# Statutory Duties and Liability

## (a) Controlling Act

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

## (b) Directors' Duties Provisions Engaged

1. **Section 181 — Duty to exercise powers and discharge duties in good faith in the best interests of the company and for a proper purpose.** The diversion of a profitable customer contract to a separate company the director owns engages this duty: the director is preferring their own interest over the company's interest and is not acting for a proper purpose.

2. **Section 182 — Duty not to improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the company.** Routing the contract away from the insolvent company to a personal entity is a clear misuse of directorial position for personal gain and to the company's detriment.

3. **Section 183 — Duty not to improperly use information acquired through their position to gain an advantage or cause detriment.** The director is exploiting knowledge of the customer relationship and contract opportunity obtained qua director.

4. **Section 180 — Duty to exercise care and diligence (the business judgment rule in s 180(2) is unlikely to assist where insolvency warnings are ignored).** Continuing to order stock on credit while ignoring the bookkeeper's insolvency warning falls below the standard of a reasonable director.

## (c) Insolvent Trading Provision Engaged

**Section 588G — Director's duty to prevent insolvent trading by company.** The key concepts are:

- The company incurs a debt at a time when it is **insolvent** or becomes insolvent by incurring that debt (s 588G(1)(a)–(b)), assessed against the **cash-flow insolvency** test in **s 95A** (unable to pay debts as and when they fall due);
- There are **reasonable grounds to suspect insolvency** (s 588G(1)(c)) — the bookkeeper's warning supplies those grounds;
- The director is aware, or a reasonable person in their position ought to be aware, of that suspicion (s 588G(1)(d)); and
- The director fails to take **reasonable steps** to prevent the debt being incurred (s 588G(2)), such as obtaining advice, appointing an administrator, or ceasing to trade.

Civil penalty consequences follow under **s 1317E** (civil penalty provisions), and the director may also face **compensation orders** under **s 588J–588M** (where a debt is incurred and the company is insolvent at the time, the "solvent" defence under s 588S being unavailable on these facts).