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In 2011 the Queensland Supreme Court made a ground breaking
decision by using section 1324 of the Corporations Act to find a
director (McCracken) directly liable to creditors for section 182
director duty breaches: Phoenix Constructions (Queensland) Pty
Ltd v. Coastline Constructions (Aust) Pty Ltd [2011] QSC 167.
Under s.182(1) a director must not use their position to gain an
advantage for themselves or someone else 1 , or cause
detriment to the company 2 . Section 1324(10) gives the
Court power to grant an injunction against a person and also
"either in addition to or in substitution for the grant of
the injunction, order that person to pay damages to any other
person".
The Court's use of section 1324 to order McCracken to pay
damages to a creditor direct left directors exposed to possible
liability for damages claims from creditors and even
shareholders.
However the Court of Appeal has now overturned the trial
judge's decision, finding that s.1324 cannot be used to order a
director to pay damages to creditors of the company: McCracken
v. Phoenix Constructions (QLD) Pty Ltd [2012] QCA 129 (18 May
2012). The appeal reinstates the general proposition that directors
do not owe a direct duty to creditors.
Key Findings
At first instance the Court found McCracken had engaged in
improper conduct by causing the company to amend a joint venture
agreement with his wife. This dissipated available assets to the
prejudice of a building company (Phoenix), causing detriment to the
corporation and advantaging McCracken's wife. The Court ordered
the director to pay damages to Phoenix (a creditor) direct under
section 1324 of the Act.
The Queensland Court of Appeal then allowed the appeal and found
that s.1324(10) does not confer a right to creditors to claim
damages for loss suffered by contravention of s.182. The Court
found that:
A creditor's claimed loss is merely derivative of the
company's recoverable loss. Damages cannot be awarded for
creditors' loss direct;
Section 1324 does not change this. Section 1324(1) gives the
power to award damages only as a supplement or substitute remedy
for the other relief referred to in the section.
Implications and Conclusions
The previous danger to directors lay in the extremely broad
wording of s.1324(10), which empowers the award of damages to
"anyone whose interests have been affected". The
original decision interpreted this provision broadly, expanding
directors' possible exposure. Subject to any possible appeal to
the High Court, the appeal decision lays these concerns to rest and
reiterates that, in general, directors owe duties to the company,
not creditors.
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