AI Monitoring Tools Are Shifting the Legal Test for Australian Directors

As AI-powered monitoring and forecasting tools become standard business practice, Australian law firm DSA Law argues that the legal test directors are held to is shifting with them. In an article published September 7, 2026, the firm examines how directors' duties around insolvent trading and care and diligence apply when AI tools flag financial warning signs, and what directors should do to protect themselves.

A Standard That Moves With the Tools

The article starts from the duty to prevent insolvent trading in section 588G of the Corporations Act 2001 (Cth), which requires a director to prevent a company incurring a debt when there are reasonable grounds to suspect it is, or will become, insolvent. Breach can expose a director to civil liability once the company is in liquidation and, where dishonesty is involved, to criminal liability. That sits alongside the general duty of care in section 180(1).

Both duties are objective: the test asks what a reasonable director in the company's circumstances should have known, not what the director believed. DSA Law says that standard moves with the tools reasonably available to directors at the time. A warning generated and ignored is the kind of detail a liquidator can later point to, while the absence of a tool does not automatically excuse a director either. The firm adds that monitoring solvency is a responsibility that cannot be delegated.

Regulators and the Courts

DSA Law notes that ASIC has said directors' obligations are principle-based rather than technology-specific, applying equally to outcomes produced by AI, and that monitoring AI use in sectors such as banking, credit, insurance and advice is a stated strategic priority. The firm also cites guidance that human judgment must remain central to any AI-informed decision.

It points to the Federal Court's liability judgment in ASIC v Bekier, in which the former CEO and General Counsel of The Star Entertainment Group were found to have breached their duty of care by failing to escalate risk information to the board. DSA Law reads the case as showing that the duty of care concerns not only whether the final call was reasonable but whether a board's systems could surface a genuine warning sign in time, and whether an AI tool's limitations were understood before its output was relied on.

Relying on a Tool's Output

Directors can generally rely on information from an employee or adviser they reasonably believe to be competent and reliable, but that reliance must involve independent assessment and good faith. DSA Law says the Act frames this around persons, not systems, so an AI tool cannot itself be treated as an expert, and competence sits with whoever is responsible for the system. It also warns that adopting an AI output without real interrogation raises doubt about whether any judgment was exercised, which can leave the business judgment rule in section 180(2) unavailable. Directors need not understand how a tool works technically, the firm says, but must be able to explain how its outputs were tested, challenged and acted upon.

Separately, from December 10, 2026, new obligations under Australian Privacy Principle 1 require privacy policies to disclose where a computer program is used to make, or substantially assist in making, a decision that could significantly affect an individual's rights or interests. The firm says those obligations are not limited to generative AI, and that boards should check now whether their privacy policy needs updating.

What DSA Law Recommends

The firm's practical guidance for directors includes:

• Treat a monitoring tool's warning as something to act on and document, not just glance at
• Keep a record of advice sought and action taken when a risk indicator is raised
• Where an AI tool filters or summarises board material, make sure someone can explain how it works and who is accountable for it
• Remember that the duty to monitor solvency cannot be delegated to a tool, and apply independent judgment
• If personal information feeds an AI-enabled decision, check the new APP 1 obligations

"A warning that's ignored is hard to defend later," the firm says. "A warning that's acted on and documented is one of your strongest protections." The full article, written by paralegal and legal trainee Cheryl Garreau, is available at dsalaw.com.au. This summary is general information only and is not legal advice.