The future of Directors' liabilities

The Supreme Court has recently released the long-awaited Mainzeal judgment, awarding damages totaling $39.8 million against the four directors, and setting a strong precedent for directors’ personal liabilities in New Zealand.

Mainzeal was a prominent construction and property developer until it went into liquidation in 2013 while owing $110 million to unsecured creditors.  

The liquidators had brought a series of claims against the company’s directors, alleging a breach of duties to the company and its creditors.

The High Court found that the directors had breached duties by continuing to operate while the business was in a vulnerable and delicate state.  In an appeal, the Court of Appeal agreed that the directors had breached those duties, but disagreed that the breach led to any losses to the company.

This judgment was further appealed to the Supreme Court, which has taken a comprehensive look at New Zealand’s legal framework for directors’ liabilities and duties while trading insolvent.  

The Supreme Court broadly cited five main aspects of the directors’ breaches:

• Continuing to trade while being balance sheet insolvent for many years.
• External advice cited that extra capital was required, yet was not provided by directors.
• Little, if any, profit was generated from 2008 (noting that liquidation was entered into in early 2013).
• Directors’ awareness of the delicate position the company was in.
• Unreasonable reliance on the holding company’s assurances, which were not legally or practically enforceable.

With an award of damages totaling $39.8 million the judgment provides a stark warning to directors of their obligations and responsibilities, with a recurring theme of protecting creditors, namely:

• To continually monitor current and future performance and solvency.
• To consider the interests of creditors if the company is facing insolvency or likely to be insolvent soon.
• To protect creditors if liquidation is unavoidable.

The bottom line is that professional advice and guidance is key to avoiding situations where directors’ liabilities and obligations may be unclear while a company is trading insolvent.

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.

Guy Goodwin and Raiyan Azmi