Family business decisions: why agreement between owners is not enough
By Symmetry Accounting & Tax Pty Ltd
A decision can have the support of every family member involved in a business and still expose its directors to legal consequences.
The issue is whose interests the decision serves. Shareholders have an ownership interest in the company. Directors have responsibilities for how it is managed. When the same people perform both roles, it becomes easy to assume that whatever the owners agree must also be acceptable for the company.
That assumption can be costly. For Perth family businesses, recognising the distinction is particularly important when decisions involve company assets, personal interests or financial pressure.
What changes when an owner acts as a director?
Shareholders may have different priorities. One might want income from their investment, another might favour expansion, and another may be preparing to sell. Their rights depend on their shares, the company’s rules and the law.
Being a shareholder does not mean personally owning the company’s assets. It also does not, by itself, give someone authority to manage its daily affairs. ASIC explains the position of shareholders.
Directors must approach decisions through the responsibilities of their office. Under the Corporations Act 2001 and general law, those responsibilities include exercising care and diligence, acting in good faith in the company’s best interests and using powers for proper purposes. Improper use of their position or company information is also prohibited. ASIC’s director obligations guide outlines these duties.
The owners’ interests and the company’s interests will often align. A successful, financially sound business usually benefits both. Problems arise when a proposal favours an individual or the family while leaving the company worse off.
Why family agreement can create false confidence
Family businesses often rely on trust, shared experience and quick conversations. Those relationships can help a business operate efficiently. They can also make it difficult to question a proposal put forward by a parent, spouse or sibling.
A discussion may focus on whether an arrangement seems fair within the family. Directors also need to assess what it means for the company.
For example, allowing a relative to use company premises on generous terms may solve a family problem. The company may nevertheless lose income or accept obligations it cannot afford. Approval from the owners does not answer those commercial concerns.
This does not mean every family transaction is improper. It means the relationship between the parties cannot replace a proper assessment of the arrangement.
The limit of shareholder approval
Shareholder approval has a legitimate role in company affairs. Its legal effect depends on the decision, the applicable rules and the circumstances. It is not a general protection against breaches of directors’ duties.
The position becomes especially significant when a company is insolvent or nearing insolvency. Directors must take creditors’ interests into account as part of their duty to the company. Shareholders cannot simply override those interests by agreeing among themselves. The High Court discussed this distinction in Spies v The Queen [2000] HCA 43, paragraphs 93–95.
The directors’ duty remains owed to the company. Considering creditors’ interests in these circumstances does not create a general, separate duty that every creditor can enforce directly against a director.
What the court examples demonstrate
Kinsela: an arrangement supported by the family
In Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, a family company leased its premises to family members on favourable terms. The shareholders supported the arrangement, but the company was in financial difficulty and subsequently entered liquidation.
The lease was set aside. The case illustrates the limits of relying on shareholder consent when the arrangement prejudices the interests that directors must consider.
For a family business, the practical lesson is straightforward: agreement about how the family would like to use an asset does not establish that the company should enter the transaction.
ASIC v Adler: personal interests influencing company decisions
The proceedings in ASIC v Adler [2002] NSWSC 171 concerned, among other matters, a $10 million unsecured payment from an HIH subsidiary to a company controlled by Rodney Adler.
The arrangement involved the use of funds for HIH share purchases and other investments, without proper board approval. The court found serious breaches of directors’ duties. Disqualification and compensation orders followed.
The scale was very different from a typical owner-operated business, but the underlying concern is relevant: influence over a company cannot be used improperly to advance personal interests.
These cases concern different transactions. Both show why directors need to examine the company’s position separately from the preferences of the people who own or control it.
A practical approach to significant decisions
Before committing the company to a material arrangement, directors should work through the following questions.
What is the benefit to the company? Identify the commercial reason for the proposal. Explain why it makes sense for the business, including any alternatives considered.
Who has a personal interest? Identify connections to directors, shareholders or family members. Check the applicable disclosure and approval requirements, obtaining legal advice where necessary.
What risks will the company accept? Consider its financial position and ability to meet commitments. If it is under pressure, examine the effect on creditors and seek advice promptly.
What evidence supports the decision? Keep relevant financial information, proposed terms and approvals with a record of the reasons for proceeding.
This is a practical review framework, rather than a substitute for the company’s formal requirements.
Good records should capture the reasoning at the time. A minute stating that everyone agreed is much less useful than a record explaining the proposal, the information considered and why the directors believed it served the company.
Where accounting and business advisory support fit
Reliable accounting information helps directors understand the financial consequences of their decisions. Current reports can show whether a proposal is affordable and identify commitments that might otherwise be overlooked.
Business advisory support can help owners assess alternatives and their likely effect on the business. Questions about directors’ legal duties, conflicts or the effectiveness of shareholder approval should be considered with a lawyer.
The aim is to bring the relevant information into the discussion while the decision is still open. Advice obtained after an arrangement has been implemented may leave fewer options.
Frequently asked questions
Do these duties apply if I own all the shares?
Yes. A company remains a separate legal entity even when one person is its sole shareholder and director. The director’s responsibilities still apply. ASIC’s director obligations guide.
Can directors take the family’s wishes into account?
They can understand and consider those wishes. Their decision must still satisfy their duties to the company. A family preference cannot, by itself, justify an arrangement that breaches those duties.
Are transactions with family members prohibited?
Not automatically. The terms, purpose, conflicts and applicable legal requirements need assessment. A family connection is a reason to examine the proposal carefully, rather than assume it is acceptable or unacceptable.
Is documenting a decision enough to protect a director?
No. Records help explain a decision, but they cannot make an improper transaction lawful. The quality of the decision and compliance with the relevant duties remain essential.
When should a family business seek advice?
Before a significant arrangement involving personal interests, uncertainty about authority or financial difficulty. The earlier those issues are identified, the more opportunity there is to assess alternatives.
Keep the company’s interests visible
Strong family relationships and responsible company management can support each other. Clear roles make it easier to question proposals without treating every disagreement as a personal dispute.
Before approving a significant decision, ask whether the reasons would still make sense to someone who had no connection to the family. That question can help reveal assumptions worth examining.
Contact Symmetry Accounting & Tax Pty Ltd to discuss accounting and business advisory support for your Perth business.
Phone: 0420 970 369
This article provides general information only and is not personal accounting, financial or legal advice. Individual circumstances differ. Obtain appropriate professional advice before acting.
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