Supreme Court Decision in Mainzeal Case: Implications for Directors

Lawyers and business people have now had a month to digest the Supreme Court’s decision in Yan v Mainzeal Property and Construction Limited (In Liquidation) (Mainzeal). [1]

The Supreme Court (Court) upheld the Court of Appeal’s decision that the Mainzeal directors were liable for insolvent trading and ordered that the directors contribute $39.8 million plus interest to the assets of the company. The liability of three of the four directors was capped at $6.6 million plus interest.

The Mainzeal decision is perhaps unsurprising. It reinforces the Supreme Court’s existing position in Madsen-Ries (as liquidator of Debut Homes Limited (In Liquidation)) and Othersv Cooper and Others (Debut Homes)[2]. The decision also provides extensive guidance on the approach directors should take to their statutory duties under sections 135 and 136 of the Companies Act 1993.

In summary, the Court ruled that, at the point at which company is insolvent, or nearing insolvency, it is incumbent upon the directors to take stock of the situation and seek independent advice if necessary. At this point, there needs to be a plan for continued trading that mitigates a substantial risk of serious loss to creditors and means that obligations incurred will continue to be honoured. A lack of capital should be addressed by recapitalisation or shareholder support which could be reasonably relied upon. Liquidation, or some other form of insolvency protection, becomes the alternative if continued trading cannot be justified on this basis.

This result has been roundly criticised by lawyers and business people as providing too much focus on creditor protection, at the expense of allowing directors to exercise their business judgment. This outcome has prompted numerous calls for a review of the Companies Act.[3]

Perhaps, the most interesting aspect of the decision is shareholder support. On a balance sheet basis, Mainzeal had been trading insolvent for some time. The Richina Pacific group ostensibly provided support through letters of support and “contra” arrangements for the supply of goods. Assurances of support were also given by Richard Yan, the managing director, often in unconditional terms. Issues of legal enforceability, extracting money from China, and lack of capitalisation of some group members put question marks next to this support. Ultimately, the Court decided it was “distinctly uncertain” whether Richina Pacific would provide money to meet Mainzeal’s liabilities. As such, going forward, the directors did not have reasonable grounds for believing the company would honour its obligations.[4]

In our view, this finding places directors of foreign owned subsidiaries in an invidious position. They are being asked to test the effectiveness of shareholder support but will likely lack the means do so. In many cases, they will be employees who are ultimately responsible to the offshore business.

Questioning the legal enforceability or lack of intent behind support arrangements may be seen as a lack of good faith. Historically, letters of comfort from a parent company were given great weight; although, not legally enforceable. Often, these letters would support an auditor’s finding of solvency. Now, directors are being asked to apply a much higher degree of scrutiny to these arrangements.

We agree the law needs a serious review. The pool of directors in New Zealand is already too small. This is unsurprising given the consequences of taking too much business risk and getting it wrong.

[1] [2023] NZSC 113

[2] [2020] NZSC 100

[3] See in particular National Business Review, Companies Act ‘long overdue a rethink’: lawyers react to Mainzeal, 25 August 2023, https://www.nbr.co.nz/law/companies-act-long-overdue-a-rethink-lawyers-react-to-mainzeal/

[4] [2023] NZSC 113 at paragraph [267]

For more information contact Mark Hopkinson or Mike Roberton.

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