BTF5955 · Business and Company Law
Directors' Duties — Part 2
Topic 11 completes directors' duties with the conflict and insolvency provisions that generate the richest IRAC problems in the final. Part 2 covers no improper use of position (s 182) or information (s 183), the criminal offences (s 184), the fiduciary no-conflict/no-profit rules and disclosure of a material personal interest (s 191), related-party transactions (Chapter 2E, ss 208–210), the duty to prevent insolvent trading (s 588G) with solvency judged on the s 95A cash-flow test, and the consequences of breach. Expect a company-law IRAC question in the open-book exam that layers a conflict of interest onto a near-insolvency.
What this chapter covers
- 01No improper use of position — s 182: a director/officer must not improperly use their position to gain an advantage for self or another, or to cause detriment to the company
- 02No improper use of information — s 183: must not improperly use information obtained through the position; s 184 makes dishonest/reckless breach of ss 181–183 a criminal offence
- 03Fiduciary no-conflict and no-profit rules (general law) — Regal (Hastings) Ltd v Gulliver; Aberdeen Railway v Blaikie: no personal interest in conflict with duty and no profit from the position without fully informed consent
- 04Disclosure of a material personal interest — s 191 (with the s 195 restriction on a public-company director voting on such matters)
- 05Related-party transactions — Chapter 2E, ss 208–210: a public company needs member approval to give a financial benefit to a related party unless an exception applies (e.g. arm's-length terms, s 210)
- 06Duty to prevent insolvent trading — s 588G; solvency is the s 95A cash-flow test; defences in s 588H and the safe harbour in s 588GA
- 07Consequences: civil penalty declaration (s 1317E), pecuniary penalty (s 1317G), compensation (s 1317H), disqualification (ss 206C–206E), and account of profits — ASIC v Adler
IRAC on directors' duties (Part 2): diverting a contract and trading on while insolvent
- +1Issue. Has Nadia breached s 182 (improper use of position) and s 183 (improper use of information), the general-law no-conflict rule and the s 191 disclosure duty, and s 588G (insolvent trading) — and what consequences follow?
- +2Rule — misuse and conflict. Section 182 prohibits improperly using position, and s 183 improperly using information gained through the position, to gain an advantage or cause the company detriment; dishonest or reckless breach can be criminal under s 184. The general-law no-conflict/no-profit rules (Regal (Hastings) Ltd v Gulliver) bar a director from profiting from the position or letting interest conflict with duty without fully informed consent, and s 191 requires disclosure of a material personal interest.
- +2Rule — insolvent trading. Section 588G imposes a duty to prevent the company incurring a debt while it is insolvent, or where the debt would cause insolvency, if there are reasonable grounds to suspect insolvency. Solvency is the cash-flow test in s 95A (able to pay all debts as and when they fall due). Defences appear in s 588H and the safe harbour in s 588GA.
- +2Application — misuse, information and conflict. Nadia used confidential client information (s 183) and her position (s 182) to divert a contract to a company she part-owns, gaining an advantage and causing Harbour detriment. That is a classic undisclosed conflict caught by Regal (Hastings) and s 191, and her secrecy and dishonesty could engage the s 184 criminal offence.
- +1Application — insolvent trading; Conclusion. Letting Harbour incur new supplier debt when there were reasonable grounds to suspect it could not pay existing debts (s 95A cash-flow test) breaches s 588G, absent a s 588H defence or the s 588GA safe harbour. Conclusion: Nadia has likely breached ss 182, 183, 191 and 588G (possibly s 184); consequences may include a civil penalty declaration (s 1317E), a pecuniary penalty (s 1317G), compensation (s 1317H) and disqualification (ss 206C–206E) — as in ASIC v Adler.
Key terms
- Improper use of position (s 182)
- A director, officer or employee must not improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the company. It targets self-dealing and diversion of corporate opportunities; dishonest or reckless breach can be criminal under s 184.
- Improper use of information (s 183)
- A person who obtains information because they are (or were) a director, officer or employee must not improperly use that information to gain an advantage or cause the company detriment. Confidential client, pricing or strategic information is the typical subject matter.
- No-conflict / no-profit rule (Regal (Hastings) v Gulliver)
- The general-law fiduciary rules: a director must not place personal interest in conflict with duty to the company, nor profit from the position, without the company's fully informed consent (Regal (Hastings) Ltd v Gulliver; Aberdeen Railway v Blaikie). Liability can arise even where the company suffered no loss and the director acted honestly.
- Disclosure of material personal interest (s 191)
- A director with a material personal interest in a matter being considered at a directors' meeting must give the other directors notice of that interest, subject to exceptions. For a public-company director, s 195 further restricts voting on such a matter. Non-disclosure is a common thread in conflict breaches, and Chapter 2E (ss 208–210) requires member approval for financial benefits to related parties.
- Duty to prevent insolvent trading (s 588G)
- A director must prevent the company incurring a debt while it is insolvent, or where incurring the debt would cause insolvency, if there are reasonable grounds to suspect insolvency. Solvency is the cash-flow test in s 95A (able to pay all debts as and when due); defences are in s 588H and the safe harbour in s 588GA.
- Consequences of breach (ASIC v Adler)
- Breach of a civil-penalty duty can lead to a court declaration of contravention (s 1317E), a pecuniary penalty (s 1317G), a compensation order (s 1317H) and disqualification from managing corporations (ss 206C–206E), plus account of profits or equitable compensation at general law. ASIC v Adler (2002) is the key application case (breaches of ss 180–183 and s 208).
Directors' Duties — Part 2 FAQ
What does Directors' Duties Part 2 add to Part 1?
Part 1 (Topic 10) deals with care and good faith — s 180 (care and diligence, plus the s 180(2) business-judgment rule) and s 181 (good faith and proper purpose). Part 2 (Topic 11) adds the conflict and insolvency duties: no improper use of position (s 182) or information (s 183), the criminal offences (s 184), the general-law no-conflict/no-profit rules and disclosure of a material personal interest (s 191), related-party transactions (Chapter 2E), and the duty to prevent insolvent trading (s 588G). It also covers the consequences of breach — civil penalties, compensation and disqualification (ASIC v Adler).
What is the difference between s 182 and s 183?
Both are 'no improper use' duties owed by directors, officers and employees, but they target different things. Section 182 prohibits improperly using your position to gain an advantage for yourself or another, or to cause the company detriment — for example, diverting a corporate opportunity to a business you own. Section 183 prohibits improperly using information you obtained because of the position, such as confidential client lists or pricing. They frequently overlap on the same facts, and a dishonest or reckless breach of either can be a criminal offence under s 184.
What is insolvent trading and how is solvency tested?
Insolvent trading is a director allowing the company to incur a debt while it is insolvent, or where incurring the debt would cause insolvency, when there were reasonable grounds to suspect insolvency (s 588G). Solvency is judged by the cash-flow test in s 95A: a company is solvent if it can pay all its debts as and when they become due and payable. Directors have defences under s 588H (for example, reasonable grounds to expect solvency, or reasonable reliance on a competent person) and the s 588GA safe harbour for developing a course of action reasonably likely to lead to a better outcome.
What are the consequences of breaching a directors' duty?
The care, good-faith and misuse duties (ss 180–183) and s 588G are civil-penalty provisions. A court can make a declaration of contravention (s 1317E), impose a pecuniary penalty (s 1317G), order compensation to the company (s 1317H), and disqualify the person from managing corporations (ss 206C–206E); at general law the company may also seek an account of profits or equitable compensation. Serious dishonest or reckless breaches can be criminal under s 184. ASIC v Adler is the leading example of these consequences applied together.
Can Sia help me with directors'-duties problems in BTF5955?
Yes, as a study aid. Sia can walk you through the Part 2 duties section by section on fresh facts, explain the difference between s 182 and s 183, work an insolvent-trading analysis using s 588G and s 95A, and check whether your IRAC answer ran every relevant duty and named the consequences. It explains the method and checks your reasoning; it does not do your graded assessment for you, and Monash University academic-integrity rules apply.
Exam move
Part 2 is where the highest-value company-law IRAC problems live, so treat the conflict and insolvency duties as a checklist you run on every fact scenario: s 182 (misuse of position), s 183 (misuse of information), s 184 (criminal breach), the general-law no-conflict/no-profit rule with s 191 disclosure and Chapter 2E related-party approval, and s 588G insolvent trading (solvency on the s 95A cash-flow test, with the s 588H and s 588GA defences). Attach an authority to each: Regal (Hastings) v Gulliver for the no-profit rule and ASIC v Adler for both misuse and consequences. Always finish a directors'-duties answer with the consequences — the s 1317E declaration, pecuniary penalty (s 1317G), compensation (s 1317H) and disqualification (ss 206C–206E) — because those marks are easy to bank. Write visible IRAC answers that apply every relevant section and remember the regulator must prove the breach while the director carries the onus on a defence. When a step won't click, ask Sia to explain it a different way and to set you a fresh conflict-plus-insolvency problem; it teaches the method and checks your reasoning, and it never substitutes for your own graded work.
Working through Directors' Duties — Part 2 in BTF5955? Sia is AskSia’s AI Business Law tutor — ask any BTF5955 Directors' Duties — Part 2 question and get a clear, step-by-step explanation grounded in how BTF5955 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
