New Zealand: Significant director liability causes review
Directors' duties have recently been in the spotlight, with the directors of a prominent construction company, Mainzeal, being held liable to the tune of NZ$36 million. When Mainzeal collapsed in 2013 creditor losses were approximately NZ$110 million.
The High Court found that the directors acted in breach of their duties under section 135 (“reckless trading”) of the Companies Act 1993. Directors must not agree, cause or allow a business to be carried on in a manner likely to create a substantial risk of serious loss to the company's creditors.
Key matters in relation to section 135 were that:
- Mainzeal had been trading while balance sheet insolvent, as the intercompany debt that it was owed was in reality not recoverable.
- There were no assurances of support from the group that the directors could reasonably rely upon. One factor the court considered was that even if the assurance of support provided from the China based group was legally binding, the directors also needed to ensure that the support would be effective, given the potential limitations associated with Chinese law in relation to the transfer of funds in this context.
- Mainzeal's trading performance was generally poor and prone to significant one-off losses. Accordingly, it needed a strong capital base or an equivalent form of backing to avoid collapsing.
The case is being appealed. However, it highlights the potentially serious consequences of a failure by directors to observe their duties in circumstance where reliance is placed on financial support from group companies.
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