18 Sep 2018

Mainzeal directors should have known it couldn't recoup loans, court told

5:52 pm on 18 September 2018

Dame Jenny Shipley was among directors of a failed construction company who should have known it wouldn't be able to recoup $33 million in loans, a court has been told.

Dame Jenny Shipley

Dame Jenny Shipley (file). Photo: RNZ / Diego Opatowski

The former prime minister this morning sat in the public gallery at the High Court in Auckland for the second day of the hearing into allegations at Mainzeal of systematic governance failings that pre-empted the company's collapse in 2013.

In 2004 and 2005, Mainzeal gave millions of dollars in loans to the shell company MLG Limited, which was part of the same group of companies.

Being a director of both entities, lawyer Mark O'Brien said Dame Jenny and Richard Yan, who was also on both boards, should have known it could not pay the money back.

Dame Jenny also signed off on one of the loans on behalf of MLG.

As early as December 2008, MLG's financial statements recorded that it owed $28.6 million to Mainzeal and had negative equity of $44.8m.

When Mainzeal fell, MLG was in $33m debt to the construction giant.

In February 2010, Dame Jenny had also emailed the board's chairman expressing concern about parent company Richina restructuring, and the implications for recouping the loan.

"Dame Jenny, clearly on behalf of the board and clearly concerned about where things stood ... post restructuring emailed the chairman John Walker and we note there some of the concerns she raised," Mr O'Brien said.

However, it was not until July 2011 that Mainzeal's directors were formally told that MLG could not pay its debt.

Mr O'Brien said the directors should have known this long before then, yet no steps were taken.

A 2008 report by accounting firm PriceWaterhouseCoopers had also noted that in order for Mainzeal to keep afloat it "could not survive" without support from the other companies in its group.

"They noted that in order for MPC [Mainzeal] to operate on a standalone basis it required a cash injection because, excluding the inter-company loans, MPC was in a deficit position, not operating profitably and could not survive without support from the remainder of the group."

Mainzeal had counted on support from these affiliated companies, yet there was no guarantee they would inject capital into the ailing business. And they did not.

"Despite these unresolved issues - and they were - and despite the precarious financial position - and it was because, if for no other reason than [what] PWC had identified, the directors allowed the company to continue," Mr O'Brien said.

Furthermore, Mainzeal was subject to mounting leaky building claims.

Dame Jenny had expressed concern about the company's "legacy issues", which Mr O'Brien said may have resulted from under-provisioning for leaky building claims.

"Legacy concerns continued to emerge and we say these were not properly analysed in the kind of detail and with the kind of attention that was required for a company in Mainzeal's position."

Mainzeal was the country's third largest construction company when it collapsed in 2013, owing creditors more than $117m.

As well as Dame Jenny, among other directors being sued for $75m is the former Brierleys chief executive Sir Paul Collins.

The company's liquidators claim the directors allowed the company to continue trading while insolvent for more than five years.