Australian law recognises that a company is a separate legal entity from its directors, officers and shareholders, and that directors are not generally liable for the debts of companies. The law will pierce the "corporate veil" only in limited circumstances, such as where directors breach their duties to the company or cause the company to trade while insolvent. The recent Supreme Court of Queensland decision of Phoenix Constructions Queensland Pty Ltd v Coastline Constructions Pty Ltd and McCracken [2011] QSC 167 has potentially widened the scope for creditors to claim damages against a director personally for a contravention of the Corporations Act 2001 (Cth) (Act).
The Court held that a creditor is entitled to damages against a director personally if the claim falls within section 1324 of the Act. Section 1324 provides that where a person has engaged in conduct that constitutes a contravention of the Act, any person affected, including creditors or a member of the insolvent company, may apply to the Court for an injunction restraining the director from engaging in that conduct. The Court also has the power under section 1324(10) to order that person to pay damages to any other person.
The Court awarded damages, including interest of approximately $2 million against the defendant, Mr McCracken. This decision is subject to appeal.
Background
The third defendant, Mr McCracken, was the sole director of Coastline Constructions. In August 2004, the first defendant, Coastline Constructions, entered into a joint venture agreement (JV Agreement) for the development of land owned by the second defendant, the wife of Mr McCracken. Coastline Constructions then entered into a construction management agreement with the plaintiff, Phoenix Constructions. Coastline Constructions breached the construction management agreement, causing Phoenix Constructions to institute proceedings against it. Subsequently, Coastline Constructions became insolvent and Mrs McCracken became bankrupt.
In February 2007, a Deed of Amendment (Deed) was entered into by Coastline Constructions and Mrs McCracken. The Deed amended the JV Agreement so that Coastline Constructions abandoned its rights in much of the remaining land in favour of Mrs McCracken.
Amendment of JV Agreement in breach of section 182 of the Act
Phoenix Constructions alleged that Mr McCracken had engaged in "improper" conduct, in breach of section 182 of the Act. That section requires directors to exercise their position and discharge their duties in good faith, in the best interests of the company and for a proper purpose. The Court accepted Phoenix Constructions' submission and held that Mr McCracken had used his position as director to gain an advantage for his wife. The Court held that the effect of entering into the Deed was to deprive Coastline Constructions of a beneficial contractual interest in six units. This denied Phoenix Constructions recourse against the assets of Coastline Constructions, so far as those six units were concerned. The court noted as relevant, evidence of an earlier threat made by Mr McCracken to Phoenix Constructions that he would "not be paying anything" and could "close the company down" if he needed to.
Entitlement to damages under section 1324 of the Act
Phoenix Constructions applied under section 1324 of the Act for injunctive relief, and in the alternative, or in addition to, damages, as a person whose interest had been, or would be, affected by Mr McCracken's actions. The question for the Court was whether the Court had power to award damages under section 1324(10).
The Court held that, the fact it had jurisdiction to grant an injunction under section 1324 to restrain Mr McCracken, was sufficient to enable the plaintiff to claim for damages. Significantly, the court held it was not necessary for Phoenix Constructions to prove that it was likely an injunction would have been granted or otherwise refused on discretionary grounds. The court cited with approval the principle established in Wentworth v Woollahra Municipal Council (1982) 42 ALR 69 that a discretionary defence to a claim for equitable relief, such as injunction, cannot operate as a defence to a claim for common law damages for infringement of the right on which the equitable relief was based.
Accordingly, the Court was satisfied that the terms of section 1324 of the Act were met and ordered Mr McCracken to personally pay damages to Phoenix Constructions.
Conclusion
This decision potentially broadens the category of persons who may claim against directors personally for breach of duties owed to the company. Whether this case marks the beginning of a new line of authorities widening the personal liability of directors will depend on the outcome of the pending appeal. Central issues that will be raised include whether section 1324(10) confers a right to damages on a creditor for loss suffered from a breach by a director of a duty imposed by section 182 and whether the Court has power to award damages in substitution for an injunction that has no prospect of being granted.
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