funds are misapplied, the director violates their core equitable obligation to act exclusively in the separate legal interest of the company.

3. Real-World Consequences: Compensation and Penalties

Minimalist corporate infographic by Leo Lawyers titled “Misappropriation of Funds: Director Liability” in navy, gold and white. The layout shows a gold shield labelled “The Separate Legal Entity” beneath the Corporations Act 2001, branching into two sections: “Statutory Breaches” (Section 181 – Directors’ Duties; Section 182 – Misuse of Position) and “Fiduciary Breaches” (No Profit Rule). Below, NSW precedents [2016] NSWCA 347 and [2023] NSWSC 1498 are referenced, followed by three consequence boxes: Section 1317H Compensation Orders, Director Disqualification, and Statutory Derivative Action.

The fallout from misappropriation is severe and often involves parallel legal actions:

  • Civil Penalties: Significant fines and court-ordered disqualification from managing corporations.

  • Compensation Orders: Under Section 1317H of the Act, a director can be ordered to compensate the company for the full value of the loss.

  • Equitable Remedies: The company may seek an “account of profits,” forcing the director to repay any gains made from the misapplied funds.

A clear example of court intervention is City Garden Australia Pty Ltd v Meng Dai [2023] NSWSC 1498. In this case, a director obtained loans without the knowledge or consent of their co-director. The NSW Supreme Court issued a substantial compensation order under Section 1317H, demonstrating that the court will look past “informal” arrangements to enforce strict statutory compliance.

4. Can an Innocent Director Take Action?

In companies with two directors where one has engaged in misconduct, the “innocent” director may need to apply to the court for leave to bring a statutory derivative action. This allows a person to bring a claim in the name of the company against the offending director. Because duties are owed to the company as a separate entity, a director cannot defend their conduct by pointing to “informal understandings” or broad discretionary powers.

Protecting Your Company from Director Misconduct

At Leo Lawyers, we understand that director misconduct is a grave breach of trust that requires immediate and strategic intervention. Whether you are seeking to recover misappropriated funds or need to navigate a dispute involving a breach of duty, feel free to contact Damin Murdock at Leo Lawyers via our website, on (02) 8201 0051 or at office@leolawyers.com.au. Further, if you liked this article, please subscribe to our newsletter via our Website, and subscribe to our YouTube, LinkedIn, Facebook and Instagram. If you liked this article or video, please also give us a favourable Google Review.

DISCLAIMER: This is not legal advice and is general information only. You should not rely upon the information contained in this article, and if you require specific legal advice, please contact us.

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Damin Murdock (J.D | LL.M | BACS - Finance) is a seasoned commercial lawyer with over 17 years of experience, recognised as a trusted legal advisor and courtroom advocate who has built a formidable reputation for delivering strategic legal solutions across corporate, commercial, construction, and technology law. He has held senior leadership positions, including director of a national Australian law firm, principal lawyer of MurdockCheng Legal Practice, and Chief Legal Officer of Lawpath, Australia's largest legal technology platform. Throughout his career, Damin has personally advised more than 2,000 startups and SMEs, earning over 300 five-star reviews from satisfied clients who value his clear communication, commercial pragmatism, and in-depth legal knowledge. As an established legal thought leader, he has hosted over 100 webinars and legal videos that have attracted tens of thousands of views, reinforcing his trusted authority in both legal and business communities."