Boaden v Mahoney - Directors' personal liability for company debts

The High Court has recently awarded claims of $131,000 for breach of director’s duties in its first material judgment following the Supreme Court’s decision in Mainzeal last year.  This has clarified the position post-Mainzeal as to how directors may be personally liable for company debts.

The plaintiff, Mr. Boaden, leased commercial property to the civil works company of the defendant, Mr. Mahoney.  That company, Civil Underground, failed to pay rent and did not comply with end of lease conditions for clearing the site.  

The plaintiff incurred significant costs in remedying the site issues and losses in the form of unpaid rent.  The plaintiff had issued a statutory demand for the outstanding rent in July 2020 and Civil Underground was placed into liquidation in October that year.

Alleged Breaches of Director’s Duties

The plaintiff alleged that the defendant, in his position as director of Civil Underground, had breached director’s duties in relation to reckless trading and unreasonably incurring obligations on behalf of the company.

The Companies Act 1993 imposes a duty upon company directors to avoid ‘reckless trading’.  Specifically, a director of a company must not:

• 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
• 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.

Furthermore, a director has a duty not to agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when required to do so.

The decision in Boaden v Mahoney confirmed that the key aspects of the duty to avoid reckless trading are that:

• The duty is owed by directors to their company, rather than to creditors such as Mr. Boaden.
• The duty focuses on the way a company is operated, rather than the director’s belief, in relation to whether the operations create a substantial risk of serious loss; and
• At the time the company faces financial challenges, a requirement exists for directors to make a ‘sober assessment’ of the company’s affairs, likely future income, and prospects.

The High Court found that the defendant had allowed Civil Underground to continue trading insolvent for over a year.  During this time, Civil Underground was unable to meet its debts as they fell due and was unable to meet obligations to the IRD.  The defendant in his role as director had increased the company’s overdraft.  This did improve the company’s equity position, but the company continued to operate in an asset deficit. 

The opportunities for the defendant to undertake a sober assessment of the company’s affairs and viability were not taken. Efforts to refinance were not sufficient and were undertaken too late. The defendant continued to rely on financial forecasting and advice that the Court considered to be unrealistic and incorrect. 

The Court found that by allowing Civil Underground to continue trading, the defendant’s conduct amounted to a breach of duty in relation to reckless trading due to the creation of a substantial risk of serious loss.

The Court considered the defendant had also breached director’s duties in relation to unreasonably incurring obligations on behalf of the company, which required consideration of whether the director subjectively believed on reasonable grounds, at the time the obligation was entered, that the company would be able to meet its obligations when required to do so.

At the time where it would have been reasonable for the defendant to undertake a sober assessment of the company’s affairs, the defendant:

• Agreed to enter into a variation of Civil Underground’s lease agreement while operating in a net-deficit asset position:
• More than tripled the company’s overdraft; and 
• Was accruing creditor debts rapidly. 

The Court considered there was no reasonable basis upon which the defendant could have believed that Civil Underground would be able to continue to meet these obligations or “trade its way out of debts”. 

Relief Granted

New Zealand’s company law enables the Court to order people to repay money or return property, including a creditor who is recovering compensation from a director.  

The Court considered that it could assess losses for breach of directors’ duty not to engage in reckless trading based on the net deterioration between the time of breach and the eventual liquidation of the company.  

Losses for a director incurring obligations they could not have reasonably believed their company would be able to meet are based on the extent to which that decision leaves creditors out of pocket.

The Court ordered the defendant to pay the plaintiff the sum of unpaid rent, accrued interest, and associated costs of clearing the site.

Claims against directors for breach of director’s duties can be intricate and challenging.  It is important to consider how you can prove the breaches occurred and how they caused you loss.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.