This is a self-contained legal hypothetical. I have everything I need from the prompt. Producing the answer now.

# LAW-0003: Statutory Duties and Liability Engaged by the Facts

*This is a benchmarking hypothetical, not legal advice. Law stated as at FY2025-26 (Commonwealth of Australia).*

## (a) The controlling Act

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

This is the principal Commonwealth statute governing companies, directors' duties, and insolvency in Australia. A "small proprietary company" is itself a creature of that Act (the proprietary company form and the "small/large" classification sit in ss 45A and 112-113). The director's conduct here engages the duty provisions in Part 2D.1 and the insolvent-trading provisions in Part 5.7B, all of which live in this Act. Enforcement is by the Australian Securities and Investments Commission (ASIC) under the Act, with civil penalty consequences, and the company's liquidator may also sue.

## (b) Directors' duties provisions engaged

Two distinct courses of conduct are in the facts: (1) continuing to trade and order stock while insolvent, and (2) diverting the profitable customer contract to the director's own separate company. Both engage the statutory directors' duties in **Part 2D.1** of the Corporations Act:

**Section 180 - 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 same position. A reasonable director who has been warned by the bookkeeper that the company "looks insolvent", and who can see it is not paying debts as they fall due with no realistic funding prospect, fails this standard by ploughing on, ordering more stock on credit, and exposing the company (and its creditors) to mounting unpayable liabilities. (Section 180(2) contains the business-judgment rule, but it protects only informed, good-faith, rationally-believed decisions free of material personal interest - it does not shelter trading on regardless of an insolvency warning, and certainly not the self-interested contract diversion.)

**Section 181 - Good faith and proper purpose.** A director must exercise their powers and discharge their duties in good faith in the best interests of the *company* and for a proper purpose. Diverting a profitable customer contract away from the company to a separate company the director owns is the paradigm breach: the power is exercised for the director's own benefit, not the company's, and for an improper purpose. (Where a company is insolvent or nearing insolvency, the "interests of the company" in s 181 extend to taking the interests of *creditors* into account - so trading on and stripping out value while insolvent compounds the breach.)

**Section 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 profitable contract to a company the director personally owns is improper use of position for personal advantage and to the company's detriment.

*(Closely related and often pleaded alongside these on the same diversion facts is s 183 - improper use of information acquired through the position - if the director exploited information about the customer/contract to capture it. The contract diversion may also be a related-party / uncommercial transaction caught elsewhere, and breaches the general-law fiduciary no-conflict and no-profit rules that ss 181-183 codify.)*

**Key concept behind these duties.** Sections 180-183 are the core statutory fiduciary-and-competence duties owed by a director *to the company*. Section 180 is the objective competence standard (care, skill and diligence). Sections 181-183 are loyalty/honesty duties: act bona fide for the company's benefit and for proper purposes, do not exploit your office, position, or insider information for private gain or to the company's harm. Sections 180-183 are **civil penalty provisions** (s 1317E): a breach can attract a pecuniary penalty, a disqualification order (s 206C), and compensation to the company for resulting loss (s 1317H). Dishonest or reckless breaches of s 181 can also be **criminal** under s 184.

## (c) Insolvent trading provision engaged

**Section 588G of the Corporations Act 2001 (Cth) - the director's duty to prevent insolvent trading.**

This is the specific liability squarely engaged by the director continuing to order stock on credit after the company had stopped paying debts as they fell due with no realistic prospect of funding.

The elements of s 588G are:

1. the person is a **director** of the company **at the time the company incurs a debt** (s 588G(1)(a)) - here, each new credit order for stock is a debt incurred;
2. the company is **insolvent** at that time, or becomes insolvent by incurring that debt (or debts including it) (s 588G(1)(b)) - "insolvent" under s 95A means unable to pay all debts as and when they become due and payable (the cash-flow test), which the facts (stopped paying debts as they fall due) directly satisfy;
3. at that time there are **reasonable grounds to suspect** the company is or would become insolvent (s 588G(1)(c)); and
4. the director **fails to prevent** the company incurring the debt, and either was actually aware of grounds for suspecting insolvency, or **a reasonable person in a like position would have been so aware** (s 588G(2)).

On these facts every element is met: the director keeps incurring debts (stock on credit) while the company is cash-flow insolvent, and there are plainly reasonable grounds to suspect insolvency - indeed the director was *actually warned by the bookkeeper* that the company looked insolvent, so both the objective "reasonable grounds to suspect" limb and the director's actual awareness are satisfied.

**Key concept.** Section 588G imposes a positive, personal duty on a director to **prevent the company from incurring debts when it is insolvent or insolvency is reasonably to be suspected**. It exists to protect creditors from a director who keeps the company trading on credit it cannot repay. Contravention of the core duty is a **civil penalty provision** (s 588G(2), via s 1317E), exposing the director to a pecuniary penalty, disqualification, and - importantly - personal **compensation liability for the loss suffered by creditors** (recoverable by the liquidator under ss 588M-588W, or by ASIC/a creditor in the prescribed circumstances). Where the failure to prevent the debt is **dishonest**, s 588G(3) makes it a **criminal offence**.

The standard defences are in **s 588H** (e.g. reasonable grounds to expect solvency, reasonable reliance on a competent person, illness, or that the director took all reasonable steps to prevent the debt). None is realistically available here: the bookkeeper's insolvency warning destroys any "reasonable grounds to expect solvency" and any reliance defence, and continuing to order stock is the opposite of taking reasonable steps to prevent the debts. (The **safe-harbour** carve-out in **s 588GA** also cannot apply, because it is available only while the director is *developing a course of action reasonably likely to lead to a better outcome* than liquidation - not while simply trading on and diverting away the one profitable contract.)

## Summary

| Requirement | Answer |
|---|---|
| **(a) Controlling Act** | Corporations Act 2001 (Cth) |
| **(b) Directors' duties provisions** | ss 180 (care and diligence), 181 (good faith / proper purpose, incl. creditors' interests near insolvency), 182 (improper use of position); s 183 (improper use of information) closely related to the contract diversion - all in Part 2D.1, civil penalty provisions, with criminal liability for dishonest/reckless breach under s 184 |
| **(c) Insolvent trading provision** | s 588G - director's duty to prevent insolvent trading (Part 5.7B), with s 95A insolvency (cash-flow) test, defences in s 588H, safe harbour in s 588GA, and liquidator recovery under ss 588M-588W |

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### Note on approach

The facts contain two separable wrongs, so I mapped each to the Commonwealth statute that governs it. (a) Australian company law is federal and codified, so the controlling Act is the **Corporations Act 2001 (Cth)** - I confirmed the "small proprietary company" descriptor is itself defined there (ss 45A, 112-113). (b) "Statutory duties... engaged by these facts" points to the general directors' duties in **Part 2D.1**: trading on against an insolvency warning engages the s 180 objective care-and-diligence standard, and diverting the profitable contract to the director's own company engages the loyalty duties - s 181 (good faith / proper purpose), s 182 (improper use of position), and relatedly s 183 (improper use of information). I noted that near insolvency the s 181 "interests of the company" reach creditors, and that these are civil penalty provisions with a criminal overlay (s 184). (c) The "incurring debts while insolvent" fact maps to the dedicated insolvent-trading liability, **s 588G**, so I set out its four elements, tied each to a stated fact (the bookkeeper warning satisfies both the objective "reasonable grounds to suspect" limb and actual awareness; the cash-flow test in s 95A is met by "stopped paying debts as they fall due"), and flagged the s 588H defences, the s 588GA safe harbour, and the liquidator's s 588M recovery route - then explained why the defences and safe harbour do not assist on these facts.