The Supreme Court of New Zealand has dismissed directors’ appeals from a finding that they must pay over NZ$6 million and up to NZ$39.8 million for breach of the laws against, in Australian terms, insolvent trading. Yan v Mainzeal Property and Construction Limited (in liquidation) [2023] NZSC 113 (25 August 2023) (nzlii.org)
The Court said that the decision raises issues of “fundamental importance to the business community”, in applying ss 135 and 136 of the Companies Act 1993 that seek to address the interests of creditors in an insolvency. The decision also deals with how compensation for breach of those duties should be assessed. Section 135 – reckless trading – is concerned with the general conduct of the business of the company and the risk that such conduct poses to creditors, while s 136 – duty in relation to obligations – addresses the incurring of debts owing to creditors.
Mainzeal
These issues arose in the context of the failure of a major New Zealand construction company, Mainzeal Property and Construction Ltd, which was placed in receivership and liquidation in February 2013. By the conclusion of the receivership, the receivers had paid the secured creditor, the Bank of New Zealand, and preferential creditors in full. However, the shortfall owed to unsecured creditors in the liquidation is approximately NZ$110 million.
Breaches
The Court found that the directors were in breach of their s 135 duty from 31 January 2011. They ought to have recognised by 2010 that, without a substantial injection of capital or assurances of support on which reliance could reasonably be placed, continued trading by Mainzeal posed a likelihood of substantial risk of serious loss to creditors. The assurances of support the directors received from related companies could not be reasonably relied upon. The limited actions the directors took were insufficient to reduce the risk to the extent required to ensure compliance with s 135. In not recognising this, the directors acted unreasonably.
The directors also acted in breach of s 136 in respect of four major projects entered into by the Mainzeal after 31 January 2011 when the directors did not have reasonable grounds to believe that Mainzeal would, in the medium to long term, be able to pay its debts, and then all obligations incurred after 5 July 2012.
Loss
The loss involved was NZ$39.8 million. Treating culpability as the critical factor, the Court directed the directors to pay compensation of $39.8 million together with interest apportioned on the basis that one director, Mr Yan, is responsible for the entire amount, with the liability of the other directors – Dame Jennifer Shipley and Messrs Tilby and Gomm – each limited to $6.6 million and interest each.
The directors were ordered to pay costs to the liquidators of NZ$65,000 plus usual disbursements.
Comment
NZ law is an interesting comparator with Australia.
When considering its COVID-19 reforms, NZ, perhaps wisely, decided it did not need an equivalent to Australia’s section 588GAAA and related safe harbour sections because Australian law imposed an
“insolvency-related duty, which is much more strict than the two New Zealand creditor protection duties. Unlike in Australia, there is no specific duty on New Zealand directors to not allow a company to trade while insolvent. The duties in New Zealand are principles-based and provide scope for directors to exercise judgment”.
That may have changed in light of the NZ Supreme Court decision.
The Court of Appeal had not found the laws satisfactory, commenting that
“[12] The legislation governing insolvent trading in New Zealand is unsatisfactory in a number of respects. The Act should be reviewed to ensure that it provides a coherent and practically workable regime for the protection of creditors where directors decide to keep trading in circumstances where a company insolvent or near insolvent”.
The Supreme Court said it endorsed the view expressed by the Court of Appeal that a law reform review of the relevant provisions would be appropriate.
New Zealand law did not feature in the 2022 review of Australia’s safe harbour regime which the 2023 PJC Report has recommended be adopted. Other safe harbour reform issues identified in the Report are to be dealt with in any comprehensive review. These do not appear to encompass insolvent trading itself. In any event, the NZ Supreme Court decision in Mainzeal adds to the broad issue of the timing and extent of responsibility of directors to have regard to the interests of creditors.
