AYB230 · Corporations Law
Duty of Care & Insolvent Trading
This Topic 6 chapter covers the duty of competence: the duty of care and diligence (s180), the minimum standard of care drawn from AWA / Daniels v Anderson, the business judgement rule (s180(2)) safe harbour, and — the unit's single highest-yield decision tree — the duty to prevent insolvent trading (s588G), its s588H defences, and the anti-phoenix creditor-defeating disposition rule (s588GAB). It is examined as an ILAC problem (often paired with s180 and s588G together), where the marks come from working the insolvent-trading tree step by step against the facts.
What this chapter covers
- 01Duty of care and diligence (s180): the reasonable-person standard in the director's position
- 02Standard varies by office: executive directors > non-executive directors; the managing director highest
- 03Minimum standard of care: the AWA / Daniels v Anderson steps
- 04Business judgement rule (s180(2)): the four-part safe harbour
- 05Duty to prevent insolvent trading (s588G): the decision-tree elements
- 06Insolvency test (ASIC v Plymin) and the statutory presumption
- 07Defences to insolvent trading (s588H)
- 08Creditor-defeating disposition / anti-phoenix law (s588GAB)
Duty of care & insolvent trading (ILAC, s180/s588G)
- +1Issue: Has Hana breached (a) the s180 duty of care and diligence, and (b) the s588G duty to prevent insolvent trading?
- +1Law (care): s180 requires the care and diligence a reasonable person would exercise in the director's position. The minimum standard (AWA Ltd v Daniels / Daniels v Anderson) requires directors to stay informed, review the financial statements, and make sufficient enquiries.
- +1Law (insolvent trading): s588G is contravened if the person was a director when the debt was incurred, the company was insolvent (or the debt caused insolvency), there were reasonable grounds to suspect insolvency, and a reasonable person would have suspected it. Insolvency indicators come from ASIC v Plymin; defences are in s588H.
- +1Application: Hana signed off without reviewing the financials or making enquiries — a breach of the minimum standard under s180. The Plymin indicators (PAYG arrears, dishonoured cheques, COD demands) gave reasonable grounds to suspect insolvency, yet she allowed new debts to be incurred, with no apparent s588H defence — so s588G is contravened.
- +1Conclusion: Hana breaches both s180 and s588G. She may be personally liable for the debts incurred while insolvent and face ASIC civil penalties and disqualification.
Key terms
- Duty of care and diligence (s180)
- A director or officer must exercise the degree of care and diligence that a reasonable person would exercise if they were a director of that company in those circumstances. The standard is objective but varies with the office held — an executive director or managing director is held to more than a non-executive director.
- Minimum standard of care (AWA / Daniels v Anderson)
- The baseline every director must meet: understand the business fundamentals, stay informed of the company's activities, delegate only to capable people, become familiar with the financials by reviewing the statements, make sufficient enquiries, not ignore misconduct, and pay attention to all areas of the business.
- Business judgement rule (s180(2))
- A safe harbour for a duty-of-care claim: a director is taken to have met the s180 standard for a business judgement if they made it in good faith for a proper purpose, had no material personal interest, informed themselves to the extent they reasonably believed appropriate, and rationally believed it was in the company's best interests.
- Duty to prevent insolvent trading (s588G)
- A director must prevent the company from incurring a debt when it is insolvent, or when incurring the debt would cause insolvency, if there are reasonable grounds to suspect insolvency and a reasonable person in the role would have suspected it. Contravention can make the director personally liable for the debt, in addition to civil penalties.
- Insolvency & the Plymin indicators
- Insolvency is the inability to pay debts as and when they fall due. ASIC v Plymin lists practical indicators — dishonoured cheques, COD demands from suppliers, post-dated cheques, no timely audited accounts, unpaid PAYG withholding and superannuation, bank demands, and an unsatisfied statutory demand — and a failure to satisfy a statutory demand triggers a statutory presumption of insolvency (s459C).
- Creditor-defeating disposition (s588GAB)
- The anti-phoenix provision: it is a contravention to dispose of company property for less than its value where the company is insolvent or enters external administration within 12 months, if the director knows or reasonably should know — carrying both a criminal offence and a civil penalty.
Duty of Care & Insolvent Trading FAQ
What is the minimum standard of care for a director?
Drawn from AWA Ltd v Daniels (Daniels v Anderson), every director — including a non-executive director — must take reasonable steps to be informed: understand the business, keep up with its activities, review the financial statements, make sufficient enquiries, delegate only to capable people, and not ignore signs of misconduct. The standard rises with the office, so an executive or managing director is expected to do more, but none can simply rubber-stamp decisions without engaging with the financials.
How do I work through an insolvent-trading (s588G) problem?
As a decision tree. Ask, in order: (1) was the person a director when the debt was incurred? (2) was the company insolvent, or did the debt cause its insolvency? (3) were there reasonable grounds to suspect insolvency (using the ASIC v Plymin indicators)? (4) would a reasonable person in the director's position have suspected it? If the answer is yes throughout, s588G is contravened — then consider whether any s588H defence applies.
What defences are there to insolvent trading?
The s588H defences include that the director had reasonable grounds to expect (not merely hope) the company was solvent and would remain so; that they reasonably relied on competent information from a responsible person; that they did not take part in management at the time because of illness or another good reason; and that they took all reasonable steps to prevent the debt being incurred. There is also the separate 'safe harbour' for restructuring efforts, and the business judgement rule applies to the s180 duty of care.
What is the business judgement rule and which duty does it protect?
It is a safe harbour under s180(2) for the duty of care only. A director is taken to have met the s180 standard for a business decision if they made the judgement in good faith for a proper purpose, had no material personal interest, informed themselves to the extent they reasonably believed appropriate, and rationally believed the decision was in the company's best interests. It does not protect against the loyalty duties (s181–183) or insolvent trading.
Exam move
Drill the two high-yield tools until they are automatic. For s180, memorise the AWA/Daniels minimum-standard list and the four-part business judgement rule (good faith + proper purpose / no material personal interest / informed / rational belief). For insolvent trading, internalise the s588G decision tree as a four-question checklist and keep the ASIC v Plymin indicators ready (PAYG arrears, dishonoured cheques, COD demands, statutory demand) so you can show 'reasonable grounds to suspect'. Only after establishing a contravention go to the s588H defences. These two often appear together in one problem (care + insolvent trading), so practise running both rails in a single ILAC answer, citing s180, AWA/Daniels, s588G, Plymin and s588H, and applying each to the specific director.
