Lessons from Mainzeal

In New Zealand, company directors are under a duty to not trade in a manner that causes a substantial risk of serious loss to the company’s creditors.  This duty has been highlighted in the recent High Court decision in Mainzeal Property and Construction Limited v Yan, where the directors of Mainzeal Property and Construction Limited (Mainzeal), including Dame Jenny Shipley, were collectively fined NZ$36 million for breach of this duty.  We set out below the key lessons we consider can be taken from this high profile case.

What happened?

Between 2003 and 2009, Mainzeal was a wholly-owned subsidiary of a company controlled by Richina Pacific Limited (Richina Pacific).  Pursuant to a restructure in late 2009, Mainzeal ceased to be a wholly-owned subsidiary of Richina Pacific and instead Mainzeal and Richina Pacific had common shareholders.

Richina Pacific required Mainzeal to effectively follow an insolvent trading policy.  It extracted sums from Mainzeal by way of loan through vehicles that did not themselves have the ability to repay.  This money was used by Richina Pacific to its own advantage.

By the end of 2009, Richina Pacific had borrowed over $42 million (including interest) from Mainzeal.  Excluding the value of these loans from Mainzeal’s balance sheet meant that Mainzeal was insolvent.

In 2012, Mainzeal collapsed.  On liquidation, Mainzeal owed significant debts to the sum of over $110 million to sub-contractors, construction contract claimants, employees, and other general creditors.

What led to the breach of director duties?

The High Court held that three key factors ultimately established a breach of the director duties set out in section 135 of the Companies Act 1993 (i.e. reckless trading):

• Mainzeal was trading while balance sheet insolvent, because the intercompany debt was not in reality recoverable.
• There was no assurance of group support on which the directors could reasonably rely if adverse circumstances arose.
• Mainzeal’s financial trading performance was generally poor and prone to significant one-off loses, which meant it had to rely on a strong capital base or equivalent backing to avoid collapse.

A key fact was that, despite the intercompany loans, Mainzeal was not assured of group support that could provide equal security to a strong balance sheet.  From the group restructure onwards, there was no guarantee of group support and the verbal assurances provided to Mainzeal were neither legally binding nor recorded in writing.

Lessons

Rely only on written, legally binding assurances

A feature of the case was that aspects of the assurances provided to the directors were held to be misleading or unenforceable.  Directors must ensure that all assurances upon which they are relying, are in writing, legally binding, are of substance and (to the extent possible) unconditional.

Ensure documentation is duly executed

The High Court put little to no weight on board resolutions where executed copies could not be located or produced.  It largely dismissed witness evidence asserting they were executed.  This highlights the importance of ensuring that all governance documents are properly prepared, executed, and filed adequately.

Director and officer indemnities and insurance should be procured prior to any circumstances giving rise to potential liability

Subject to the provisions of a company’s constitution, directors in New Zealand can be indemnified and insured in respect of certain claims that may be made against them.  The outcome of this case highlights the importance of ensuring appropriate director and officer indemnities are in place and appropriate insurances held.  This includes a period of run-off insurance to cover any claims that may be made against directors after they vacate the office.

Seek professional advice, especially in circumstances where the company is in financial difficulty

Directors must always ensure they are appropriately advised.  Without adequate legal advice, directors may be unaware of, or misled to the extent of, the duties that New Zealand law imposes upon them as directors of a company.  Procuring legal and/or financial advice in early stages may serve to save both directors and their company significant costs down the line.

Where to from here?

The Mainzeal case is a salutary reminder of the particular care that directors in New Zealand must take if their company is facing financial difficulty.  Assessing a potential breach of duties in these circumstances is fact-dependent, and directors of a New Zealand company should seek specific advice if they have any doubt as to the level of compliance required in respect of any duties imposed upon them under law.

If you would like any assistance or legal advice in connection with your position as a director, the operation of your company or corporate advisory matters in general, then please do not hesitate to get in touch with the Business Law team at Lane Neave.

Business Law team

Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace,  Peter Orpin, Ellen Sewell, Matt Tolan, Carlo Wan, Kristina Sutherland, Jacob Nutt, Whitney Moore, Alex Stone, Ben Cooper, Lisa Catto

Also in this edition: