Personal liability for misleading or deceptive conduct
The Corporations Act 2011 (Cwlth) provides that, where a company is in liquidation, directors and shadow directors are the only individuals who may be held personally liable for debts incurred by the company while it was insolvent. While individual creditors are able to commence insolvent trading proceedings in certain circumstances, it is more common for liquidators to do so. In that situation any funds recovered are shared among all creditors.
As an alternative, creditors may be able to rely on the provisions of their respective State’s Fair Trading Act (State) or the Trade Practices Act 1974 (Cwlth), to pursue directors and others for company debts. Under these provisions, any person involved in misleading or deceptive conduct, which results in a creditor suffering financial detriment, may be liable. Furthermore, a company does not have to be in liquidation for a claim to be made.
The key section of the Fair Trading Act 1999 (Vic), is as follows:
- A person must not, in trade or commerce, engage in conduct that is misleading and deceptive, or likely to mislead or deceive
- Where a representation is made as to a future matter, then that representation is deemed to be misleading unless the maker of the representation can establish that the person had reasonable grounds for making the representation
- A person may recover the amount of loss or damage resulting from a contravention of the Act from the person who contravened a provision of the Act, or a person who was involved in the contravention.
The key section of the Trade Practices Act (TPA) is as follows:
- A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive;
- A representation is taken to be misleading if it is a representation with respect to any future matter and the maker of the representation does not have reasonable grounds for making the representation. Further, the maker of the representation with respect to any future matter is deemed not to have had reasonable grounds for making the representation unless it adduces evidence to the contrary;
- A plaintiff who is able to establish a breach is able to seek recovery of its resulting loss or damage against any person involved in the contravention;
- The Court may make such orders as it deems appropriate against any person involved in the contravention; and
- The person involved in the contravention is someone who aided and abetted, directly or indirectly, or was knowingly concerned in the breach. This certainly applies to directors, and most likely to any other officer, who made the representation.
The following cases are examples where these provisions have been applied successfully to claim damages from a director of a company for unpaid debts.
In Con-Pac Systems (Aust) Pty Ltd v Wijeyewardene [2006] FMCA 985, the plaintiff received a purchase order from Nature’s Own Brands Pty Ltd (NOB) for plant and equipment. The defendant, who was the director of NOB, made representations to the plaintiff in relation to the future payment for the plant and equipment, in the form of statements such as ‘you deliver it and I will have the cheque there’ and ‘you get it finished and I’ll pay’.
These representations were deemed to be misleading and deceptive pursuant to the TPA, and the plaintiff was successful in its claim.
In Ventouris Enterprises Pty Ltd v Dib Group Pty Ltd [2010] NSWSC 963, the plaintiff claimed that the defendant made representations which were misleading and deceptive through statements such as ‘It will be okay, trust me’ and ‘We won’t let anything go wrong [with respect to obtaining finance]’. As the defendant did not have any reasonable grounds for making these assertions, it was held that the plaintiff was entitled to damages from the defendant and its Chief Executive Officer.
Directors and other officers of companies need to exercise care when making statements about future payments being made to creditors. Should these creditors subsequently not be paid, the Courts may take the view that such statements were misleading and deceptive, resulting in directors and others being held personally liable for company debts.