After a decade-long legal battle, the New Zealand Supreme Court has released its decision against Mainzeal’s former directors. Let’s review the judgment and explore what it means for company directors.
The Supreme Court’s Mainzeal Decision
In August 2023, New Zealand’s highest judicial body released its decision against Mainzeal’s former directors in the Mainzeal construction case, Yan v Mainzeal Property and Construction Limited (in liquidation). The court ruled against the challenge from Mainzeal’s former directors, determining that they were aware of the company’s unstable financial situation following its post-2008 profit difficulties. The court established that these directors failed to uphold their responsibilities as stipulated in sections 135 and 136 of the Companies Act.
Mainzeal, once a leading New Zealand construction firm, faced volatility and various legal issues that weakened its finances. Its balance sheet misleadingly included unrecoverable advances to related companies. It struggled with cashflow and sold assets. In 2013, Mainzeal entered receivership and liquidation, owing creditors $110 million. In 2015, liquidators sued Mainzeal’s former directors for allowing insolvent trading, causing creditor losses. The Supreme Court held that the Mainzeal directors breached their duties as Mainzeal’s directors under sections 135 and 136 of the Companies Act 1993, ordering Mainzeal’s former directors to pay almost $40 million plus interest and costs to creditors.
The Mainzeal decision is significant because our highest court, the Supreme Court, in a rare move, helpfully took the opportunity to provide general guidance to directors and the business community, about the implications of its decision for directors and decision making. That guidance will equally apply to creditors seeking a recovery.
Directors’ duties under the Companies Act
The Mainzeal judgment focuses on two duties on all directors under the Companies Act 1993 that prohibit:
- Carrying on business in a manner likely to create a substantial risk of serious loss to the company’s creditors (s 135)
- Incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so (s 136).
The other critical piece of legislation is s 301. When a company is in liquidation it allows liquidators, shareholders and importantly creditors, to bring a court claim against directors (and potentially others involved in the company) where the director has, among other things, misapplied or retained money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company. The court has the power to order the director to pay or transfer the money or property to a creditor.
Guidance to Directors
The Supreme Court specifically notes that it is important that the principles the judgment establishes are accessible to provide guidance for directors in the future.
The Mainzeal judgment focuses on the need to protect creditors, particularly in distressed financial situations. Directors are now under scrutiny to act in ways that safeguard creditor interests. While this may seem restrictive, it underlines the need for heightened vigilance and prudent decision-making, particularly in companies facing financial struggles.
Directors should:
Overall, a director’s decision will be assessed by a standard of reasonableness while exercising business judgment, recognising that directors must make complex decisions under pressure of time and events often with incomplete information. The court will recognise and adjust for hindsight bias, such as treating a bad outcome as more predictable than it actually was and balancing this with the need for creditors’ interest. Sometimes, reasonable decisions turn out badly.
We’re ready for what’s next
The Mainzeal decision addresses the challenging balance that exists between holding directors accountable while allowing them the freedom to make commercial decisions involving risk. The balance has undoubtedly tipped more toward caution and accountability.
If you are a director of a business, be prepared for greater scrutiny and potential liability, particularly when dealing with financially distressed companies. Consult experts regularly and adjust your strategies based on legal and financial updates. Wynyard Wood has experts who can assist with you reviewing and understanding your options.
If you are a creditor left in a difficult financial position due to a company’s mismanagement, the Mainzeal decision sets a crucial precedent. It emphasises that directors have a legal mandate to protect creditor interests, providing you with stronger legal grounds for holding directors accountable. Creditors should still take proper measures to protect themselves by conducting thorough due diligence, obtaining security such as registering security interests, having clear terms of trade and monitoring the creditworthiness of borrowers.
