Directors - A Cautionary Tale

7 July 2011

We hear again and again in the media of companies incurring debts, breaching contracts and then closing down the business and leaving creditors stranded. The directors walk away often with their own personal wealth intact and start a new venture with seemingly no consequences for past questionable business practices.

Recovering a debt or damages from companies that have become insolvent can be frustrating and extremely expensive, often with little likelihood of success, particularly in the absence of a director’s personal guarantee.

However, the Australian Consumer Law may in certain circumstances hold directors personally accountable for damages or a debt incurred by their company. The directors may become liable for payment and can be sued personally, if it can be shown that they had full knowledge of and were active themselves in the breach.

A good example of a situation that we have seen at Meerkin & Apel:-

Case Study

A 5 star Hotel and a Travel Agency (Sole Director) had an arrangement in place where the Hotel provided a special rate to clients of the Travel Agency.
The practice was that the Travel Agency books clients into the Hotel six months in advance and collected money from the clients for the accommodation cost.
The Travel Agency would hold the monies until after the accommodation was provided.
After the clients have stayed at the Hotel, the Hotel would provide an invoice to the Travel Agency for payment.
In this case, the Travel Agency experienced a significant downturn in business and the sole director decided the company would cease trading immediately and keep all money paid by its clients.
The Travel Agency did not advise the Hotel or its clients that it had ceased trading and it allowed the Hotel to provide the accommodation with no intention of paying the Hotel.
This constituted misleading and deceptive conduct by the Travel Agency.
Because the director had full knowledge of and was himself involved in the breach, he is personally liable and can be sued by the Hotel for recovery of money.

Each case will stand on its own facts and must be examined carefully to ensure it can be proved that a director was knowingly involved in a breach. Only then can it be determined if it is appropriate to sue a director personally.