# Response — LAW-0003

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

## Approach

I identified the controlling statute for Australian company directors, then mapped the two distinct categories of conduct in the facts — (1) general directors' duties breaches, including the duty triggered by trading while insolvent and the diversion of the contract, and (2) the specific civil/criminal liability for insolvent trading — to their numbered provisions in that Act. Below I name each and state the core concept.

## (a) The controlling Act

**The *Corporations Act 2001* (Cth).** This is the Commonwealth statute governing proprietary companies and the conduct of their directors. (The duties below sit alongside, but do not displace, equivalent general-law/fiduciary duties.)

## (b) Directors' duties provisions engaged

The general directors' duties are in **Part 2D.1** of the *Corporations Act 2001* (Cth). On these facts the engaged provisions are:

- **Section 180 — Care and diligence.** A director must exercise their powers and discharge their duties with the degree of care and diligence a reasonable person would in the company's circumstances. Continuing to incur debts and order stock on credit while the company is insolvent, after being warned by the bookkeeper, is the paradigm breach of this objective standard.

- **Section 181 — Good faith and proper purpose.** A director must act in good faith in the best interests of the company and for a proper purpose. Continuing to trade an insolvent company (when the interests of the company's creditors come to the fore) and the diversion of the contract breach this duty.

- **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. **Diverting a profitable customer contract to a separate company the director owns** is a direct breach — using the directorial position to take for personal benefit an opportunity that belonged to the company.

- **Section 183 — Improper use of information.** Closely related: a director must not improperly use information obtained through their position to gain an advantage or cause detriment. To the extent the customer relationship/contract was exploited using information gained as director, this provision is also engaged.

*Key concept:* these are statutory restatements of the directors' fiduciary and duty-of-care obligations. Sections 180–183 carry **civil penalty** consequences (Part 9.4B), and ss 184 the equivalent **criminal** offences where the conduct is reckless or dishonest (e.g. dishonest diversion of the contract). Diverting the contract also engages the no-conflict / corporate-opportunity rule.

## (c) The insolvent trading provision engaged

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

*Key concept:* a director breaches s 588G where, at the time the company incurs a debt, the company is insolvent (or becomes insolvent by incurring it) and there are reasonable grounds to suspect insolvency, and the director was (or a reasonable director would have been) aware of those grounds. On the facts — the company has stopped paying debts as they fall due (the **cash-flow test of insolvency** in s 95A), there is no realistic prospect of new funding, and the director was expressly warned by the bookkeeper — the director plainly fails to prevent the company incurring further debts to suppliers. Breach exposes the director to a **civil penalty** (s 588G(2)), a **compensation** order for the loss to creditors (recoverable by the liquidator under ss 588J/588M), and, where the failure was **dishonest**, a **criminal offence** under **s 588G(3)**. The **safe harbour** in s 588GA and the statutory defences in s 588H would need to be considered, but on these facts (no genuine restructuring course, ignored warnings) they are unlikely to assist.

## Summary

| Element | Provision | Core concept |
|---|---|---|
| Controlling Act | *Corporations Act 2001* (Cth) | Governs companies and directors |
| Duties engaged | ss 180, 181, 182, 183 (Pt 2D.1); criminal counterparts in s 184 | Care/diligence; good faith & proper purpose; no improper use of position; no improper use of information |
| Insolvent trading | s 588G (cash-flow insolvency per s 95A; safe harbour s 588GA; defences s 588H) | Duty to prevent the company incurring debts while insolvent |