Liability of Directors – Liability of receivers – Whether potential liability for damages constitutes incurring of a debt
Reed contracted to purchase paper from King & Prior. After Reed had paid King & Prior for the paper, but before the paper had been delivered, receivers and managers were appointed to King & Prior’s business. As King & Prior had not paid the manufacturer for the paper, the paper was repossessed from King & Prior by the manufacturer. Reed sued King & Prior, its directors and receivers for the refund of the purchase price.
The Australian Corporations Law (s.592) provided that where a company had incurred a relevant debt, a person who was at the time a director or who took part in the management of the company was personally liable for the payment of the debt if “immediately before the debt was incurred there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due”, whether because of the subject debt or otherwise.
In a contract situation the right to claim damages only arises when there is a total failure of consideration. A potential liability for damages does not constitute the incurring of a debt for the purposes of the section.
The second and third defendants successfully argued that a contractual right to sue for damages was not a debt for the purposes of the relevant section.