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A reversal of a prior decision regarding the rights of creditors to pursue directors personally under the Corporations Act s1324(10)

Company Law News | August 2012

Last year’s decision of the Supreme Court of Queensland in Phoenix Constructions (Qld) Pty Ltd v Coastline Constructions (Aust) Pty Ltd [2011] QSC 167 was a landmark decision, in that the decision represented the first time that damages had been awarded to a creditor of a company under Section 1324(10) of the Corporations Act, for the alleged breach of duty by a director.

However, the Queensland Court of Appeal recently overturned that decision in the case of McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129.

These two cases give some insight into the preparedness of the court to extend the obligations and duties of company directors, not only to shareholders of the company, but also to trade creditors. Ultimately, the appeal decision restored and reiterated the long prevailing status quo in this area of corporations law. A brief overview of both decisions is set out below:

The 2011 decision

Phoenix commenced proceedings against Coastline (Australia) Pty Ltd, and later joined Coastline’s sole director-secretary, Mr McCracken, and his wife (who was party to a joint venture agreement with Coastline), as defendants. Mrs McCracken’s joint venture with Coastline, was for the development of land owned by Mrs McCracken, in 2004. In the same year, Phoenix agreed with Coastline to manage the construction of the development.

In 2006, Phoenix served a statutory demand on Coastline and started proceedings against Coastline for breaches of the construction management agreement.

In early 2007, the joint venture agreement between Mrs McCracken and Coastline was amended to remove some of the land that had been developed by the parties from the agreement the practical effect was that 6 units valued at some $7,385,000.00 were given over to the exclusive ownership of Mrs McCracken, and the value of these units was left out of the proceeds of the development that were available to Coastline.

When Coastline went into liquidation in 2010, and Mrs McCracken became bankrupt in early 2011, Phoenix was forced to pursue its claim against Mr McCracken only.

Phoenix argued that, as director of Coastline, Mr McCracken had breached s182 of the Corporations Act in relinquishing a share in the proceeds of sale of the 6 units that had been transferred to Mrs McCracken, as he had improperly used his position to gain an advantage for Mrs McCracken and disadvantage the company (Coastline). As a result of Mr McCracken’s breach of his director’s duties, Phoenix’s ability to pursue Coastline for monies owed to it pursuant to the construction management agreement had been impeded.

Arguing that it was a party whose “interests have been or would be affected” by Mr McCracken’s breach of the duties contained in s182, Phoenix applied to the Court for an injunction under s1324(10) requiring Mr McCracken to retrieve the 6 units from his wife back to Coastline, and Phoenix also made an alternative application under s1324(10) for damages in excess of $1.23m.

The Court held that, as a creditor of Coastline, Phoenix was clearly affected by Mr McCracken’s wrongful conduct, and was therefore entitled to make the application for an injunction and/or damages. The Court noted that a claim for an injunction such as that sought by Phoenix was permissible at that late stage of the proceedings [after the third defendant (Ms McCracken) had been joined as a defendant] because, although the claim for injunction was amended at this point, a claim for injunctive relief had formed part of Phoenix’s claim from the commencement of the proceedings. The Court affirmed that it had jurisdiction under s1324(10) to award damages even where the injunction sought was refused on discretionary grounds.

Ultimately, Phoenix secured an order for damages in excess of $1.49m against Mr McCracken personally, instead of an injunction.

The 2012 appeal decision

The Court of Appeal restored the previous, generally prevailing rule, that a company director does not owe a duty or duties directly to creditors of the company that would entitle a creditor to pursue the director for damages under the Corporations Act. The Court of Appeal did iterate, however, that creditors may still seek an injunction restraining a director from acting so as to breach the Act or their directors’ duties.

Specifically, the Court of Appeal found that s1324(1) of the Act does not give a creditor the right to recover damages from a director for a breach of s182(1) of the Act, or any other civil penalty provisions.

Importantly, the Court noted that the meaning of a “person affected” by a director’s breach of the Act is a broad one, meaning that it may be relatively straightforward for a creditor to demonstrate that they are affected by the wrongful actions of a director sufficient to pursue injunctive relief against that director.

Directors should take note of the issues raised by the above decisions, as a wide range of third parties may potentially seek injunctions against directors for perceived breaches of the Corporations Act.

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