30/04/2012

The law generally considers a company to be a separate legal entity to its directors and therefore in most circumstances the director will not be liable for debts incurred by the company. Having said that, it is noteworthy that there are over 700 separate pieces of federal and state legislation throughout Australia that make a director liable for their company's behaviour.

In 2011 the Supreme Court of Queensland held a director liable for his company's debt where the creditor proved the director engaged in conduct that was in breach of the director’s duties under the Corporations Act 2001 ("Act").
   
In the decision in Phoenix Constructions (Queensland) Pty Ltd v Coastline Constructions (Aust.) Pty Ltd & Ors. [2011] QSC 167, the Court held that former North Sydney and Canterbury rugby league star Jarrod McCracken, who  was the director of Coastline, had breached his duty under s.182 of the Corporations Act and was liable for the debt owed by Coastline to Phoenix under s.1324(10) of the Act.  The Court ordered Mr McCracken to pay $1,495,208.71 plus $530,003.46 in interest to Phoenix.

Section 182 of the Act states that an officer or employee of a corporation must not improperly use their position to gain advantage for themselves or someone else or cause detriment to the corporation.  In this case, Mr McCracken entered into an agreement for the development of land on behalf of the company which was "improper" which resulted in an advantage for him and a detriment to the company.

The Court then considered if his breach of s.182 of the Act entitled the creditor of the company to recover the debt from the director.  The Court held that s.1324 of the Act could be relied on by the creditor to seek the recovery of the debt.

Section 1324 of the Act states that:

"Where a person has engaged ….. in conduct that constitutes …..:
(a)    a contravention of this Act…………..
the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction …….....
(10)    Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct …..the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person."

In a majority of cases where this section is relied on the party is seeking an injunction to prevent or force the person from or to do an act; such as preventing the sale or disposition of assets.

In this case, the section was used to seek an order for damages against Mr McCracken based on his conduct and that the plaintiff was otherwise not able to recover the debt from the company assets.

The Court's decision included:

"In particular, the question arises whether the power of the Court to award damages in section 1324(1) arises in this case."

"The plaintiff as a creditor is a person whose interests are affected by the third defendant’s (director’s) breach of s182 and thus comes within s1324(1) of the Act."

The court held that it did have the power to award damages in substitution for injunctions and therefore ordered Mr McCracken to pay the plaintiff the debt plus interest.

Directors should be conscious in all dealings on behalf of the company that they are not in breach of the Corporations Act obligations to limit the possibility of personal liability for damages that may be suffered by creditors.

If you have any questions in relation to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.