Mainzeal - the Lessons for Directors
About the Author:
BEN JOHNSTON
Partner at Anderson Lloyd, Christchurch
Ben is an experienced commercial lawyer, with particular expertise in company, banking and insolvency, securities law and commercial transactions. He has advised on a number of high-profile projects and transactions.
There has been much publicity since the release in February of the High Court decision on directors’ liability in relation to the collapse of construction firm Mainzeal.
The liquidators claimed that the Mainzeal directors breached their duties under section 135 of the Companies Act 1993, commonly known as the reckless trading provision.
Section 135 requires that a director of a company must not agree to, cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
Result
The High Court found that the directors breached their duties under section 135 in the circumstances, with key considerations being:
Mainzeal was trading while balance sheet insolvent because money Mainzeal lent to other group companies was not, in reality, recoverable;
There was no assurance of broader group support on which the Mainzeal directors could reasonably rely if adverse circumstances arose; and
Mainzeal’s financial trading performance was generally poor and prone to significant one-off losses, which meant it had to rely on a strong capital base or equivalent backing to avoid collapse.
The Court made an order for the directors to pay $36M to the liquidators in light of the breaches. The Court found that Mr Yan had greater liability as he had an inherent conflict of interest, he induced the directors to breach their duties and he benefited considerably from the funds that were extracted from Mainzeal causing it to become insolvent. Mr Yan therefore has principal liability for the full amount of the $36M, with fellow former directors Dame Jenny Shipley, Mr Gomm and Mr. Tilby each being jointly and severally liable with Mr Yan to pay $6M.
Lessons
The decision is an important reminder of directors’ legal duties.
There remains a high legal hurdle to establish liability for reckless trading, and such a claim is highly fact specific. However, directors must consider whether the commercial decisions that they are making in the circumstances, and the information that they are relying on in doing so, discharge their legal duties. Such decisions may be judged harshly with hindsight.
Some general lessons for directors:
Do not rely on non-legally binding assurances of financial support where such support is critical to the company.
Be clear who your legal duties are owed to when you are a director of a company which is a part of a group of companies.
If relying on financial support from other companies in a group, regularly and critically assess whether that support is robust and will be available when needed.
Take independent advice if you are unsure of, or uncomfortable with, the information that you are receiving – sooner rather than later.
Directors’ and officers’ insurance cover should be regularly reviewed for adequacy given the size and value of the company and its trading activities.
Where cash is tight, directors need to constantly review the company’s trading position with the benefit of the most up-to-date information available to make informed decisions.
Keep good written records of decisions made, the reasons for those decisions, the information considered and the benefit of any advice received.
Partner, Christchurch
Anderson Lloyd
03 379 0037
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