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Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Mainzeal’s NZ$36m reckless trading appeal pending; bankruptcy of director deferred

Liquidators of Mainzeal with a NZ$36m judgment for reckless trading against the company’s directors have failed in an attempt to bankrupt one of the directors only two weeks out from the director’s appeal hearing.

Meanwhile, the outcome of the appeal may assist in any review of NZ’s insolvency laws.

The New Zealand High Court decision in Mainzeal Property & Construction [2019] NZHC 255 resulted in its liquidators obtaining judgment for wrongful trading against the company’s directors for $36 million.

An appeal is being heard by the New Zealand Court of Appeal commencing on 27 July 2020.

In the meantime, Mainzeal applied to bankrupt one of the directors – Mr Yan – based on the $36m judgment.  There was no dispute that the requirements for the making of a bankruptcy order were satisfied. But Mr Yan succeeded in having that proceeding “halted” pending determination of the appeal with no further security to be provided.

Details

The High Court found that Mr Yan and other Mainzeal directors had breached their duties under s 135 (reckless trading) of the Companies Act 1993. They were ordered to pay NZ$36m, of which Mr Yan was solely liable for $18m. Mr Yan and the directors were ordered to jointly pay costs to Mainzeal in excess of $2.3m.

Mr Yan has appealed separately from the other director defendants. While the other directors have provided security for $18m, no security has been provided for the balance of the $18m for which Mr Yan is solely liable. He lives mainly in China.

NZ law gives a court a general discretion to “halt” a creditor’s application for bankruptcy, similar to s 52 of the Australian Bankruptcy Act; and in particular if there is an appeal pending. The Court’s discretion to grant a halt is unfettered but case law has settled various criteria.

Some factors that were found relevant were:

  • the appeal hearing is imminent and it involves questions of general public importance
  • it is not a case where the appeal lacks substance
  • if Mr Yan were made bankrupt, the Official Assignee may not pursue the appeal
  • the time for the claw-back procedures under the Insolvency Act has already commenced
  • any bankruptcy order now made would likely be annulled should Mr Yan succeed on appeal
  • the expert evidence on Chinese law indicates that the courts of China will not recognise or enforce a New Zealand bankruptcy order.

Generally, where an appeal or application to set aside a judgment has been brought that is bona fide, it is not uncommon for the Court simply to adjourn or halt the bankruptcy for a period of time. And in the ordinary run of cases, it would likely be unusual and perhaps exceptional to order security as a condition of a halt.  This generally accords with Australian law.

Although evidence of his assets was not fully explained, there are difficulties for Mr Yan in transferring funds out of China because of its Safe Regulations and other inferences should not be unfairly drawn.

As to whether Mr Yan should offer further security,  although evidence of his assets was not fully explained, there are difficulties for Mr Yan in transferring funds out of China because of its Safe Regulations and other inferences should not be unfairly drawn.

And in complex litigation of the kind here, security is best considered in the appeal process, where, as appropriate, it can be controlled either by the trial judge and/or the appellate court.

“In these circumstances, I find it would not be appropriate at this very late stage to impose security on Mr Yan personally as a condition of an order halting the bankruptcy proceedings. In my view, it is essential that the appeal proceed, as scheduled, without the late imposition of conditions which might interfere with or disrupt the appeal process. If there is a further appeal beyond the Court of Appeal, the rules provide for further consideration of security at that stage”.

Mainzeal Property & Construction Limited (in liquidation) v Yan [2020] NZHC 1659.

Generally

New Zealand does not have a regular “safe harbour” regime like that of Australia, under s 588GA; probably because its liability provisions are not as severe as Australia’s s 588G. But there is a move in NZ to introduce one: see An insolvency safe harbour in New Zealand?

But New Zealand does have a COVID-19 safe harbour, in s 138B Schedule 12 of the Companies Act 1993, recently introduced. See New Zealand’s COVID-19 laws on reckless trading and debt hibernation.

RITANZ supported that new provision, and wisely recommended that a review of insolvency law take place once circumstances created by COVID-19 have run their course. That review should consider, in light of the current experience, whether any permanent changes to insolvency law are required.  RITANZ also raised the idea whether an emergency set of insolvency law provisions could be put in place for future use, if required.   The outcome of the appeal in Mainzeal will be another factor to consider.

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