This is a self-contained legal hypothetical. I'll write the answer directly.

# LAW-0003: Statutory directors' duties and insolvent trading liability

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

## Approach

I read the facts as engaging two distinct strands of Australian company-law liability for a sole director of a proprietary company: (1) the general statutory directors' duties (good faith / proper purpose, care and diligence, and the no-improper-use duties), triggered here principally by the diversion of the profitable customer contract to the director's own separate company; and (2) the specific insolvent trading prohibition, triggered by continuing to incur debts (ordering stock on credit) while the company is insolvent and the director has grounds to suspect insolvency. I identify the controlling Act, then name and explain each provision. The named warning from the bookkeeper and the company's inability to pay debts as they fall due are the facts that satisfy the "reasonable grounds to suspect insolvency" element.

## (a) The controlling Act

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

This is the single Commonwealth statute that codifies directors' duties and the insolvent trading prohibition for companies. (The general law / equitable fiduciary duties run in parallel and are preserved by s 185, but the question asks for the statutory duties, which all sit in this Act.)

## (b) The directors' duties provisions engaged

The general statutory duties of a director sit in Part 2D.1 of the Corporations Act. On these facts the engaged provisions are:

1. **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 director is not acting in the company's best interests and is using their position for an improper (self-interested) purpose. Continuing to trade and rack up supplier debt with no realistic prospect of funding can also offend this duty, where it is not in the company's (or its creditors') interests. (Where the company is insolvent or near-insolvent, the "best interests of the company" extends to the interests of creditors.)

2. **Section 182 - Improper use of position.**
   A director (or officer/employee) must **not improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the company.** Channelling the customer contract into the director's own company is an improper use of the directorial position to gain a personal advantage and to the company's detriment.

3. **Section 183 - Improper use of information.**
   A person who obtains information because they are (or were) a director or officer must **not improperly use that information to gain an advantage for themselves or another, or to cause detriment to the company.** Knowledge of, and the relationship with, the profitable customer is information obtained through the directorship; using it to win the contract for the director's own company is an improper use of that information.

4. **Section 180 - Care and diligence.**
   A director must exercise their powers and duties **with the degree of care and diligence that a reasonable person would exercise** in the same position. Continuing to order stock on credit, after being warned by the bookkeeper that the company looks insolvent and with no realistic prospect of new funding, is conduct a reasonable director would not engage in - so a failure to meet the objective care-and-diligence standard is also engaged.

**Key concept (b):** ss 180-183 are the codified core fiduciary and care duties. They require a director to act competently, loyally, in the company's (and, in the insolvency zone, its creditors') interests, and not to exploit their office, position, or inside information for private gain. They are **civil penalty provisions** (s 1317E), and breach can also attract compensation orders and, where dishonesty/recklessness is involved (notably s 184, the criminal counterpart of ss 181-183), criminal liability.

## (c) The insolvent trading provision engaged

**Section 588G - Director's duty to prevent insolvent trading by the company.**

A director breaches s 588G where:

- a **person was a director** at the time the company **incurred a debt** (here, ordering stock on credit from suppliers);
- the company was **insolvent** at that time, or **became insolvent by incurring that debt** (s 95A: insolvent = unable to pay all its debts as and when they become due and payable - met here, as the company has stopped paying debts as they fall due);
- at that time there were **reasonable grounds to suspect** the company was (or would become) insolvent; and
- the director was **aware of such grounds**, or **a reasonable person in a like position would have been so aware** (clearly satisfied: the bookkeeper warned the director the company looks insolvent, and there is no realistic prospect of new funding).

**Key concept (c):** s 588G imposes a positive duty on a director to **prevent the company from incurring debts while it is insolvent or where insolvency would result**. It targets exactly this conduct - trading on and incurring new credit debts when the director knew or ought to have known the company could not pay. Consequences include a **civil penalty** (s 588G(2) via s 1317E), **compensation** to creditors for the loss (ss 588J, 588M, and ASIC/liquidator-led recovery), and, where the failure to prevent the debt was **dishonest**, a **criminal offence** under **s 588G(3)**. Statutory defences are in **s 588H** (e.g. reasonable grounds to expect solvency, reasonable reliance on a competent person for information, illness/non-participation, or taking all reasonable steps to prevent the debt) - the bookkeeper's express warning makes those defences hard to establish here. The **safe harbour** in **s 588GA** (developing a course of action reasonably likely to lead to a better outcome) is also unavailable on these facts, since the company has no realistic prospect of new funding and the director simply kept trading.

## Summary

| Element | Provision | Core concept |
|---|---|---|
| Controlling Act | *Corporations Act 2001* (Cth) | Codifies directors' duties and insolvent trading |
| Good faith / proper purpose | **s 181** | Act in good faith, in the company's best interests, for a proper purpose |
| Improper use of position | **s 182** | No improper use of office for personal advantage / company detriment |
| Improper use of information | **s 183** | No improper use of directorial information for advantage / detriment |
| Care and diligence | **s 180** | Objective reasonable-director standard of care |
| (Criminal counterpart of 181-183) | **s 184** | Dishonest/reckless breach = criminal liability |
| Insolvent trading | **s 588G** | Duty to prevent the company incurring debts while insolvent; defences in s 588H, safe harbour in s 588GA |

On these facts, the **contract diversion** principally engages **ss 180-183** (with **s 184** if dishonesty is established), and the **continued trading on supplier credit while insolvent** engages **s 588G**, all under the **Corporations Act 2001 (Cth)**.