In McCracken, the Queensland Court of Appeal
comprehensively demolished the idea that section 1324 could be used
to order a director to pay damages to a creditor of his
Directors have dodged a bullet, thanks to a Queensland Court of
Appeal decision on Friday.
Former rugby league star – and company director
– Jarrod McCracken has won his appeal against a $1.5
million damages (plus interest) award (McCracken v Phoenix
Constructions (Qld) Pty Ltd  QCA 129).
What took this case out of the ordinary was that the damages
were awarded to someone to whom Mr McCracken thought he owed no
legal duties – a creditor of his company.
Mr McCracken was originally ordered to pay the damages under a
little-noticed section at the back end of the Corporations Act.
That decision threatened directors with the possibility of personal
damages claims from creditors and even shareholders.
Section 1324 says that a court can 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, and has never been used to order directors
to pay damages for breach of their duties under the Corporations
In Mr McCracken's case, the trial judge found that he had
breached his duties as a director, by improperly reducing its
assets (and thus its ability to pay a creditor). The trial judge
used section 1324 to order Mr McCracken to pay damages to that
This decision was groundbreaking, because directors have long
been held to owe no duty to creditors (or shareholders, if it comes
to that). The Court's original interpretation of section 1324
in Mr McCracken's case would have severely diluted the effect
of that principle. Last Friday, the Queensland Court of Appeal
allowed Mr McCracken's appeal. In doing so, it comprehensively
demolished the idea that section 1324 could be used to order a
director to pay damages to a creditor of his company, which are
merely derivative of the company's loss.
The Court of Appeal said that there were a host of reasons why
section 1324 did not operate in this way. These ranged from the
wording of the provision, to legislative policy, to very practical
concerns (for example, if creditors could claim damages from
directors, there'd be a race among creditors to get in first,
before the director was bankrupted).
Subject, of course, to the possibility of an appeal to the High
Court, the Court of Appeal's decision appears to have put the
section 1324 damages genie back in its lamp, encased the lamp in
lead and dropped it into a very deep part of the ocean.
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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