Mainzeal directors liable for reckless trading - what could this mean for other directors?

The High Court has released its decision in the claim against the former directors of Mainzeal,1 holding them liable for reckless trading in the years leading up to Mainzeal's receivership.

Justice Cooke decided that Dame Jenny Shipley, Peter Gomm, and Clive Tilby all “acted in good faith, and with honesty”, but that they nevertheless breached their duties as directors. Richard Yan's position was considered separately, as he was a director of both Mainzeal and its parent company, and had a clear conflict of interest. This decision should be carefully considered by anyone currently holding or contemplating a directorship.

Background

Mainzeal was a well-known New Zealand construction company, building everything from residential developments to large commercial projects. In 1995, the majority shareholding in Mainzeal's holding company was purchased by a Chinese investment consortium (Richina Pacific), headed by Richard Yan. By 2004, Mainzeal was wholly owned by Richina Pacific.

Richina Pacific regularly extracted funds from Mainzeal for use elsewhere in the group, particularly for investment in China. In return, Richina Pacific provided Mainzeal support for its ongoing operations, usually either by being a guarantor for Mainzeal's construction bonds, or by providing those construction bonds itself.

The group was restructured in 2009, after a difference in view arose between the shareholders of Richina Pacific, some of whom did not want to have investments in New Zealand. From April 2009, Mainzeal was expected to be a standalone business entity, financially self-sufficient from Richina Pacific. Despite this expectation, after the restructuring Richina Pacific continued to request funds from Mainzeal, and continued to provide letters of support.

Following a difficult trading period in 2012, Richina Pacific declined to provide further support to Mainzeal, and Mainzeal went into receivership in early 2013, followed soon after by liquidation.

Section 135: Reckless trading

The Companies Act 1993 provides that:

A director of a company must not

(a) agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company's creditors; or

(b) 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.

It is important to note that the prohibition is not on trading a company while it is insolvent. However...