In Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd  WASC 19, the Western Australian Supreme Court recently had to consider the law relating to a director's liability for the acts of the responsible entity in circumstances where the responsible entity was being sued by investors in a scheme who had lost their capital.
Sugarloaf was an investor in a managed investment scheme operated by Rewards. It brought an action against Rewards for misleading and deceptive conduct in relation to the representations made to it in the offer document, and for breach of its duties as responsible entity of the scheme. As part of those proceedings, Sugarloaf also made claims against the directors of Rewards on the basis that they were liable for 'procuring and directing' Rewards to do the acts of which it complained.
The matter came on for hearing before the court in relation to a preliminary matter, being whether or not Sugarloaf should provide security for any costs incurred by Rewards and the directors in defending the proceedings. In determining whether or not to grant that order for security for costs, the judge was required to undertake an examination of the strength of the case against the directors.
In essence, Sugarloaf alleged that the directors were jointly and severally liable with Rewards for "being engaged" in Rewards' conduct and that they procured and directed the conduct, insofar as they were directors of Rewards; the argument being that Rewards could only act through the directors. It was also alleged that the directors had breached the duties imposed on them by the Corporations Act 2001 (Corporations Act) and that they had procured and directed the misleading and deceptive conduct by Rewards in relation to the representations made about the investment.
Without determining the merits of the case, the judge made some comments about the strength of the claim against the directors as follows:
- Directors are not personally liable for the torts committed by a company, merely because they have general control of the company's business.
- Directors cannot be held liable for the torts of the employees or agents of the company merely by reason of their position as directors, unless they ordered or procured the acts to be done.
- At common law, the conduct of a person associated with a company may be attributed to the company where that person can be said to be the directing mind and will of the company. This needs to be proved on the facts of the case, and cannot be inferred just because a person holds the title of director.
- A director may be liable as an accessory if a relevant statute imposes accessorial liability. However under the Corporations Act and the ASIC Act, a director will not be party to a company's contravention merely by being a director.
- A party to a contravention must be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention. The accessory must have knowledge that the false and misleading representation has been made and must be involved in the contravention with that knowledge. Further, there must be some act of involvement—an act of aiding or assisting or procurement.
For the reasons set out above, the judge found that the case pleaded against the directors was lacking in particularity, because the only allegation made was that they directed and procured the contravention by Rewards by being directors.
Whilst the court did not need to determine the merits of the matter, the weaknesses identified in the case pleaded against the directors was one of the discretionary factors that the judge took into account in ordering that Sugarloaf provide security for costs before it could pursue the action further.
The decision shows that the courts are prepared to take a robust view towards claims by investors for the recovery of an investment, including ordering that they provide security for costs before they be entitled to proceed with the action.
Whilst there is no new law annunciated by the court in this case, it is an interesting example of the court taking a firm position in relation to the unnecessary joinder of directors to actions against the company. It is tempting for investors to try to join not only the responsible entity, but as many other parties associated with the responsible entity as possible, in order to maximise the possibility of recovering damages. However, as this case demonstrates, unnecessarily joining parties can have some disadvantages, including being ordered to pay security for costs.
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