In brief - Phoenix awarded damages instead of injunction, decision appealed
The Supreme Court of Queensland has considered the question of awarding damages to a creditor who sought an injunction under section 1324 of the Corporations Act for a breach of that Act.
Creditor's application for an injunction under section 1324
Under section 1324 of the Corporations Act 2001 (Cth), a court can issue an injunction in circumstances where there has been, or will be, a breach or threatened breach of the Act. The court also has the power to award damages to the person making the application, either in addition to or in substitution for an injunction.
But when will a court award damages?
The Supreme Court of Queensland recently considered this question in the case of Phoenix Constructions (Queensland) Pty Limited v Coastline Constructions (Aust) Pty Limited and Ors.
In particular, the Court considered the right to damages from the perspective of a creditor.
Joint venture formed to develop land in Townsville
Mr McCracken was the sole director of Coastline Constructions (Aust) Pty Limited.
In about 2002, Mr McCracken's wife purchased some land in Townsville with the intention of developing it. In order to do so, Mrs McCracken entered a joint venture (JV) agreement with Coastline in about August 2004. A month later, Coastline entered a construction agreement with Phoenix Constructions (Queensland) Pty Limited.
The land that was subject to the JV agreement was listed in schedule 1 of that agreement.
The JV agreement included a clause which allowed Mrs McCracken to keep certain lots once development was complete. Any lots that she would keep were to be identified in schedule 2 of the JV agreement.
At the time the JV agreement was created, no lots were listed in schedule 2. In fact, the whole of the land originally purchased by Mrs McCracken was listed in schedule 1.
Proceedings launched for breach of construction agreement
In around June 2006, Phoenix commenced proceedings against Coastline, alleging breach of the construction agreement. The parties attempted to settle the matter at mediation in late 2006 and early 2007. However, the mediation was unsuccessful.
During the course of the mediation, Mr McCracken allegedly made a comment that he would "...not be paying anything and I can close the company down if I need to".
JV agreement amended to exclude six units from proceeds
One month later, Mrs McCracken and Coastline amended the JV agreement. Amongst other things, the following amendments were made:
- the joint venture land was amended to include the land that had been developed at that time
- schedule 2 was amended to include six units, valued at $7,385,000; these units were excluded from the proceeds available to Coastline pursuant to the JV agreement
Coastline went into liquidation in mid-2010. In early 2011, Mrs McCracken (who had been added as a party with her husband in mid-2007) became bankrupt. As a result, Phoenix continued the proceedings against Mr McCracken only. The Court looked at the JV agreement between Mrs McCracken and Coastline and agreed with Phoenix that the JV agreement gave Coastline a substantial contractual interest: Coastline had certain power over the land and had received a benefit pursuant to the JV agreement.
By allowing the amendment to take place, Mr McCracken has caused Coastline to lose this interest insofar as it related to the six units.
Breach of directors' duties causes detriment to Coastline
Phoenix also argued that Mr McCracken's behaviour was a breach of his duties as a director of Coastline. The Court agreed.
The Court looked at the effect of the amendment and the comment made by Mr McCracken during the mediation and concluded that the conduct was improper, that Mr McCracken had used his position as a director to gain an advantage for his wife and that he had caused detriment to Coastline.
Phoenix applies for injunction and damages
Phoenix sought an injunction against Mr McCracken which would require him either to obtain a transfer from his wife, which would result in the transfer of certain property to Coastline, and/or to require his wife to transfer the property to Coastline.
In addition to the injunction or as an alternative, Phoenix sought damages in the amount of $1,230,614.79.
At the time that the application was made, Phoenix was a creditor of Coastline. In June 2006, Phoenix had served a statutory demand on Coastline.
Phoenix argued that as a creditor, they were a person whose interests had been or would be affected by Mr McCracken's behaviour and therefore had standing to bring the application under section 1324. The Court agreed with this approach.
The Court then went on to consider Phoenix's application for damages. In doing so, the Court focused on a number of questions and took the view that previous cases did not provide a unanimous answer to these questions.
Must a party seek an injunction?
As a first step, the Court looked at whether the party must seek an injunction in the proceedings. This was not a controversial issue.
Phoenix had sought an injunction when Mr McCracken was added as a party. The original claim for an injunction was amended after this point. However, the Court was satisfied with this approach. Nothing further was added on this point.
When must an injunction be sought?
The second question posed by the Court was whether, if an injunction does have to be sought in the proceedings, when it must be sought.
The Court was satisfied in this case that Phoenix had always had a claim for injunctive relief on foot since Mr McCracken was added as a defendant.
Does an applicant need to show that an injunction would be granted?
The Court then went on to ask: will damages be refused if the injunction would fail on discretionary grounds? In other words, is it enough that the Court has the power to grant the injunction, or does an applicant need to show that the injunction would, in fact, be granted?
Phoenix argued that it was sufficient that the Court had jurisdiction to grant the injunction and that it was irrelevant whether the injunction might be refused under its discretionary powers.
The Court agreed with this argument and drew on the comments made in Wentworth v Woollahra Municipal Council and Ors  HCA 41, where the Court noted:
"It is obvious that a discretionary defence to a claim for equitable relief does not, if made out, operate as a defence to a claim for common law damages for infringement of the legal right on which the case for equitable relief is based" (at 17).
Phoenix awarded damages instead of an injunction
Phoenix was awarded damages in the amount of $1,495,208.71 plus interest. Damages were awarded instead of granting an injunction.
The decision is subject to an appeal. The appeal raises a number of questions, including:
- the admissibility of evidence concerning Mr McCracken's breach of his director's duties
- whether the Act allows a creditor to obtain damages where their loss is a result of the breach of a director's duties
- whether the Court is able to award damages in substitution for an injunction where there is no prospect of an injunction being granted
- whether, as a creditor, Phoenix was a "person affected" under the Act
The appeal is likely to make some interesting comments on this topic. However, until the appeal is determined, the position continues to be that set out by the Supreme Court of Queensland.
For more information about insolvency and reconstruction, please see the website of CBP Lawyers or contact Peter Harkin at email@example.com or Grazia Altieri at firstname.lastname@example.org
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