# LAW-0003 - Statutory Duties and Liabilities Engaged

## Approach

This analysis identifies the Australian statutory duties and specific liability provisions
engaged by the facts: continued trading while insolvent, and diversion of a company
contract to a director-owned entity. All references are to Commonwealth law as at
FY2025-26 (the Corporations Act 2001 (Cth) as currently in force).

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## (a) Controlling Act

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

The Act is the primary Commonwealth statute governing the duties of company directors,
including the duty to prevent insolvent trading and the general fiduciary and statutory
duties owed to the company.

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## (b) Directors' Duties Provisions Engaged

### 1. Section 181 - Good faith and proper purpose

**Provision:** s 181(1) requires a director to exercise their powers and discharge their
duties in good faith in the best interests of the corporation, and for a proper purpose.

**Key concept:** The director must act for the benefit of the company as a whole, not for
their own benefit or the benefit of a related entity. Continuing to incur credit while
knowingly insolvent, and diverting a profitable contract to a personally owned company,
both breach this duty because they advance the director's personal interests (or shield
personal assets) at the expense of the company and its creditors.

**Breach here:** Diverting the customer contract to a separate director-owned company is
the clearest trigger - the director is using their position to confer a benefit on
themselves (through the related entity) rather than acting in the company's best
interests.

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### 2. Section 182 - Use of position - improper use

**Provision:** s 182(1) prohibits a director from improperly using their position to gain
an advantage for themselves or someone else, or to cause detriment to the corporation.

**Key concept:** The provision targets the misuse of the directorial office itself as the
mechanism for obtaining a personal gain. It operates alongside s 181 but focuses on the
use of the position rather than the quality of judgment.

**Breach here:** Routing the profitable customer contract to a company the director
personally owns is a textbook s 182 breach - the director's positional access (knowledge
of, and authority over, the contract) is the enabling mechanism for the personal gain.

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### 3. Section 183 - Use of information - improper use

**Provision:** s 183(1) prohibits a director from improperly using information obtained
as a director to gain an advantage for themselves or someone else, or to cause detriment
to the corporation.

**Key concept:** Information about the company's contracts, customers, and financial
position, obtained solely because of the director role, must not be weaponised for
personal gain. This provision can be engaged in parallel with s 182 when confidential
business information is used to divert an opportunity.

**Breach here:** The director's knowledge of the customer contract - who the customer is,
the terms, the profitability - is inside information obtained in the course of acting as
director. Diverting the contract using that knowledge engages s 183 alongside s 182.

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### 4. The corporate opportunity / conflict of interest dimension - Section 191

**Provision:** s 191 requires a director who has a material personal interest in a matter
that relates to the affairs of the company to disclose that interest to the other
directors.

**Key concept:** A director must not place themselves in a position where their personal
interest conflicts with the company's interests without disclosure. Establishing or
benefiting from a competing entity that takes a company contract is a classic conflict-
of-interest scenario.

**Note in this fact pattern:** There is only one director (sole director of a small
proprietary company). The s 191 disclosure mechanism is largely procedural (it requires
notice to co-directors), but the underlying substantive duty - to avoid undisclosed
conflicts - underpins the liability under ss 181-183. Small proprietary companies are
exempt from the s 191 member-approval pathway if the director is the only director and
the only member, but where there are other members the conflict remains actionable.

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### 5. Section 180 - Care and diligence

**Provision:** s 180(1) requires a director to exercise their powers and discharge their
duties with the degree of care and diligence that a reasonable person in their position
would exercise.

**Key concept:** The business judgment rule in s 180(2) can protect a director who
makes an informed, good-faith business decision, but it does not protect a director who
ignores clear warning signs of insolvency. Being warned by the bookkeeper that the
company appears insolvent, yet continuing to order stock on credit, is precisely the
failure of care and diligence that s 180 targets.

**Breach here:** Disregarding the bookkeeper's warning and continuing to trade on credit
establishes that the director fell below the standard of a reasonable person in their
position who had received that same warning. The business judgment rule in s 180(2) is
unavailable because the director did not make an informed, rational decision - they
ignored relevant information.

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## (c) Insolvent Trading Provision Engaged

### Section 588G - Director's duty to prevent insolvent trading

**Provision:** s 588G(1) imposes a duty on a director of a company to prevent the company
from incurring a debt if:

- the company is insolvent at the time of incurring the debt, or becomes insolvent by
  incurring the debt (s 588G(1)(a));
- at that time there are reasonable grounds for suspecting that the company is insolvent
  or would become so (s 588G(1)(b)); and
- the director is aware of such grounds, or a reasonable person in their position would
  be (s 588G(1)(c)).

**Key concept - the cash flow test of insolvency:** Insolvency is defined in s 95A of the
Act: a company is solvent if and only if it is able to pay all of its debts as and when
they become due and payable; otherwise it is insolvent. The standard used throughout
Part 5.7B (insolvent trading) is the inability to pay debts as and when they fall due -
not a balance-sheet / net-assets test. A company may have positive net assets but still
be insolvent if it cannot meet current obligations from available liquidity.

**Liability:** A director who contravenes s 588G is personally liable to compensate
creditors for the unpaid debts incurred while the company was insolvent (s 588M). ASIC
may pursue a civil penalty order (up to 5,000 penalty units: s 1317G) or, where the
contravention is dishonest, a criminal penalty (s 588G(3): up to 800 penalty units /
15 years imprisonment).

**Defences (s 588H):** The director may escape liability only if they can prove one of:

- at the time of the debt, they had reasonable grounds to expect and did expect that
  the company was solvent and would remain so (s 588H(2));
- they relied in good faith on competent and reliable information from a responsible
  person that the company was solvent (s 588H(3));
- because of illness or some other good reason, they did not take part in the management
  of the company at the time (s 588H(4)); or
- they took all reasonable steps to prevent the company from incurring the debt
  (s 588H(5)).

**Breach here:** The director cannot rely on any s 588H defence on these facts. They were
expressly warned by the bookkeeper, so they had actual grounds to suspect insolvency.
They nonetheless continued to incur debts (stock orders on credit) after the point at
which they knew or should have known the company was insolvent - a straightforward
s 588G contravention.

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## Summary Table

| Provision | Subject | Key concept |
|---|---|---|
| s 180(1) | Care and diligence | Reasonable care; ignoring bookkeeper's insolvency warning falls below the standard |
| s 181(1) | Good faith and proper purpose | Act in the company's best interests, not the director's own; contract diversion breaches this |
| s 182(1) | Improper use of position | Must not use the directorial role to gain a personal advantage; diverting the contract is a direct breach |
| s 183(1) | Improper use of information | Inside knowledge of the contract cannot be used to benefit a related entity |
| s 588G(1) | Insolvent trading | Director must not allow the company to incur debts when there are reasonable grounds to suspect insolvency; personal liability for resulting creditor losses under s 588M |

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## Controlling authority

All provisions are from the **Corporations Act 2001 (Cth)**. The cash flow test of
insolvency that underpins s 588G is confirmed in *Sandell v Porter* (1966) 115 CLR 666
(HCA) and applied consistently in Australian courts, including *Expile Pty Ltd v Jabb's
Roofing Pty Ltd* [2003] NSWCA 171. The director's duty to avoid conflicts of interest
and not divert corporate opportunities is articulated in *Cook v Deeks* [1916] 1 AC 554
(PC) and embedded in ss 181-183 of the Act.