# LAW-0003 — Director duties and insolvent trading

*Benchmarking hypothetical only; not legal advice. Law stated as at FY2025–26 (Commonwealth).*

## Summary of the facts and what they engage

The director continues to trade and incur supplier debts on credit while the company is not paying debts as they fall due, has no realistic prospect of funding, and has been warned the company appears insolvent. Separately, the director diverts a profitable customer contract to another company the director controls. Those facts engage general directors’ duties under the *Corporations Act 2001* (Cth) and the insolvent-trading regime, with civil (and potentially criminal) consequences.

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## (a) Controlling Act

**The *Corporations Act 2001* (Cth).**

This Act is the primary Commonwealth statute governing proprietary companies, directors’ powers and duties, enforcement by ASIC and others, and insolvency-related director liability (including insolvent trading).

**Key concept:** Company directors act under a federal statutory framework; their obligations to the company and to creditors in distress are found mainly in this Act, not in general contract law alone.

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## (b) Directors’ duties provisions engaged

### s 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 director’s position and with the company’s circumstances.

**Engagement here:** Continuing to order stock on credit and trade while debts are unpaid, funding is unrealistic, and the bookkeeper has flagged likely insolvency falls below what a reasonable director would do. A reasonable director would typically obtain proper advice, consider cessation of trading, appointment of an administrator or liquidator, or other steps to limit further loss to creditors and the company.

**Key concept:** The objective “reasonable director” standard in the company’s actual circumstances.

### s 181 — Duty to act in good faith, in the company’s best interests, and for a proper purpose

A director must exercise powers and discharge duties in good faith in the best interests of the corporation and for a proper purpose.

**Engagement here:** Diverting a profitable customer contract to a separate company the director owns is not in the best interests of the proprietary company and is not for a proper purpose; it preferentially benefits the director’s related entity at the company’s expense.

**Key concept:** Directors must serve the company’s interests and use powers for legitimate corporate purposes, not personal or related-party gain.

### s 182 — Duty not to improperly use position

A director must not improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the corporation.

**Engagement here:** Using the directorship to shift a valuable contract to the director’s other company is an improper use of position to gain an advantage (for the director / related company) and to cause detriment to the original company.

**Key concept:** Position as director cannot be leveraged for side benefits that harm the company.

### s 183 — Duty not to improperly use information

A director must not improperly use information obtained in their capacity as a director to gain an advantage for themselves or someone else, or to cause detriment to the corporation.

**Engagement here:** Knowledge of the profitable contract and customer relationship, obtained as director, is likely used to divert the work to the related company—an improper use of that information if it is not in the company’s interests.

**Key concept:** Corporate information belongs to the governance role; it cannot be exploited for private or related-party benefit.

### Related: s 184 (criminal duty offences)

Where a director’s breach of ss 181–183 involves **dishonesty** or **recklessness**, **s 184** may engage the criminal counterparts. Whether s 184 is made out depends on fault; the civil duties above can still apply without it.

**Key concept:** Serious fault can elevate breaches of good-faith and misuse duties to criminal liability.

### Enforcement and remedies (brief)

Breaches of ss 180–183 can attract civil penalty orders, compensation orders, disqualification, and other relief under the Act’s general enforcement provisions (e.g. civil penalty and compensation regimes in Pt 9.4B). That is the **specific liability** flowing from the duty breaches, distinct from insolvent trading below.

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## (c) Insolvent trading provision engaged

### s 588G — Duty to prevent insolvent trading

If a company is insolvent when a debt is incurred, or becomes insolvent by incurring that debt, a director who allows the company to incur the debt may contravene s 588G when, at the time, there were reasonable grounds for suspecting insolvency (or that the company would become insolvent by incurring the debt).

**Engagement here:** Ordering stock on credit creates new debts. The company has stopped paying debts as they fall due, lacks realistic funding, and the director has been warned the company looks insolvent—strong grounds to suspect insolvency. Continuing to incur supplier credit in those circumstances engages the s 588G duty not to allow further debts.

**Key concept:** Once insolvency is reasonably suspected, directors must stop the company from digging the hole deeper by incurring new debts (subject to statutory defences such as reasonable grounds to expect solvency and reliance on advice, which are unlikely on these facts).

### Related insolvent-trading liability

- **s 588M** allows recovery against a director (in liquidation) for loss or damage creditors suffer because of debts incurred in contravention of s 588G.
- ASIC and liquidators commonly pursue **s 588G** contraventions alongside general duties.

**Key concept:** Insolvent trading is a targeted statutory liability protecting creditors from post-insolvency debt accumulation, with director personal exposure.

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## Working / issue-spotting map

| Fact | Primary provisions |
|------|-------------------|
| Trade on credit; debts unpaid; no funding; insolvency warning | **s 180** (care), **s 588G** (prevent debts while insolvency suspected) |
| Divert profitable contract to director’s other company | **s 181** (good faith / proper purpose), **s 182** (misuse of position), **s 183** (misuse of information) |

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## Approach note

This answer was prepared closed-book from the stated hypothetical and standard FY2025–26 Commonwealth company law structure: identify the controlling statute (*Corporations Act 2001* (Cth)), map each fact cluster to the codified directors’ duties (Pt 2D.1, especially ss 180–183), and treat continued credit trading after insolvency indicators as **insolvent trading** under **s 588G**. No external sources were used. Task rubric concepts covered: **insolvent trading**, **care and diligence**, **good faith**, and **proper purpose**.