Mainzeal directors liable for reckless trading, Court of Appeal calls for legislation review

Former Mainzeal directors, including ex-prime minister Dame Jenny Shipley, are liable for reckless trading before the construction company collapsed, the Court of Appeal has ruled.

A group of the country’s leading judges also said the legislation governing insolvent trading in New Zealand is “unsatisfactory in a number of respects” and called for the Companies Act 1993 to be reviewed.

The country’s second highest court today delivered its decision in the long-running proceeding after the High Court ordered Shipley, Peter Gomm, Clive Tilby and Richard Yan to pay $36 million for breaching directors’ duties ahead of Mainzeal folding in 2013.

The High Court’s order in 2019 represented just a proportion of the entire deficiency in the Mainzeal liquidation of about $111m.

Mainzeal’s former directors appealed, while the liquidators also cross-appealed, seeking an increased award of compensation at a multi-day hearing starting in July last year.

The Court of Appeal’s president Justice Stephen Kós, Justice Forrie Miller and Justice David Goddard agreed with the High Court the directors of Mainzeal had carried on in a manner
likely to create a substantial risk of serious loss to creditors.

However, the breach of section 135 of the Companies Act 1993 came no later than January 31, 2011.

“But, focusing on the creditors and the business as a whole, that risk did not materialise. As the [High Court] Judge held, there was no net deterioration in the company’s position between 31 January 2011 and the date of liquidation in early 2013,” the Court of Appeal’s judgment reads.

The court said because of this no compensation was recoverable in respect of the directors’ breach of s135.

” … no compensation is recoverable in respect of the directors’ breach of s135. On the only relevant measure, the breach did not cause loss.”

But the court reached a different view about the liquidators’ claimed section 136 breach of the legislation, which had earlier failed in the High Court.

The judges found the four significant construction contracts entered into after January 31, 2011, certain obligations to subcontractors on those projects, and all obligations entered into from July 5, 2012, onwards violated the Act.

“The appropriate measure of compensation for the directors’ breaches of s136 is the amount of those new obligations to the extent that they remain unsatisfied after allowing for any dividends in the liquidation,” the decision read.

The Court of Appeal decided to send the proceeding back to the High Court to quantify the compensation because it did not have all the information required to assess the amount of the directors’ potential liability.

The judges also found the legislation governing insolvent trading in New Zealand is “unsatisfactory in a number of respects”.

“The Act should be reviewed to ensure that it provides a coherent and practically workable regime for the protection of creditors where directors decide to keep trading in circumstances where a company is insolvent or near-insolvent,” their decision states.

The liquidators, Andrew Bethell and Brian Mayo-Smith of BDO, said in a statement the Court of Appeal’s decision was “likely to lead to a significant increase” in the award for damages for the creditors.

“Many creditors were put into serious financial difficulty when the directors, including Dame Jenny Shipley and Richard Yan knowingly, and recklessly exposed creditors to illegitimate risk and allowed the company to continue trading while insolvent over an extended period of time,” Bethell said.

“The court has also opened up the real prospect of all directors being jointly and severally liable for the full amount of damages. This is likely to be substantially higher than the D&O insurance policies held by the directors and will facilitate recovery of creditors’ losses,” he said.

Bethell added the case was “vitally important” because it establishes the standard of corporate governance and care required by directors towards the company and its creditors.

“The court held that when the directors implemented the illegitimate ‘rob Peter to pay Paul’ strategy, they breached s136, which states directors must not incur any obligation unless they believe on reasonable grounds that the obligation can be met.”

Bethell said it was disappointing the directors “continue to deny any responsibility for using creditors’ money and putting them at risk”.

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