The Supreme Court has rejected the appeal of the four directors of the collapsed construction firm Mainzeal, with $39.8m in damages, plus interest, awarded against them for breaching the Companies Act.
Former managing director Richard Yan and three other directors, Dame Jenny Shipley, Clive Tilby and Peter Gromm, had breached company law for allowing the firm to trade while it was insolvent, failed to protect the interests of creditors, and allowed the company to enter contracts it could not fulfil.
Yan, who now lives in China, has been found liable for the entire amount, while the liability of the three other directors has been raised to $6.6m each.
The Supreme Court decision backed lower court rulings that the directors breached s135 of the Companies Act in continuing to trade while insolvent and relying on limited commitments from Mainzeal's parent company, Richina Pacific group, that it would repay a $44m loan with interest.
"The directors were aware of the precariousness of Mainzeal's position," the judgment said.
The directors "could not reasonably have relied on assurances of support given to them by other companies in the Richina Pacific group or Mr Yan as mitigating the risk to creditors sufficiently to ensure compliance".
"These assurances were neither legally nor practically enforceable."
Insolvent for years
The court held that from January 2011 onwards, the directors allowed Mainzeal to trade in a manner that was likely to create a serious risk of substantial loss to creditors.
"That Mainzeal was trading in such a manner would have apparent to the directors if they had acted with reasonable skill and diligence."
The Supreme Court also upheld the Court of Appeal's ruling that the directors breached another part of company law, s136, when they entered into four long-term contracts without reasonable grounds to believe it could meet those obligations.
"Although the directors argued that these breaches had not been specifically argued or pleaded, the Court considered that this aspect of the case was squarely on the table at trial," the judgment said.
The highly-anticipated decision is expected to have ramifications for directors, setting the bar for directors duties, which the court said were "of fundamental importance to the business community".
'Rob Peter to pay Paul strategies' - Liquidator
Mainzeal liquidator Andrew McKay of BDO said the decision brought to a close more than eight years of prolonged court proceedings.
"This is a landmark judgment which reinforces the obligations directors have to fulfil their duties diligently and responsibly," he said.
"The Mainzeal directors knowingly, and recklessly exposed creditors to illegitimate risk with their trading while insolvent and 'rob Peter to pay Paul' strategies."
McKay said the directors and their insurance company, QBE, denied wrongdoing at every stage of the process, delaying justice for the creditors.
"Given the clear facts of the case, established in each of the trials, it is disappointing that the Mainzeal directors have failed to take any responsibility for their actions which illegitimately used creditors' money and put them at risk, losing over $111m.
"We are committed to recovering the damages awarded by the Court including in part from the insurers, enforcement action against the directors to ensure creditors receive compensation for their financial losses."
He thanked the litigation funder, LPF Group, saying that pursuing such a case, with costs of nearly $10m, would have been impossible without litigation funding.
'Deeply disappointed' - directors respond
In a statement, the lawyers representing the directors said they were deeply disappointed their appeal was dismissed and continued to regret the collapse of the company.
"They note the court took no issue with their honesty and good faith, and their absence of conflicts of interest, in their conduct as directors," it read.
"They continue to regret the collapse of Mainzeal and its serious consequences for its staff, customers and creditors.
"They accept that the court has declared the law on important and difficult questions with potential relevance for the hundreds of thousands of company directors in New Zealand."
The directors would take time to consider the consequences of the court's judgment and in the meantime would not make any further public statements.
Mainzeal Construction, the country's third-largest construction firm at the time, collapsed in 2013, affecting more than 400 staff.
The receivers paid the secured creditor, Bank of New Zealand, and preferential creditors in full, however unsecured creditors are still owed $110m.
The issue has been before the court since 2017, instigated by liquidators Andrew Bethell and Brian Mayo-Smith of BDO, claiming the directors breached their duties by engaging in reckless trading. The High Court ruling the directors were liable for $36m.
The four directors appealed in 2019 over the findings and penalties, prompting a cross appeal by the liquidators seeking higher damages.
The Court of Appeal in 2021 upheld the breach of Companies Act but overturned the financial penalties, because the risk did not materialise.
However, it found the directors breached a separate part of company law when they entered into four long-term contracts without reasonable grounds to believe it could meet those obligations.
The case was to be sent back to the High Court to determine the size of the financial penalty, prompting the directors to appeal to the Supreme Court, followed by cross-appeals.