Sleeping at the Wheel: Why Inactive Directors Remain Liable

The NSW Court of Appeal's recent decision in Kim v JM World AU Pty Ltd (in liq); Bak v JM World AUPty Ltd (in liq) [2026] NSWCA 146 serves as a stark reminder that being a director in name only, does not insulate a person from liability. For those who have accepted a directorship as a favour, or who have gradually stepped back from a company's affairs, the consequences can be significant.

The Facts

Ms Kim was a co-director and co-shareholder of JM World AU Pty Ltd (JMW) alongside her husband, Mr Bak. She had never taken any active role in JMW's affairs, leaving all decisions, large and small, to Mr Bak. When Mr Bak caused JMW to enter into a building contract that exposed the company to substantial liability and later transferred over $980,000 of the company's funds to overseas entities in flagrant disregard of creditors, Ms Kim knew nothing about it.

Ms Kim argued that because she had no knowledge of, or involvement in, Mr Bak's actions, she could not be liable for the resulting losses. She also sought relief from liability on the basis of a traumatic accident in 2013 that left her with Post Traumatic Stress Disorder and Major Depressive Disorder, which the medical evidence confirmed had reduced her capacity to discharge her duties as a director. However, the Court found that her psychological conditions were intermittent in nature, and that she had been inactive as a director even before the accident. The primary judge declined to relieve her from liability under ss 1317S and 1318 of the Act, and the Court of Appeal (Black J, Ward P agreeing; Leeming JA dissenting on causation) upheld that finding.

The Principle: Core Irreducible Requirements

The Court reaffirmed that every director owes a minimum, non-delegable standard of engagement. This is often referred to as the "core irreducible requirement" of the office. As Black J observed, Ms Kim's total lack of knowledge was not a defence; rather, it was itself the very breach. Her failure to make even the simplest inquiries, such as asking what was happening with the company's money, enabled Mr Bak to act with a free hand, and her inactivity was held to be causative of JMW's loss.

This reasoning accords with a well-established line of authority. In ASIC v Healey (No 2) [2011] FCA 1003, the Federal Court held that directors of a large public company could not rely on management information alone and bore a personal responsibility to understand the company's financial position. Similarly, in ASIC v Rich [2009] NSWSC 1229, Austin J emphasised that directors must bring an inquiring mind to their responsibilities, and that ignorance arising from a failure to pay attention to the company's affairs will not excuse a breach.

Key Takeaways for Directors

Directors should be mindful of the following:

1. A directorship role is not honorary. Accepting the role means accepting the obligations that come with it, regardless of one's actual involvement.
2. Ignorance is no defence. Where a director's lack of knowledge results from a failure to discharge their duties, that ignorance is itself the breach.
3. Inactivity can cause loss. A director who fails to inquire, supervise or intervene may be held causally responsible for losses that an active director would have prevented.
4. Relief from liability is not guaranteed. Even where a director has acted honestly, the Court retains a discretion to refuse relief under sections 1317S and 1318 of the Corporations Act 2001 (Cth), particularly where excusing the director would prejudice creditors.

If you hold a directorship role, whether active or otherwise, it is prudent to understand and discharge your obligations. Stanton & Stanton would be pleased to assist directors in understanding their duties and managing their exposure to liability.