Director’s Liability to Creditors Challenged and Defeated

In a recent case Jarrod McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129, the Queensland Supreme Court of Appeal ruled that a Court has no power to award damages to a creditor under section 1324(10) of the Corporations Act against a director for contravening a civil penalty provision, in this case S182(1), below:

Use of position–civil
obligations

Use of position–directors, other officers and employees

(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation.

Jarrod McCracken was found to have breached his duties as a sole director, in a property development joint venture with Phoenix Constructions (Qld) that turned sour:

At [11]” The trial judge accepted Phoenix’s case that, by the amendment deed, Mr McCracken caused the company to abandon its contractual interest under the joint-venture agreement in those six units thereby diminishing the company’s assets and denying Phoenix recourse to the company’s assets to that extent.”

The trial judge ordered that McCracken pay Phoenix $1.5m in damages by applying

S1324(10) below :

Injunctions

S 1324 (10) Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do a particular act or thing, the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person.

On appeal however, this order was reversed, thus enhancing the principle that directors owe no duty to creditors (Spies v R [2000] HCA 43).

Whilst this case may be appealed to the High Court, it seems for the time being there is a clear message from this decision that directors can be protected from claims by creditors.