## (a) Controlling Act

**Corporations Act 2001 (Cth)** - the statute governing directors' duties and insolvent trading for Australian companies.

## (b) Directors' duties provisions engaged

- **s 180(1) - duty of care and diligence.** A director must exercise the care and diligence a reasonable person would in the same position. Continuing to trade and take on credit while ignoring a clear bookkeeper warning of insolvency, with no realistic funding prospect, falls short of that objective standard.
- **s 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 a profitable customer contract to the director's own separate company is an exercise of power for the director's benefit, not the company's - a breach of this duty (and of the parallel general-law fiduciary duty against conflicts and taking corporate opportunities).
- **s 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. Using the directorship to redirect the company's contract to the director's own entity is the paradigm case.
- **s 183 - improper use of information.** A director must not improperly use information obtained as director to gain an advantage or cause detriment to the company. It is engaged here to the extent the director used company information (the customer relationship/contract details) to divert the opportunity.

Sections 180-183 are civil penalty provisions (s 1317E - declarations, pecuniary penalties, compensation, disqualification), and dishonest breaches of ss 181-183 are criminal offences under s 184. Because the diversion strips value from a company that is insolvent or near it, creditor-defeating disposition provisions (ss 588FDB/588FE(6B), the "anti-phoenixing" rules) may also be enlivened.

## (c) Insolvent trading provision engaged

- **s 588G - director's duty to prevent insolvent trading.** A director contravenes s 588G if the company incurs a debt while insolvent (or becomes insolvent by incurring it) and, at that time, there were reasonable grounds to suspect insolvency and the director was aware of those grounds or a reasonable person in that position would have been. Here the company is not paying debts as they fall due (the cash-flow test of insolvency in s 95A), there is no prospect of new funding, and the director has been expressly warned by the bookkeeper - so each new stock order on credit is a debt incurred in contravention of s 588G.

**Consequences:** civil penalty liability (s 588G(2), via s 1317E) and personal liability to compensate for the loss to creditors (ss 588J/588K/588M, recoverable by a liquidator or creditors); if the failure to prevent the debt was dishonest, a criminal offence under s 588G(3). The **s 588GA safe harbour** (developing a course of action reasonably likely to lead to a better outcome than immediate administration/winding up) would not be available on these facts - the director is doing the opposite of a restructuring plan, and diverting the company's best contract to a related entity is inconsistent with any better-outcome course of action.