# Statutory Duties and Liability Engaged

## (a) Controlling Act

**Corporations Act 2001 (Cth)** — the Commonwealth statute governing companies, directors' duties and insolvent trading.

## (b) Directors' Duties Provisions Engaged

**Section 180 — Duty of care and diligence.** A director must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise in the same circumstances. Continuing to trade and incur credit after clear warning signs of insolvency (and warnings from the bookkeeper) falls short of this standard. The business judgment rule defence (s 180(2)) is unlikely to be available where the director ignored insolvency indicators.

**Section 181 — Duty of good faith and proper purpose.** A director must act in good faith in the best interests of the company and for a proper purpose. Diverting the company's profitable contract to another entity is not acting in the company's interests. Once insolvency is imminent, directors must also have regard to creditors' interests.

**Section 182 — Improper use of position.** A director must not improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the company. Redirecting the customer contract to the director's own separate company squarely engages this provision.

**Section 183 — Improper use of information.** A director must not improperly use information obtained by virtue of their position to gain an advantage or cause detriment to the company. Using knowledge of the profitable customer relationship to divert it engages this duty.

*Key concept for ss 181–183:* these are fiduciary-style statutory duties; breach attracts civil penalties, and under **s 184** a breach becomes a **criminal offence** where the director acts dishonestly or recklessly — a real prospect here given the deliberate diversion of the contract.

## (c) Insolvent Trading Provision Engaged

**Section 588G — Duty to prevent insolvent trading.** A director contravenes this section if:

- they were a director when the company **incurred a debt** (ordering stock on credit);
- the company was **insolvent** at that time, or became insolvent by incurring the debt — insolvency being the inability to pay debts as and when they fall due (s 95A, the **cash-flow test**), which is satisfied on these facts;
- there were **reasonable grounds to suspect insolvency** — plainly established by the failure to pay debts as they fall due, no funding prospects, and the bookkeeper's express warning; and
- the director was aware of those grounds, or a reasonable director in the position would have been.

**Consequences:** civil penalty liability, personal liability to **compensate for loss suffered by creditors** (ss 588J–588M), and a **criminal offence under s 588G(3)** where the failure to prevent the debt was dishonest.

**Defences/safe harbour:** the s 588H defences (reasonable grounds to expect solvency, reliance on a competent person, illness, reasonable steps) are unlikely to succeed. The **s 588GA safe harbour** (developing a course of action reasonably likely to lead to a better outcome than immediate administration/liquidation) would not protect this director, who took no restructuring steps and instead stripped value from the company.

## Summary

| Issue | Provision | Key concept |
|---|---|---|
| Controlling Act | Corporations Act 2001 (Cth) | National corporate regulation |
| Careless continued trading | s 180 | Care and diligence of a reasonable director |
| Diverting the contract | ss 181, 182, 183 (s 184 if dishonest) | Good faith, proper purpose, no improper use of position/information |
| Trading on credit while insolvent | s 588G (defences s 588H; safe harbour s 588GA) | Duty to prevent incurring debts when insolvency is suspected; personal liability to creditors |