A legal battle in Queensland threatens to open up a new set of
liabilities for company directors.
Former rugby league star – and company director
– Jarrod McCracken is appealing against a $1.5 million
damages (plus interest) award.
What takes this case out of the ordinary is that the damages
were awarded to someone to whom the director (Mr McCracken) owed no
The Queensland Supreme Court made the award under a
little-noticed section at the back end of the Corporations Act.
Section 1324 says that a court can, on the application of ASIC
or a person affected by the conduct, grant an injunction to prevent
a person from contravening the Act. It also says that the court can
"order that person to pay damages to any other person".
Although it has been a part of company law for many years, section
1324 has rarely been used in litigation.
In McCracken's case, the Court used section 1324 to order
him to pay damages to a creditor of his company for an alleged
breach of duties owed by McCracken to the company as director of
What makes this decision very unusual – if not unique
– is that directors have long been held to owe no duty to
creditors. Although directors may be held personally liable for
insolvent trading, such proceedings are brought by a company
liquidator (or by a creditor only with the liquidator's
consent). Unsecured creditors have otherwise been held to have no
interest in the company's assets and no standing to bring
proceedings directly against directors regarding their management
of the company. The Court's interpretation of section 1324 in
Mr McCracken's case could considerably dilute the effect of
Another potential group of "beneficiaries" is
shareholders. Like creditors, shareholders have traditionally been
owed no duty by directors, and so have been unable to recover
damages directly from directors for breach of duty.
We understand that the decision is now being appealed. Without
anticipating what the Court of Appeal will say, it is likely that
the Court will be asked to decide between two competing theories
about section 1324.
On the one hand, there is a school of thought that the decision
against Mr McCracken merely demonstrates the hitherto unrealised
potential of section 1324.
Opposing this is the view (which enjoys some judicial support) that
Parliament never intended the section to override longstanding
limitations on the persons to whom directors owe duties.
If the original decision stands, the implications go beyond an
increase in the legal liabilities of directors. Directors who are
ordered to pay damages to creditors, shareholders or other third
parties for breach of statutory duties owed to the company may not
be covered by their company's D&O insurance. Section 199B
prevents companies from paying D&O premiums to cover
liabilities arising from improper use of directors' knowledge
or position (sections 182 and 183) or wilful breaches of duty in
relation to the company. Almost all D&O policies, therefore,
expressly exclude such liabilities, to enable the company to pay
the premium without the risk of the policy being invalidated by
In some instances, absence of insurance may mean that the
director is not worth suing. That, however, may be small
compensation for the threat of extended liability to a whole new
pool of claimants.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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