Company director personally liable for cladding costs

Cladding Safety Victoria (CSV) was established in 2019 to oversee cladding rectification works throughout Victoria. Among other things, CSV provides grants of financial assistance to owners corporations for the rectification of external wall combustible cladding of eligible higher-risk, class 2 residential apartments.

Section 137F of the Building Act 1993 (Vic) (Building Act) gives the State of Victoria the right to recover payments made by CSV from companies or their officers[1] responsible for the installation or use of non-compliant or non-conforming cladding.

Owners Corporation 1 Plan No PS 707553K and Ors v Shangri-La Construction Pty Ltd (ACN 130 534 244) and Anor [2023] VCC 1473 is the first successful recovery action against a company director for rectification costs incurred by CSV.

Facts of the case

Shangri-La Construction Pty Ltd (Shangri-La) constructed a residential apartment complex in Victoria (Development) using RMAX Orange Board combustible cladding (RMAX). The factual background, and parties involved, were as follows:

• In December 2013, Shangri-La and the developer, 290 Hawthorn Road Pty Ltd, entered into an agreement for the design and construction of the Development (Contract).
• In June 2014 a design meeting took place between Mr Obaid Naqebullah, principal of Shangri-La (Director), and various consultants including the fire engineer and Mr Tsaganas, the building surveyor. The Director’s evidence was that this meeting related to the brand of cladding to use, and the consensus was that RMAX was the most appropriate.  
• The Lacrosse fire occurred on 24 November 2014.[2]
• In December 2014 a building permit and amended permit were granted for the Development by Mr Tsaganas, which authorised the use of RMAX and departure from Deemed-to-Satisfy standards of the Building Code of Australia 2010 (BCA).
• RMAX was installed at the Development between December 2014 and 13 August 2015.
• An occupancy permit for the Development was issued in September 2015.[3] In issuing this permit, the building surveyor relied on letters from the Director confirming that the Development had “met all Fire Engineering requirements as per the BCA and consultants design”.
• The Grenfell Tower fire occurred on 14 June 2017.[4]
• The Director did not know RMAX was problematic or inappropriate until “2016 or 2017”.
• A building audit conducted in November 2019 identified extensive use of RMAX throughout the Development[5] and recommended its removal and replacement.
• In March 2020 a local council order required removal of the RMAX and in November 2020 the Owners Corporation received funding from CSV for cladding rectification works. 
• Shangri-La went into voluntary liquidation in March 2023.

Pursuant to the rights of subrogation outlined in s 137F of the Building Act, the State of Victoria brought proceedings against the Director, alleging that Shangri-La breached the Contract, Domestic Building Contracts Act 1995 (Vic) and BCA as the use of RMAX was not suitable and did not comply with legislation.[6]

Defence

The Director relied on the following arguments in defence of the claim against him:

• He did not know that RMAX was a non-compliant or non-conforming external wall cladding product at the time of installation.
• In approving the use of RMAX, he relied upon guidance from the relevant building surveyor and fire engineer.
• He was therefore entitled to rely on the defence in s137F(4), that if an act or omission by an entity occurred without the knowledge or consent of an officer of the entity, a right or remedy is not enforceable against the officer.
• Section 137F does not apply retrospectively.

Judge’s findings

His Honour Judge Macnamara made the following findings:

• The application of s 137F cannot be limited in the manner contended. If this was to occur, it would serve no purpose at all.
• The Director’s knowledge that RMAX was being used was sufficient to exclude him from the benefit of the s137F(4) defence. It did not matter that he did not know the product was non-compliant at the time of approval and installation. His Honour considered that this interpretation advances the purposes of the Cladding Safety Victoria Act 2020 (Vic); whereas the construction advanced by the Director does not.
• The Director was ordered to pay the State of Victoria the sum of $1.2 million for rectification costs.

Implications

We expect the Director to take further steps in these proceedings, either by way of appeal or claims against other parties. We will monitor the developments with interest.

Meanwhile, company directors and officers should pay close attention and consider appropriate risk management steps. Some comfort can be taken by officers in classes that the Judge considered Parliament intended to afford immunity:

• non-executive directors such as a building company’s solicitor or accountant who sit on the board to bring their legal or accounting expertise to the table
• company secretaries who devote their time to office administration, keeping or supervising accounts or accounting systems, payroll issues and such
• executive directors or non-director executives involved in non-building aspects of a company’s operations for instance, a marketing manager or someone devoted entirely to the raising of finance, and
• executive directors or senior executives tasked to manage or supervise particular projects, which are not affected by the cladding issue.

[1]     Defined pursuant to section 9 of the Corporations Act 2001 (Cth)

[2]     Tanah Merah Vic Pty Ltd v Owners Corporation No 1 of PS613436T and Ors [2021] VSCA 72

[3]     By building surveyor Sokratis Kromidellis

[4]     https://www.grenfelltowerinquiry.org.uk/

[5]     The audit was conducted by Mr Stephen Kip of SKIP Consulting Pty Ltd

[6]     The proceedings, which have a “long and tortuous history” (Owners Corporation & Ors v Shangri-La Construction & Anor (No 2) [2023] VCC 655) were originally commenced by the unit owners and Owners Corporation in the Victorian Civil and Administrative Authority (VCAT) against Shangri-La. Various orders were made by VCAT which culminated in a change of parties and transfer to the County Court of Victoria.