Commercial Disputes & Insolvency Alert

May, 2012

Do directors owe a duty to creditors or have to pay them damages if they breach their duties to their company?

If asked this question, most lawyers, would firmly answer the question shortly – “no”.

For all company directors and for former rugby league star Jarrod McCracken, the Queensland Court of Appeal has thankfully confirmed that such advice is sound.

In Phoenix Constructions Queensland Pty Ltd v Coastline Constructions Pty Ltd and McCracken [2011] QSC 167 the Court found that Mr McCracken had breached his duties (pursuant to s182(1) of the Corporations Act (the Act)) to a company of which he was a director by improperly reducing its assets and consequently, its ability to pay an unsecured creditor.

That unsecured creditor, Phoenix Constructions Queensland Pty Ltd (Phoenix), applied to the Queensland Supreme Court claiming damages against Mr McCracken pursuant to section 1324 which provides that in additional to a Court being able to grant an injunction restraining a person from breaching the Act, it can also “order that person (ie: the person breaching the Act) to pay damages to any other person”. At first instance, utilising section 1324, the Court ordered Mr McCracken to pay Phoenix approximately $1.5M in damages together with costs and interest.

If this decision was allowed to stand it would dramatically increase the scope for unsecured creditors (or perhaps, shareholders) to take action against directors who had breached their duties to their company (or arguably other sections of the Act).

On appeal, the Queensland Court of Appeal found for a number of reasons that section 1324 could not be used in this way, including for practical reasons (for example, if damages could be claimed from directors in this way, there would be a spate of litigation in an effort to secure judgement before the director became bankrupt).

Subject to any application for leave to appeal to the High Court, this decision confirms the orthodox view that directors do not owe a duty to creditors and that creditors cannot sue for damages if they go unpaid through the process of liquidation even if that occurs by reason of a breach of a director’s duty to his company.

Contact Mills Oakley

If you or a client of yours requires any advice concerning directors’ duties, commercial disputes or insolvency related questions generally please contact:

stuart-lewin-mills-oakley
Stuart Lewin | Partner
T: +61 3 9605 0986
E: slewin@millsoakley.com.au

 

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