Directors Found Trading Recklessly May Face Multiple Fines
In October last year, the High Court found a director who traded recklessly not only breached his directors’ duties under the Companies Act 1993, but also breached the Fair Trading Act 1986 (FTA) .
Panama Road Development Limited (PRDL), a property development company, was encountering delays on a project and its funding was due to expire. Mr Gapes, a director of PRDL, was working to secure further funding. Dempsey Wood Civil Limited (Dempsey) had provided services to PRDL and Mr Gapes assured Dempsey that PRDL had funds to pay for ongoing work. However, PRDL was unable to secure further funding and was put into liquidation.
There were insufficient funds in the liquidation to pay Dempsey for its work, so Dempsey sued Mr Gapes personally. Dempsey alleged that Mr Gapes had not only breached his directors’ duties, but that he also breached the FTA by misleading Dempsey into thinking PRDL had sufficient funds to pay it.
The High Court ordered Mr Gapes to pay $100,000 to PRDL for the breach of his directors’ duties, and an additional $280,000 to Dempsey for breaching the FTA.
This judgment is good news for unsecured creditors who may have an additional avenue for recovering funds in an insolvency situation. It is also a cautionary tale for directors to be careful about any representations they make regarding the financial position of a company should it encounter financial difficulty.
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