De facto directors of a building company were found personally liable for tortious conduct of the company that caused damage to a neighbouring property by removing support of the land and failing to properly observe the property boundary during excavation which resulted in fines totalling $4.4M.
In issue
- The primary issue in this case was whether a developer and their contracted building company were liable in trespass and negligence for damage to the plaintiffs’ property caused by over-excavation at the boundary, and whether persons involved in the operations of the building company were de facto or shadow directors such that by their conduct, they were personally liable in respect of the company’s tortious acts.
The background
Etna Developments Pty Ltd (Etna) owned property in Gosford NSW and obtained development consent in May 2016 for a significant development project, comprising the construction of a 55-apartment complex. Etna engaged Nutek Constructions Pty Ltd (Nutek) to carry out the project.
The plaintiffs were Edmund Brown and Irena Saric, owners of the neighbouring property.
The commencement of excavation works in August 2017, led to several disputes and issues, including the improper marking of boundaries and encroachments onto the plaintiffs' property and, further still, a landslide onto the plaintiffs’ property causing substantial structural damage.
Despite complaints to local authorities and attempts to engage with Nutek, Nutek continued to excavate, which culminated in significant further landslips and further damage to the plaintiffs’ house and driveway.
The plaintiffs sued Etna and Nutek, as well as four persons involved in Nutek’s operations: Nicholas (Nick), Fotis (Frank), Konstadinos (Kon) and Alexander Kalantzis (Alex) (the Kalantzis defendants). They sought damages in trespass and negligence. By the time of the trial, Etna was in external administration and Nutek was in liquidation. Frank was Nutek’s sole director, Nick ran the company, Kon ran the development site, and Alex worked at the site through his own contracting company.
The decision at trial
De facto directors – personal liability in tort
A director can be liable for breach of duty of care by a company where they have personally assumed that duty. Liability may also extend to those found to be ‘de facto’ directors.
Three of the four Kalantzis defendants were not registered directors of Nutek, so the court considered whether they were de facto directors. Section 9AC(1) of the Corporations Act 2001 (Cth) provides that although not formally appointed as a director, a person may still be considered a director if they act in the position of a director or if the directors of the company are accustomed to act in accordance with their instructions or wishes. The court emphasised that whether a person fulfills the role of a de facto director is a question of fact and relevant considerations include the size of the company, allocation of responsibilities, internal practices, whether others considered the person a director, and whether the person held themselves out as a director. The vital factor is the 'potentiality to control'.
Frank, the sole registered director, was found to be a 'puppet director' with no real control over the company or knowledge of the affairs of the company. He did not participate in company meetings, did not know where the registered office of the company was, and had virtually no understanding of his shareholding and directorship status.
Nick and Kon however had the 'potentiality to control' the business. Nick oversaw the office and Kon managed the building site; both were the decision-makers of the company. Nick dealt with developers, consultants, and regulatory authorities, and portrayed himself as the builder to the plaintiffs. He was involved in contract administration, liaising with SafeWork and the council, and was on-site regularly. Kon ran the building site and worked closely with Nick. Kon was seen directing works on the site and was involved in excavation activities. Their practical execution of typical directorial duties, and the influence they exerted indicated they effectively ran the company in a capacity consistent with having directorial responsibility. Consequently, the court concluded both Nick and Kon were de facto directors of Nutek, and considered their personal liability, as well as Frank’s, when dealing with the plaintiffs’ actions in trespass and negligence against Etna and Nutek. Alex’s personal liability was only considered in relation to the work he did by way of his subcontracting company.
Trespass
The court found that each of the defendants was liable in trespass because they authorised, directed or participated in the excavation work that crossed the boundary onto the plaintiffs' property, to which the plaintiffs did not consent. They failed to clearly mark the boundary between the development site and the plaintiffs' land. The evidence included unchallenged survey data showing encroachments of up to 2 meters onto the plaintiffs' land.
The court dismissed the defendants' argument that the encroachments were due to landslip. Further, the defendants' claims that they did not know the boundary, or that the encroachment was unintentional, were rejected. The court emphasised that the lack of clear boundary marking did not absolve the defendants of liability.
Negligence and breach of statutory duty
Although the plaintiffs’ pleaded claim did not refer to s 177 of the Conveyancing Act 1919 (NSW), the court considered breach of both the statutory duty and common law duty of care in relation to support for land.
The court determined that Etna, Nutek and the Kalantzis defendants owed a duty of care to the plaintiffs not to damage their land or cause loss, reinforced by s 177 of the Conveyancing Act 1919 (NSW), which imposes a duty not to remove the support provided by one piece of land to another.
In coming to its decision on breach, the court was referred to evidence that two geotechnical reports dated July 2015 and March 2017, were provided to the defendants, and clearly identified a high risk of landslides along the western boundary. The geotechnical reports went on to recommend works to guard against any future landslide. The defendants failed to undertake the recommended works.
The court held that a reasonable person in the position of Nick, Kon or Frank 'could not have failed to be aware that the excavation work being undertaken on the development site posed a serious, foreseeable and not insignificant risk of harm to the plaintiffs’ land'.
The court concluded that despite being aware of the risk to the plaintiffs’ property, the Kalantzis defendants (save for Alex) did nothing until compelled to do so and that they (save for Alex) were personally liable as directors of Nutek. The court found Nick, Frank and Alex liable for a combined total of approximately $1.5M, and Kon was found liable for $666,669. The court also referred the matter to the Building Commission NSW and to ASIC.
The point taken on causation
During excavation, Nutek discovered significant quantities of tyres that had been dumped or used for site fill. The defendants argued the presence of tyres in the fill could have weakened the stability of the soil, contributing to the landslip and damage to the plaintiffs' property, as a means of suggesting that their conduct was not a necessary condition of the harm suffered by the plaintiffs.
The experts on both sides agreed that they would not have significantly affected the stability of the ground. However, the removal of support at the common boundary allowed the tyres and the ground to move, causing instability that led to the damage to the plaintiffs’ property. Accordingly, the court found that the excavation work, coupled with the lack of measures to protect against landslide (which the court noted could have been addressed by Nutek following the discovery of the tyres on the site in 2017), was a necessary condition for the harm suffered by the plaintiffs, satisfying the 'but-for' test of causation.
Implications for you
The decision in this case has significant implications for the personal liability of directors. This case reminds us that the courts will hold directors personally liable for tortious conduct if they assume a duty of care or direct the company to commit a tort.
It is a cautionary tale for directors, highlighting the risk of exposure to personal liability, notwithstanding the general principle that ordinarily separates the acts, omissions and liabilities of a corporate entity from those of its officers.
