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  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  QCA 129 (18 May 2012). The appeal reinstates the general proposition that directors do not owe a direct duty to creditors.
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.
1 Corporations Act 2001 (Cth)
2 Corporations Act 2001 (Cth) s.182(1)(b)
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