# LAW-0003: Director Duties and Insolvent Trading Analysis

## Answer

### (a) Controlling Act

**Corporations Act 2001 (Cth)** - the primary Commonwealth legislation governing company law, directors' duties, and insolvency.

### (b) Directors' Duties Provisions Engaged

**Section 180 (Care and diligence duty)** and **Section 181 (Honest performance of duties)**

Additionally, the facts engage:

**Section 195A (Duty to prevent insolvent trading)** - though this is technically framed as an insolvent trading provision, it encapsulates the director's affirmative duty to ensure the company does not incur debts while insolvent.

**Key concept:** Directors owe fiduciary duties to act honestly and with care, skill and diligence. Once a director is aware or ought to be aware that a company is insolvent, the director must not permit the company to incur further debt. The director's knowledge of the bookkeeper's warning about insolvency is critical to establishing breach of these foundational duties.

### (c) Insolvent Trading Provision Engaged

**Section 588G(1) of the Corporations Act 2001 (Cth)** - the insolvent trading prohibition.

**Key concept:** Section 588G makes it unlawful for a director of an insolvent company to cause the company to incur a debt (via ordering stock and trading on credit) unless the director believed on reasonable grounds at the time of the debt's incurrence that the company was solvent and would remain solvent. The facts state the director knew the company had stopped paying debts, had no realistic funding prospects, and was warned by the bookkeeper of insolvency. This eliminates any reasonable belief in solvency, creating direct exposure under s.588G.

The diversion of the profitable customer contract may additionally engage **Section 182 (use of position)** - a prohibition on using one's position as director to gain an improper personal advantage, or to cause detriment to the company. This is particularly acute when the contract is diverted to a competing entity the director owns.

## Summary of Liability

The director faces potential civil penalties and personal liability for:
- Breach of general fiduciary duties (s.180, s.181)
- Breaching the insolvent trading prohibition (s.588G)
- Potential misuse of directorial position (s.182) via the customer contract diversion

The knowledge of insolvency (warned by the bookkeeper, evident from ceased payments and no funding prospects) is the critical factual trigger converting these from abstract duties into concrete breaches.