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  QSC 167
("Phoenix") potentially widens the scope
for creditors to recover compensation from a Director personally,
requiring only a contravention of the Corporations Act.
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
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
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.
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
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.
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