The case of Mainzeal Property and Construction Limited v Yan has been one of the highest profile cases in the last number of years. This case involves one of New Zealand’s ex-Prime Ministers, Dame Jenny Shipley, and the 2013 collapse of one of New Zealand’s largest building companies, owing creditors approximately $115 million. Not only does that make this case so well-known, but also the implications it has on what a director’s duties are and what that means in relation to their personal liabilities.
The facts of this case are generally not in dispute. A quick Google search will provide an overview of how one of the best-known building companies in New Zealand went into liquidation.
In its decision, the High Court found the directors of Mainzeal guilty of breaching s135 of the Companies Act which covers their duties relating specifically to reckless trading. This was based on the assertion that the directors had caused or allowed Mainzeal to trade for years with a significant negative balance sheet which relied purely on verbal assurances of support that were not able to be met; therefore, placing its creditors at substantial risk of serious loss.
The Court pointed out that s135 is not intended to apply to the normal business risks taken by companies but to ‘abnormal or unreasonable risk’ or ‘illegitimate’ risk-taking. The actions taken by the directors from at least mid-2010 onwards allowed the company to trade in a manner that was likely to create a substantial risk of serious loss to the company’s creditors.
What are the lessons to be learned from this case?
- It is certainly a stark reminder that directors should only rely on written, legally binding assurances and all documentation to be properly prepared, executed and filed.
- Although, directors will not automatically be liable for continuing to trade a company in an undercapitalised state. Adopting a policy of trading while insolvent may attract personal liability of reckless trading.
- Those directors must ensure that appropriate indemnities are in place and appropriate insurance policies are held.
- When a company is beginning to experience some financial trouble, it is vital to take legal advice as early as possible to better understand the position that you are in and to mitigate any issues that may arise going forward.
At Wakefields we have a specialist commercial team that routinely advises directors and shareholders on how to mitigate the potential of being liable for the liabilities of their businesses and the risk to their personal assets. Get in touch with us today on 04 970 3600 or info@wakefieldslaw.com for a no-obligation opportunity to discuss any questions you have.
