When can a director or officer of a company be personally liable for combustible cladding?
In late 2020, the Victorian Government introduced the Cladding Safety Victoria Bill. According to the responsible Minister, the Bill was intended to “support owners of buildings assessed as higher-risk to rectify their combustible cladding” by providing financial assistance.
The Bill established Cladding Safety Victoria as a State government body, which was tasked with providing grants to building owners to fund the removal of “non-compliant or non-conforming” cladding from their buildings.
The Bill provided that, once a grant was paid to a building owner, the Crown (that is, the State of Victoria) became subrogated to the owner’s rights against any person in relation to the cladding that required the cladding rectification work to be undertaken.
Once the Bill was passed, the State’s right of subrogation was enacted in section 137F of the Building Act 1993.
That section provides that, if the State can exercise a subrogated right against an entity that is not an individual (such as a company), it can also exercise that right against a person who was an officer of that entity at the time of the act or omission giving rise to the right.
In other words, the section empowers the State not only to pursue a company that is liable for the installation or use of non-compliant cladding, but also anyone who was a director or other officer of that company when the cladding was installed or used. It effectively allows the State to “pierce the corporate veil”.
The section also provides, however, that the State cannot exercise subrogated rights against an officer of an entity, where the act or omission giving rise to the right (such as the supply or installation of the non-compliant cladding) occurred without the knowledge or consent of the officer.
What does it mean for the act or omission to have occurred without the officer’s knowledge or consent? Does it mean that the officer:
- did not know that the non-compliant cladding was being used in a building at all (and therefore must be taken not to have consented to it); or
- knew that the cladding was being used, but did not know that it was non-compliant?
The County Court of Victoria recently considered this question in Owners Corporation No 1 PS707553K v Shangri-La Construction Pty Ltd  VCC 1473.
In short, Judge Macnamara held that the first meaning above is correct. That is, an officer of an entity against which the State has a subrogated right under s 137F of the Building Act can only escape personal liability if they can prove that they did not know that the cladding was being used at all.
Put another way, an officer cannot escape liability under s 137F just by proving that they did not know that the cladding was non-compliant.
Judge Macnamara considered that the latter construction did not advance the purposes of the Cladding Safety Victoria Bill.
In essence, this was because the Bill seemed to be intended to impose liability on directors of building companies for using non-compliant cladding, many of whom could plausibly show that they did not know that the cladding did not comply at the time it was used.
The result is likely to be very concerning to directors and other officers of building companies who have used combustible cladding in their projects, as well as their insurers (insofar as cladding claims are not otherwise excluded under their policies).
It is relevant to note that the limitation period for bringing a “cladding building action” has been extended to 15 years from the date of the occupancy permit, for actions that would otherwise become statute-barred before 1 December 2023.
This means that we could conceivably see cladding actions, including subrogated claims brought by the State to recover grants paid to building owners, being commenced until about late 2028.
Liability limited by a scheme approved under professional standards legislation