In many Australian businesses (especially family businesses) the same people are both shareholders and directors. This can result in the erroneous assumption that if you own the business, surely you should be the one making the decisions. However, the law draws a clear distinction between ownership and control and when that distinction is blurred, the consequences can be serious.
Two roles, two obligations
A piece that is often missing in discussions about family business is the tension between shareholders and directors.
Shareholders and directors play fundamentally different roles.
- Shareholders are owners. They can act in their own interests – seeking dividends, growth, or an exit.
- Directors are controllers. They are responsible for running the company and must act in its best interests.
Those duties are imposed by the Corporations Act 2001 (Cth) and general law. They require directors to act in good faith, for proper purposes, and in the best interests of the company – not the shareholders. That distinction matters most when the interests of the company and its owners begin to diverge.
Unclear on your role and duties as director or shareholder of your business? Call us on 1300 654 590 or email us for tailored advice.
When it goes wrong…
ASIC v Adler: The big business example
Rodney Adler, a non-executive director and major shareholder of HIH Insurance, used his influence to procure a $10 million unsecured payment from a subsidiary of HIH to a company he controlled.
The transaction was presented as an investment. However, the funds were channelled through a structure associated with Adler and used to purchase HIH shares and make speculative investments unrelated to the company’s business.
The payment was made without proper board approval, breached internal investment policies, and exposed HIH to risk without corresponding benefit.
The Court found that Adler’s conduct, which diverted company funds to prop up share prices and benefit his own interests, was deemed a serious violation of fiduciary and statutory duties. He was disqualified as a director and ordered to pay compensation.
This is a big business example, but the principle also applies to smaller family businesses.
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722: The family business reality
Kinsela brings the issue much closer to home.
A family company granted a lease of its premises to family members on favourable terms. The shareholders approved the arrangement. It reflected a collective family decision about how to use “their” asset. However, the company was in financial difficulty, and when it later went into liquidation, the Court held that the directors had breached their duties:
- Directors owe duties to the company, not to shareholders
- Even unanimous shareholder approval does not justify a harmful decision
- When a company is under financial pressure, the interests of creditors must be considered
The lease was set aside. There was nothing elaborate about the arrangement, it was simply a family decision implemented without stepping back and asking the right question – are we acting as directors or owners?
The common thread
Placed side by side, Adler and Kinsela tell the same story:
- In Adler, company funds were used in a way that benefited the director/shareholder .
- In Kinsela, a company asset was used in a way that suited the family .
In both cases, the directors failed to separate their personal or shareholder interests from their duties to the company.
The legal principle is consistent:
The company is not the shareholders.
The real risk in closely held businesses
In large organisations, governance structures create distance between ownership and control. In family businesses, that distance disappears. Decisions are often:
- Informal;
- Agreed collectively;
- Poorly documented; and
- Influenced by personal relationships.
That creates a dangerous assumption – that if everyone agrees, the decision must be acceptable. It is not. The more closely held the company, the more discipline is required. The law does not relax just because the shareholders are sitting around your kitchen table.
What that discipline looks like
For directors in closely held businesses, discipline is not about formality for its own sake. It is about ensuring decisions can withstand scrutiny. That means:
- Identifying when you are acting as a director, not a shareholder;
- Framing decisions from the company’s perspective;
- Considering financial position, risk, and long-term viability; and
- Properly documenting the reasons for decisions.
Because if something goes wrong, the question will not be whether the decision felt reasonable at the time, it will be whether it can be justified as being in the best interests of the company.
How we can help
We work with family businesses and closely held companies to navigate the tension between ownership and control. This includes advising on governance structures, documenting decision-making processes, and assisting directors to manage conflicts between personal interests and their duties. We also offer families a workshop, tailored to their structure, that aims to give each family member an understanding of their role and assets, liabilities and participation and control.
Call us on 1300 654 590 or email us to get started.
The information contained in this post is current at the date of editing – 29 July 2026.
