## (a) Controlling Act

The **Corporations Act 2001 (Cth)**, principally Chapter 2D and Part 5.7B. Under **s 95A**, a company is insolvent when it cannot pay all its debts as and when they become due and payable.

## (b) Directors’ duties engaged

- **Section 180(1) — care and diligence:** A director must act with the care and diligence of a reasonable director in the company’s circumstances. Continuing to incur credit after payments have stopped and ignoring the bookkeeper’s warning may breach this objective standard.

- **Section 181(1) — good faith, best interests and proper purpose:** Powers must be exercised in good faith in the company’s best interests and for a proper purpose. Diverting the company’s profitable opportunity to the director’s own entity is self-interested and contrary to the company’s interests. When insolvency threatens, creditors’ interests become important in determining the company’s interests.

- **Section 182(1) — improper use of position:** A director must not improperly use their position to obtain an advantage for themselves or someone else, or cause detriment to the company. Diverting the contract to the director-owned company directly engages this provision.

- **Section 183(1) — improper use of information:** Information obtained because of the directorship must not be improperly used to obtain an advantage or cause company detriment. This is engaged if customer or contract information acquired through the office was used to divert the opportunity.

These are civil-penalty duties. The corresponding criminal provisions in **s 184** may also apply if the required recklessness or intentional dishonesty is proved; dishonesty is not established merely by showing a civil breach.

## (c) Insolvent trading

**Section 588G — director’s duty to prevent insolvent trading** is engaged. It applies where:

1. the person was a director when the company incurred a debt;
2. the company was then insolvent, or became insolvent by incurring that debt;
3. reasonable grounds existed for suspecting insolvency; and
4. the director was aware of those grounds, or a reasonable person in the same position would have been aware of them.

Each order of stock on credit may constitute a new debt. The cessation of payments, absence of realistic funding and express bookkeeper warning strongly support both reasonable grounds for suspicion and the director’s awareness. Failure to prevent those debts is therefore likely a civil contravention under **s 588G(2)**.

The director may face civil penalties, disqualification and personal compensation exposure for resulting unsecured creditor losses, including recovery by a liquidator under **s 588M**. A dishonest failure to prevent the debts may constitute the criminal offence in **s 588G(3)**.