Generally, directors do not owe a direct duty to creditors. Directors owe a duty to a company to consider the interests of creditors including the ability of the company to repay them. Thus, often a liquidator or a receiver of a company will cause the company to sue directors for breaches of that duty.
Phoenix Constructions Qld Pty Ltd v Coastline Constructions Pty Ltd and McCracken[2011] QSC167 may allow creditors recourse directly against the director. Section 1324 Corporations Act allows a person whose interests have been affected by conduct of a company which would contravene the Corporations Act, or by accessorial acts pertaining to a contravention, to seek an injunction restraining the person from engaging in the conduct. If the Court considers it desirable to do so, it can require the person to do any act or thing. By section 1324(10), where the Court has power to grant an injunction under the section, the Court may in addition or in substitution, order that a person pay damages to any other person.
In this case, the ex-Bulldog's rugby league star Jarrod McCracken was found by the Queensland Supreme Court to have caused a company in which he was a director to have acted improperly. The Court found he caused the company to amend a joint venture agreement with McCracken's wife, and thereby effectively dissipated available assets to the prejudice of a building company which worked on the joint venture's development site. This was improper conduct under section 182 of the Act because it caused detriment to the corporation, and gained an advantage to Mrs McCracken (who owned the land).
Cullinane J of the Supreme Court of Queensland found:
- as an injunction was sought when McCracken was added as a party to the proceedings, that was sufficient to maintain the claim for damages.
- It was sufficient if a right for an injunction had accrued before hearing of the suit, even if at the time of commencement there was no right to an injunction or specific performance.
- the statutory power of awarding damages subsisted whenever at the material time the contract was susceptible to specific performance, or protection by an injunction, whether or not the relief might be refused on discretionary grounds.
Accordingly, McCracken was liable for significant damages with statutory interest. The decision is apparently on appeal.
Lessons from the case
- Directors should be aware that any impropriety may be met by a claim in damages directly against them; they cannot rely on a liquidator without funds failing to institute proceedings when a creditor can potentially go directly against them.
- The drafting of Court process by a creditor needs to be skilfully thought through, to bring the creditor within section 1324 Corporations Act 2001. However, if this is genuinely achievable, creditor redress against the director is significantly enhanced.
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