The Supreme Court has issued its decision in the long-running Mainzeal directors’ dispute, awarding judgment in favour of Mainzeal's liquidators and ordering the directors to pay $39.8 million. The decision not only concludes a long-standing legal battle but also provides guidance for directors from NZ’s top court.
Set out in this article is a brief summary of the Court’s decision and the implications for Directors.
Court’s decision
Mainzeal went into liquidation in February 2013 owing unsecured creditors a staggering $110 million. The Court found directors liable under the Companies Act 1993 (sections 135 and 136) for allowing Mainzeal to:
- Carry on business in a manner likely to create a “substantial risk of serious loss to its creditors” (s 135); and
- Incur obligations, including entering into large construction contracts, at a time when the directors did not have reasonable grounds to believe that Mainzeal would be in a position to perform those obligations when required to do so (s 136).
In awarding damages under s 136, the Court identified the date from which the directors did not have reasonable grounds to believe that Mainzeal would meet its obligations. The Court quantified the value of the unfulfilled obligations entered into from that date at $39.8 million and ordered the directors to personally pay that amount back to Mainzeal (for the benefit of creditors).
The liability of the three independent directors was capped at $6.6 million each, with the remaining director, who had been appointed by the parent company/shareholder, liable for the full $39.8 million. The directors were also liable for interest and costs.
As to section 135, although the directors were found liable, the Court found that the liquidators had not proved that the company had suffered losses from the date of the breach. Accordingly, no damages were awarded.
Implications for Directors
The Supreme Court’s recommendations for directors in light of its decision in the Mainzeal case are, in short:
- Directors have a continuing obligation to monitor the performance and prospects of their company. If that monitoring reveals potential for “substantial risk of serious loss to creditors” (s 135) or doubts as to whether obligations incurred will be able to be honoured (s 136), then directors should squarely address the future of the company. They must do so within a ‘reasonable time’.
- In those circumstances directors may need to take independent professional, legal or expert advice. Where advice is taken, it should be followed.
- In considering the future of the company, directors should determine whether the identified risks can be eliminated (e.g. by recapitalisation) or sufficiently managed to allow them to be satisfied on reasonable grounds that there will be no breach of sections 135/136. The company should not take on substantial new obligations while the directors are taking stock, unless there are measures in place that will allow those obligations to be met.
- A long-term strategy of operating while balance sheet insolvent is generally not acceptable. A possible exception is where there are assurances of support from related or third parties that can reasonably be relied upon, for example where they are legally enforceable.
Conclusion
A director should always be mindful of the Supreme Court’s recommendations for directors in the Mainzeal case when carrying out her or his obligations as a company director, and when considering a new role as a director of a company, a prospective new director should carry out appropriate due diligence on the company and its current and future ability to perform its obligations before accepting the role.
Disclaimer
The views expressed in this content are those of the author, who is also responsible for any errors and omissions. Family Business Association provides this article for your information only. The content of the article should not be taken as advice. If you wish to explore this topic, please consult an advisor who you consider to have the expertise to provide specific advice in relation to your family business.
