# response.md

**(a) Controlling Act**

*Corporations Act 2001* (Cth).

**(b) Directors' duties provisions engaged**

1. **Section 181 – Good faith and proper purpose**
   Requires a director to exercise powers and discharge duties in good faith in the best interests of the company and for a proper purpose. Diverting a profitable customer contract to a company the director personally owns is a clear breach – it advances the director's own interests at the company's expense, rather than acting in good faith for the company.

2. **Section 182 – Use of position**
   Prohibits a director from improperly using their position to gain an advantage for themselves or someone else, or to cause detriment to the company. Redirecting the contract uses the director's position (and the corporate opportunity that came with it) for personal gain.

3. **Section 183 – Use of information**
   Prohibits improper use of information obtained as a director (e.g., knowledge of the contract, client relationship, pricing) to gain advantage for themselves/another or cause detriment to the company. This overlaps with the diversion of the contract.

4. **Section 180(1) – Care and diligence (business judgment aside)**
   Continuing to trade and incur new credit liabilities despite bookkeeper warnings and known insolvency falls below the standard of care and diligence a reasonable director would exercise, and is not protected by the business judgment rule in s 180(2) because there is no rational basis for believing the decision is in the company's best interests once insolvency is apparent.

**(c) Insolvent trading provision engaged**

**Section 588G – Director's duty to prevent insolvent trading**

Key concept: A director contravenes s 588G where:
- the company is insolvent (or becomes insolvent) at the time a debt is incurred (s 588G(1)(a)–(b)) – here, the company has stopped paying debts as they fall due (the cash flow test under s 95A) and has no realistic refinancing prospects;
- there are reasonable grounds for suspecting insolvency, and the director is or ought to be aware of those grounds (s 588G(1)(c)) – the bookkeeper's express warning satisfies this; and
- the director fails to prevent the company incurring that debt (s 588G(2)).

Continuing to order stock on credit in these circumstances is the paradigm contravention. This exposes the director to:
- **Civil liability** under s 588G(2) for compensation to the company/creditors (recoverable by the liquidator under s 588M), and
- **Civil penalty contravention** under s 1317E, potentially leading to a pecuniary penalty order (s 1317G) and disqualification (s 206C); and
- **Criminal liability** under s 588G(3) if the failure to prevent the debt was dishonest.

**Summary of liability matrix**

| Conduct | Provision | Core wrong |
|---|---|---|
| Trading on credit while insolvent | s 588G | Incurring debts without reasonable grounds to expect payment |
| Diverting contract to own company | ss 181, 182, 183 | Breach of good faith/proper purpose, misuse of position/information for personal gain |
| Continuing to operate despite warnings | s 180(1) | Failure to exercise reasonable care and diligence |

The director is thus exposed to both **insolvent trading liability (s 588G)** for the credit debts incurred while insolvent, and **breach of statutory directors' duties (ss 180–183)** for the self-dealing diversion of the corporate opportunity — with potential overlapping civil penalty, compensation, and (if dishonesty is shown) criminal consequences under Pt 9.4B and s 588G(3) respectively.