A New Source of Director Liability
"In a recent decision of the Supreme Court of Queensland, an often overlooked section of the Corporations Act (the “Act”) was invoked by a plaintiff to make a director personally liable for the indebtedness of a company. The case is extraordinary because, by invoking section 1324 of the Act, creditors and shareholders - people to whom company directors owe no legal duties - now appear to be able to seek and obtain an order for damages against a company director".
Under section 1324 of the Act a court can, where a director has contravened (or is about to contravene) the Act, and on the application of a person affected by the conduct of a director, either:
- grant an injunction to prevent a director from contravening the Act; and/or
- order a director to pay damages to any other person.
Former rugby league player Jarrod McCracken was a director of a property development company. His company was a defendant in litigation involving the alleged breach of a development contract. The plaintiff in those proceedings succeeded in obtaining an award of $1.5 million damages plus interest against McCracken. In McCracken's case, the Court invoked section 1324 and ordered him personally to pay damages to the plaintiff (a creditor of his company) for a breach of directors duties owed to his company.
Prior to this decision, it was considered ‘settled law’ that company directors did not owe any duties to creditors of companies. Even in cases where directors are held personally liable for the insolvent trading of their company, such proceedings are usually initiated and maintained by a liquidator. Unsecured creditors have not had any legal interest in the company's assets and they did not have a right to bring proceedings against directors for their management of the company. The Court's use of section 1324 creates considerable uncertainty about these established principles.
The decision also has ramifications for another class of people previously thought not to be owed any duties by company directors – shareholders. Shareholders have not traditionally been able to recover damages directly from directors for breaches of duties owed to companies. This principle also now seems to be uncertain. An appeal of the McCracken decision has been lodged. If the original judgment stands, the ramifications for companies extend beyond the legal liabilities of directors because directors who suffer an judgment to pay damages to company creditors, shareholders or other third parties for a breach of statutory directors’ duties may not be covered by their Directors & Officers insurance policy: section 199B of the Act makes it illegal for companies to pay Directors & Officers insurance premiums to cover liabilities arising from, amongst other things, wilful breaches of duty owed by a director to the company. Invariably, all Directors & Officers insurance policies exclude such liabilities.
Michael Tzirtzilakis | Senior Associate
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