In our March 2012 Insurance Update we considered the potential widening of the scope for creditors to claim damages against a director personally for contravention of the Corporations Act 2001 (Act). The Supreme Court of Queensland awarded Phoenix Constructions over $1.2 million in damages against Mr McCracken for contravention of s 182 of the Act. This decision, a first of its kind, was appealed by Mr McCracken.
In a highly anticipated judgment, the Queensland Court of Appeal in McCracken v Phoenix Constructions (Qld) Pty Ltd  QCA 129, overturned the trial judge's decision. The Court reaffirmed the orthodox position that creditors, or other persons whose interests are affected, are not entitled to claim damages against a director personally for contravention of the Act. The Court of Appeal unanimously held that s 1324(10) of the Act did not empower the trial judge to award damages to Phoenix Constructions and to do so was contrary to the intent of the statutory provisions.
The claim against Mr McCracken was dismissed with costs.
Mr McCracken, the sole director of Coastline Constructions, entered into a joint venture agreement with his wife to develop property units. Phoenix Constructions claimed damages from Coastline Constructions for breach of a construction management contract. Subsequently, both Coastline Constructions and Mrs McCracken became insolvent and proceedings were commenced against Mr McCracken personally.
At trial, Justice Cullinane held that Mr McCracken had contravened s 182 of the Act by using his position as director to enter into an amended Deed of Agreement to gain an advantage for his wife. In effect, the amended deed deprived Coastline Construction of the beneficial interest of six units thereby depriving Phoenix Constructions recourse against those assets.
Phoenix Constructions applied for injunctive relief, and in the alternative or in addition to, damages for the loss suffered as a result of Mr McCracken's contravention of the Act.
Decision at trial
The Supreme Court held that because it had jurisdiction to grant an injunction under s 1324, Phoenix Constructions, as a creditor, was entitled to claim for damages pursuant to s 1324(10). Phoenix Constructions was awarded damages for the value of its contractual claim against the company that equated to the company's loss from Mr McCracken's contravention of s 182.
Section 1324 provides that where a person engages in conduct in contravention of the Act, any person affected by the conduct may apply to the Court for an injunction restraining the person from contravening the Act. Section 1324(10) empowers the Court to order a person in contravention to pay damages to any other person, in addition to, or in substitution of, an injunction.
Court of Appeal
The key issue on appeal was whether s 1324(10) empowered the Court to award damages to a creditor, or any other person, for loss suffered as a result of Mr McCracken's contravention of s 182. The appeal also raised questions regarding the admissibility of evidence concerning Mr McCracken's alleged contravention of s 182 and whether Phoenix Constructions proved that it had suffered the loss claimed in damages.
Mr McCracken argued that s 1324(10) should not be construed as conferring a right to damages upon a creditor's loss suffered as a result of a contravention of s 182 of the Act.
The Court followed the reasoning of Perry J in Executor Trustee Australia Ltd v Deloitte Haskins & Sells1 and held s 1324(10) should not be construed as contended by Phoenix Constructions because the focus of s 1324 as a whole is to confer Courts with powers to grant injunctions rather than to create a new right to damages. Despite the generality of s 1324(1) in terms of the persons with standing to apply for injunctions, it does not follow that a Court may award damages to "any other person" whose interests are affected by a contravention of a statutory duty.
The Court reasoned that the Act specifically provides remedies for contraventions of s 182 in Part 9.4B, namely, powers for the Court to declare a contravention, order a person to pay a pecuniary penalty, or order a person to pay compensation to a company. Under s 1317J, only ASIC or the corporation may apply for those remedies. Therefore, a construction of s 1324(10) that allowed any person adversely affected by a contravention to claim damages cannot be reconciled with these specific remedy provisions. The Court was not persuaded by the submission that the relevant section and the remedy provisions regarding compensation could co-exist because there was no material distinction between "damages" and "compensation".
Moreover, the Court held that the construction of s 1324(10) contended for by Phoenix Constructions could produce the unintended consequence of double recovery against Mr McCracken. This is because s 1317H provides that a Court may order a director who has contravened a civil penalty provision to compensate the company for any damage suffered as a result of the contravention. It could also mean the creditor might recover damages at the expense of the corporation. That latter result would effectively amount to a preference payment to Phoenix Constructions as a creditor as compared with other unsecured creditors of the company by depleting the company's capital.
Taking into account the statutory context of s 1324(10) and the expression "either in addition to or in substitution for the grant of the injunction", an award of damages in favour of Phoenix Constructions was not a substitute or supplementary remedy for the claimed injunction. The claimed injunction would require Mr McCracken to cause a transfer of the six units diverted to Mrs McCracken back to the company, although the Court noted in passing there was no allegation Mr McCracken possessed any relevant power to cause his wife to effect the transfer. In any event, if the injunction was not possible, a substitute remedy would be to award damages in favour of the company for the irretrievably lost property, not damages in favour of the creditor also affected by the contravention.
The other substantive issue in the appeal was whether Phoenix had proved that it suffered any loss. This is because Phoenix could only have suffered loss by reason of the contravention if, taking into account the other liabilities of the company, it retained sufficient assets to meet the claim immediately before the transfer of the units. As no evidence was adduced about the extent to which Mr McCracken's contravention diminished the company's ability to pay the debt owed to Phoenix or the state of the company's accounts with other creditors, the Court held that Phoenix had failed to prove any loss.
It is now clear that the correct construction of s 1324(10) is that a Court is empowered to award damages, for which a legal basis exists, only as a substitute, or supplementary remedy, for an injunction to address the adverse effect of a contravention on interests protected by the Act. The scope of personal liability for directors for relevant contraventions of the Act does not extend to creditors of the corporation or others affected by contraventions.
The Court's decision provides welcome clarity to the construction of s 1324(10), and accords with other provisions in the Act which allow only ASIC and the company, to the exclusion of others affected by a contravention, to claim compensation from a director for relevant contraventions of the Act.
1(1996) 22 ACSR 270.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.