The Australian Business Landscape: A Risk-Averse Reality

Australia’s corporate environment has long struggled under the weight of excessive regulation. For company directors, this red tape often creates a climate of fear—discouraging innovation, stifling productivity, and dampening the appetite for calculated risk.

The Business Judgment Rule was introduced to help cut through this regulatory overreach, offering directors some protection when making informed, good-faith decisions. In theory, it should empower directors to act decisively without the constant threat of personal liability.

In practice, however, it does little to shield directors from the real risks they face—particularly as a business nears insolvency.

What is the Business Judgment Rule?

Set out in section 180(2) of the Corporations Act 2001 (Cth), the Business Judgment Rule provides a defence to allegations that a director has breached their duty to exercise care and diligence.

To rely on the rule, a director must demonstrate that they:

  • Made a business judgment in good faith and for a proper purpose;
  • Had no material personal interest in the decision;
  • Informed themselves about the subject matter to the extent they reasonably believed was appropriate; and
  • Rationally believed the judgment was in the best interests of the company.

The Rule in Practice: Symbol Over Substance

Despite its promise, the Business Judgment Rule rarely provides meaningful protection. Courts have applied it narrowly, and directors seldom succeed in invoking it as a defence.

Worse still, the rule only applies to breaches of care and diligence—not to other critical areas such as:

  • Insolvent trading
  • Disclosure breaches
  • Fiduciary duties involving conflicts of interest

This limited scope undermines the rule’s practical utility, especially when directors are navigating high-stakes decisions during financial distress.

The Insolvency Dilemma for Directors

As a company approaches insolvency, the pressure on directors intensifies. Australia’s insolvent trading provisions impose strict personal liability, including the potential for civil penalties and even criminal prosecution.

This legal risk often deters directors from exploring informal restructuring options or “work-outs”—even when such approaches could save the business. For many, voluntary administration or liquidation becomes the “safest” path, even if it prematurely ends the life of an otherwise viable company.

The result? A system that pushes directors toward inaction, driven not by commercial judgment but by the fear of personal liability.

The Takeaway

Directors should be encouraged—not punished—for making informed, good-faith decisions in the face of uncertainty. The Business Judgment Rule, in its current form, offers little more than symbolic protection. A system that prioritises caution over commercial pragmatism does not serve the interests of directors, creditors, or the wider economy. It’s time to revisit how we support responsible risk-taking in the Australian economic landscape—especially when the alternative is unnecessary business failure.