After first being introduced to the Courts in 2017, the Supreme Court's decision regarding the appeal of the directors of the collapsed construction firm Mainzeal was released this morning, 25 August 2023, following much anticipation. The Supreme Court has rejected the appeal and ordered the directors to pay penalties amounting to $39.8 million for breaching their duties under the Companies Act 1993.
The Companies Act 1993 (the Act) prescribes duties that directors of New Zealand companies must follow when acting as directors (s131 to s138A of the Act.
The Mainzeal case relates specifically to the following duties:
Section 135: Reckless trading; and
Section 136: Duty in relation to obligations.
Directors must not allow the company's business to be carried out in a manner likely to create a substantial risk of serious loss to the company's creditors. Further, directors must only agree to the company incurring an obligation if the director reasonably believes at that time that the company will be able to perform the obligation when required.
Mainzeal Construction, the third-largest construction firm in the country at the time, collapsed in 2013, impacting over 400 employees. Mainzeal's secured creditor, Bank of New Zealand, and preferential creditors were paid in full by the company's receivers. Unsecured creditors are still owed $110 million.
The company's liquidators initiated legal proceedings in 2017, alleging that the directors engaged in reckless trading and breached their duties as directors under the Act. The High Court initially ruled that the directors were liable for $36 million. A number of appeals and counter-appeals have been heard since 2017.
Supreme Court Decision
The Supreme Court upheld the lower court rulings and found that the directors breached s135 and s136 of the Companies Act. The breaches included:
Allowing Mainzeal to trade while insolvent.
Failing to protect the interests of creditors.
Entering into contracts that the company could not fulfil from January 2011 onwards.
Former managing director Richard Yan has been found liable for the entire penalty amount, while the liability of the other three directors, Dame Jenny Shipley, Clive Tilby, and Peter Gromm, has been capped at $6.6 million each.
The Supreme Court determined that the directors were aware of Mainzeal's precarious financial position and could not reasonably rely on assurances of support from other companies in the Richina Pacific Group (Mainzeal's parent company) or Mr. Yan. These assurances were deemed legally and practically unenforceable. The Court also emphasised that the directors should have recognised the serious risk of substantial loss to creditors from Mainzeal's trading practices.
The Supreme Court's decision highlights the liability directors may face if they trade while insolvent or enter into contracts without reasonable grounds to believe they can be fulfilled. Mainzeal may serve to remind Directors that the Act imposes standards of reasonableness and diligence upon directors while trading and entering into obligations, and the potential consequences for non-compliance.
The Supreme Court's decision brings to a close more than eight years of court proceedings. It upholds the breaches of the Companies Act by the Mainzeal directors, imposes penalties accordingly, and strongly emphasises the importance of creditor protection in New Zealand company law.
August has been an interesting month for company law, particularly the scope of directors' duties, which have now been expanded. The new duties clarify that directors may consider matters other than maximising profits when determining the best interests of a company.
Mainzeal serves to remind us that these new duties do not release directors of their existing duties - particularly their obligation to monitor the performance of their company and their duties to creditors.
If you would like further information or legal advice about Mainzeal, its implications, or the duties a director may have at law, please reach out. We're here to give you sound business advice, for a sound night's sleep.