Introduction

As a general rule, the Directors of a company are not personally liable for the actions of the company. A company and its Directors are separate legal entities with their own independent rights and obligations. However, potential claimants often seek to impose personal liability on the Directors in circumstances where the company does not have the assets to satisfy the claim.

There are a number of ways in which this can be done. A common example is where the Director is involved with the misleading or deceptive conduct of the company. However, the Supreme Court of Queensland case of Phoenix Constructions Queensland Pty Ltd v Coastline Constructions Pty Ltd [2011] QSC 167 ("Phoenix") potentially widens the scope for creditors to recover compensation from a Director personally, requiring only a contravention of the Corporations Act.

The facts

Phoenix was owed money by Coastline Constructions Pty Ltd ("Coastline"). The sole Director of Coastline, McCracken, gave up some of Coastline's rights over land owned by McCracken's wife, thus reducing its available assets and diminishing its ability to pay damages to Phoenix. Coastline then went into liquidation.

Phoenix sought damages from McCracken personally for breach of section 182(1) of the Corporations Act, which requires Directors to exercise their powers and discharge their duties in good faith, in the best interests of the corporation and for a proper purpose.

McCracken was found to have breached section 182(1) by causing Coastline to give up its rights over Mrs McCracken's land.

The argument

Section 1324(1) of the Corporations Act stipulates that where a person has engaged in conduct which constitutes a contravention of the Act, the court may, on the application of a person whose interests have been, are or would be affected by the conduct, grant an injunction restraining the person from engaging in the conduct.

Section 1324(10) says that where such power is exercisable, the court may order that person to pay damages to any other person.

Relying on this provision, Phoenix successfully obtained damages of approximately $1.5 million against McCracken personally. The court found that it was sufficient that Phoenix had sought an injunction against McCracken and it did not matter that the injunction may have been refused on discretionary grounds.

Comment

This is the first reported decision of its type and could pave the way for those whose interests have been adversely affected by the conduct of Directors – including but not limited to creditors – to use section 1324(10) to seek damages against that Director personally.

The decision is being appealed and may eventually find its way to the High Court. For the moment, however, it appears arguable that if a Director contravenes the Act - notably the duties under Part 2D – he or she may be exposed to a risk of a claim by a creditor for damages personally under section 1324(10) of the Act.

We will report further on developments as and when they arise. In the meantime, for further information, contact Tim Lethbridge on (08) 9321 3755.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.