Careful With What You Say! Directors and Officers May Be Personally Liable For Misleading Statements

Under the State and Commonwealth law, directors and other officers may have personal liability for unpaid corporate debts if:

1. the officer makes misleading statements assuring a creditor that a future payment will be made;
2. the creditor relies on the statements; and
3. the debt is not paid.

Under both Fair Trading Act 1999 (Vic) and Trade Practices Act 1974 (Cwlth), a misleading statement is a representation about a future event when the maker of the representation cannot demonstrate that he or she had reasonable grounds for thinking the statement was true.

In the following cases, the courts have applied these provisions to find a director or officer personally liable for unpaid corporate 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 officers must be very careful when making assurances about future payments to creditors. If these debts are not subsequently paid, a court could find that the assurances were misleading and deceptive statements, resulting in the officer’s personal liability for the debt.