Case: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722
Outcome: discussed
The Harmer Report and the Discussion Paper of The Law Reform Commission (Discussion Paper 32, August 1987) explain generally the rationale of what became Pt 5.7B of the Corporations Law. It was to impose a positive duty upon a director owed to the company to prevent the company from engaging in insolvent trading. Thus, it was intended to produce a legislative structure which enables all creditors to share equally in the sums recovered, so as to promote the principle of equality. The reason for the change from a focus upon a creditor recovering a debt to the liquidator recovering loss and damage suffered by a creditor in relation to a debt is set out in pars 200 and 201 of the Discussion Paper and in the legislative proposals then put forward. It is relevantly summarised in par 202 of the Discussion Paper as being that the amount of the liability is to be determined by the Court and measured by reference to the loss and damage sustained by the creditors, and the sum recovered should then be applied for the benefit of all the unsecured creditors. Paragraph 213 then provides that the Court has ... a very broad power to give judgment in favour of the company in such amount as is just having regard to the interests of the creditors. This is to ensure that the damages recovered do not simply reflect some nominal damage to the company. The damage suffered by creditors is the relevant measure. This is consistent with Kinsela's case . It is not sufficient simply to provide that the measure of damages should be an amount equal to the sum of the unpaid debts which were incurred during the period of insolvent trading. Where debts are incurred, the company usually obtains some benefit. ... The amount for which a director who is found to have breached the duty should be liable is a matter requiring careful quantification on the facts of each case. A broad discretion to be exercised by the court is appropriate. Paragraph 317 of the Harmer Report restates those views, and gives some examples of the need for a broad judicial discretion. The reference to Kinsela's case is a reference to Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, where Street CJ (with whom Hope and McHugh JJA agreed) at 732 733 said that the damage suffered by creditors from insolvent trading supports the view that the directors of a corporation must owe a duty to consider, in certain circumstances, the interests of the creditors. 24 Paragraphs 1103 to 1106 of the Explanatory Memorandum to the Corporate Law Reform Bill specifically address the proposed s 588M. The text appears to assume that the liquidator will effect recovery of the loss and damage suffered by a creditor to whom a debt is owed by "action", and explains why such "proceedings" should generally be permitted only through the liquidator, so the creditor's right to bring proceedings under s 588M(3) is curtailed: see s 588R 588U. That was said to ensure the principle of equal sharing. 25 Nothing is said in the Explanatory Memorandum as to why the expression "loss and damage in relation to a debt" was introduced, rather than the form of expression in the earlier legislation.